Aave Proposal Targets $3.5M in Added Annual Revenue Through Reserve-Factor Changes

TL;DR: TokenLogic proposes changes to Aave's reserve factors across 54 reserves. Its model estimates $3.5 million in additional annual revenue, using November 9 balances and rates; governance has not yet approved the changes.

Aave's latest revenue proposal focuses on how lending income is divided. A November 12 submission from TokenLogic covers 12 V3 instances and V2 Ethereum, with the modeled blended reserve factor rising from 12.0% to 12.7%.

The practical issue is straightforward: the protocol treasury would retain a larger share of interest, leaving a smaller share for suppliers where a change applies. Whether that improves the economics over time depends partly on how those suppliers respond.

What the reserve factor controls

Aave's official FAQ defines the reserve factor as the percentage of borrowing interest that accrues to the treasury. It is set for each asset through governance. The treasury is controlled by Aave Governance, rather than functioning as a conventional company's bank account.

A simplified example makes the mechanism clearer. Suppose borrowers generate $100 of interest and a reserve factor is 20%. Before considering other mechanics, $20 goes to the treasury and $80 remains for suppliers. Raising the factor to 25% changes that split to $25 and $75. The underlying $100 of interest has not grown simply because the allocation changed.

This hypothetical illustrates why a higher reserve factor can improve treasury receipts while reducing the attractiveness of supplying to the same market. It also shows why the percentage should not be read as an annual return paid to either group.

Suppliers face different effects across markets

TokenLogic proposes moving Ethereum Core DAI's factor from 25% to 30%, while Avalanche V3 USDC would move from 10% to 25%. The proposal's stated purpose includes changing incentives across legacy markets as Aave's newer infrastructure develops.

The immediate parameter change does not itself alter the borrower interest rate. Over time, however, a supplier response could change available liquidity and utilisation. Those subsequent effects make it important to distinguish a mechanical estimate from a forecast of the eventual outcome.

NewsBTC's report on Aave's externally curated V4 markets offers context on how the protocol is developing different arrangements for managing liquidity and risk.