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DeFi lending protocol Aave details its decentralization bid, outlines swap process for new token

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The team behind DeFi lending protocol Aave, which launched earlier this year, is pursuing a path toward greater decentralization with the planned release of a governance token.

The particulars behind the token, its roll out process and how the existing Aave-tied LEND token will be swapped were detailed in a release published Wednesday. The process, which the team has dubbed "Aavenomics," "introduces a future-proof framework leveraging financial incentives and multilevel governance to prioritize the safety and sustainability of Aave."

The Block reported earlier this month that Aave raised $3 million in a sale of its LEND token, and the team behind the project noted at the time that it was preparing to debut its plans for a token-based governance system and a swap from LEND tokens to AAVE tokens.

On that point, according to the published plan, there will be a 100:1 swap of LEND tokens for AAVE tokens. AAVE will have a total supply of 16 million tokens, which 13 million of that amount redeemed by LEND token holders and the remaining committed to an "Aave Ecosystem Reserve." That reserve, as outlined in an explainer document, will be controlled by token holders and is to be used to incentivize development of the protocol's ecosystem.

The actual swap process will be initiated by way of a Genesis Governance poll for LEND holders. Once approved, the smart contracts designed to facilitate the swap will be deployed.

Aave's framework also outlines a so-called Safety Module, which is intended to work against negative deficit events in Aave's money markets. The Safety Module will be used to stake AAVE tokens and stakers will earn tokens as well as a percentage of protocol fees that are generated.

"The primary mechanism for securing the Aave Protocol is the incentivization of AAVE holders to lock tokens into a Smart Contract-based component called the Safety Module (SM). The locked AAVE will be used as a mitigation tool in case of a Shortfall Event within the money markets that belong to the Aave ecosystem. A Shortfall Event occurs when there is a deficit," the team's explainer notes.

The document goes on to explain:

"In the instance of a Shortfall Event, part of the locked AAVE are auctioned on the market to be sold against the assets needed to mitigate the occurred deficit. The SM includes a built-in backstop mechanism to prevent excess flow of AAVE into the open market that would further reduce the value of AAVE itself. Participants’ decision to lock AAVE into the SM assumes the acceptance of a potential Shortfall Event as they secure the protocol in return for receiving rewards, in the form of Safety Incentives (SI) and fee distributions."

The team said in its release that it is inviting feedback on the outline via its governance forum.

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