A talk between Staking Rewards and Stani Kulechov, who is the Founder and CEO of Aave.
Aave is a DeFi money market protocol on Ethereum. Users can lend assets to earn interest on them and borrow assets with a stable or variable interest rate.
Aave includes notable distinguishing features such as uncollateralized loans (Flash Loans) and “rate switching”. This allows users to switch between stable or variable interest rates to get the optimal rate when borrowing.
Formerly known and started in 2018 as ETHLend, Aave is one of the very first DeFi products in the market that has continuously delivered innovation. So what further surprises does Aave have in place? And what does Stani think about the DeFi market?
We are diving into DeFi Challenges, Competition, Risks, Decentralization Rails, and the role of Bitcoin in DeFi.
Background
SR: Can you share a brief introduction about you and your crypto career? 🙂
Stani: I did some coding when I was a teenager, but I didn’t really get into crypto until the university days when I was studying law at the University of Helsinki. Ethereum is actually what brought me to crypto. I thought it was so cool that you could have a series of smart contracts that are immutable and trackable. I have always been interested in finance, so I started thinking about how this could be applied to the financial world.
Especially I thought it could revolutionize lending. If you could lend someone money without needing to do a background check or trust them, it makes lending and borrowing much smoother and quicker. As I got more into the Ethereum community and started thinking about how it could be used to build a decentralized and trustless financial system, I started working on ETHLend, which was one of the OG decentralized peer-to-peer lending platforms. ETHLend evolved into the money market maker Aave!
Both ETHLend and Aave drew on important aspects of the traditional finance system, and I thought this was super important because traditional finance has lots of cool components that are proven to work. Traditional finance or “OldFi” served as inspiration for aspects of ETHLend and Aave, but then we tried to improve on it and make it decentralized.
Why DeFi?
SR: What do you believe is the most outstanding advantage of decentralized finance compared to traditional finance? What is the secret weapon of DeFi? And what excites you the most about it personally?
Stani: I think one of the biggest advantages of DeFi compared to “OldFi” is that it’s trustless and transparent– users can control where their money goes, and they don’t need to trust anyone to be able to do it. DeFi has higher yields for depositors than traditional finance, which is super appealing to mainstream depositors.
It’s 2020 now, and money should never sleep. Once people discover that their money can be working for them 24/7, there’s just no reason to keep all your money in a traditional bank account where you hardly earn any interest. Additionally, DeFi does not require any trust or disclosure of your identity, background checks, etc. so it opens up banking opportunities for everyone regardless of age, race, gender, background, etc. It makes the financial system more accessible and equitable for everyone, even those that sometimes might find themselves excluded from the traditional financial system. Also, for more technical DeFi users, DeFi just offers so many more opportunities like Flash Loans, for example– things that you could never do in the traditional financial system.
To me it’s amazing to see how far the DeFi space has come since ETHLend. Now there are so many projects contributing to the ecosystem and new ones pop up every day building off of previous ideas. I think this composability is the secret weapon of DeFi, and this is the most exciting part for me personally. The DeFi community, and the Ethereum community overall, are always trying to help each other out and grow together, and this makes for some really great ideas that build on each other and contribute to new projects and innovations.
The technical composability in DeFi is really more about the human composability of the community. It’s this reason that things happen so much faster in DeFi– it’s really hard to keep up with everything going on in the space. In DeFi there’s always this willingness to innovate, and OldFi lags behind because there’s not as much of this community that’s constantly striving to improve.
DeFi Challenges
SR: Which noteworthy challenges do you see that DeFi has to overcome before real adoption can and will happen? How do you tackle these challenges with Aave?
Stani: One of the challenges DeFi has to overcome before it will reach mainstream adoption is making DeFi much more user friendly. To many people, the idea of DeFi is revolutionary, and when I start telling someone new about it they are usually surprised, especially at how much interest you can earn on deposits because no normal bank lets you do that. I think for a lot of people, the words “blockchain” or crypto” can be scary, so making sure the user experience is as intuitive as possible is key.
At Aave, we focused on key integrations that help onboard users to DeFi. Argent is a great example of this, as it’s very straightforward and user-friendly, and it makes it easy to access Aave and other DeFi protocols directly from the wallet. For mainstream adoption of DeFi, it’s important to have platforms like Argent that make the whole crypto onboarding process much easier and give users a seamless platform to explore DeFi options. Mainstream adoption is closer than we think though, and the user experience is improving each day!
Feedback from the Aave community is one of our best assets to overcome these challenges too. We are always striving to improve the user experience when people use the DApp, and we really listen to suggestions from our community. We’re always asking how we can make this easier for the end-user, is this process intuitive, etc. We are extremely lucky to have such an involved and responsive community, and this has really shaped the Aave experience you get today.
Staking vs Lending
SR: What is your take on the upcoming dynamics between staking and lending proof-of-stake crypto assets? Will there be a competition? Possibly harmful?
Stani: I think staking for blockchain networks plays a vital role in providing security for the network. Some proof-of-stake cryptographic assets might have a function that aims to secure the protocol itself. For example, part of the “Aavenomics” is a staking mechanism that allows stakers to provide safety for the Aave Protocol’s liquidity providers. That is a vital part of the protocol scalability and to attract liquidity providers. I don’t see various staking mechanisms competing, rather different kinds of ways to participate in networks and each of them with their own risk and reward mechanisms. Hence, stakers can choose what they want to subscribe to.
Platform Risks
SR: How do you assess or quantify the risks that are involved with using your platform? Security of Funds etc..
Stani: We take security super seriously at Aave, and I really think security should always be the priority in DeFi. DeFi composability is awesome, but it also opens up the ecosystem to new threats if one of the components isn’t secure, so measures to alleviate the risks found in DeFi are extremely important. We have completed 2 audits of Aave Protocol: one by Open Zeppelin and one by Trail of Bits. Both audits can be found in full on our website, so all of this information is extremely open. We always want to be transparent about the risks, and we release a security update on a regular basis with any new information. We also have an ongoing bug bounty program open to anyone where we will reward you if you find a bug or vulnerability in our code. It’s peoples’ money… we don’t play when it comes to security!
Our risk management team spends all their time analyzing and assessing the risks involved with using Aave, and we have released a risk framework. Before adding a new currency to Aave Protocol we do a full risk assessment, and all of this can be found in our risk framework.
Decentralization Rails
SR: Do you have access to the private keys of your smart contracts? How do you store them? Could there be an emergency shutdown? Any plans to make smart contracts immutable?
Stani: Currently we do have access to the private keys. In the initial launch phase, we wanted to be sure that the protocol remains secure in case any issues should arise. However, we will be releasing the governance shortly, and ownership of Aave Protocol will migrate to the governance smart contracts. Once the governance is deployed, LEND token holders will be able to vote on smart contract changes.
Composability in DeFi
SR: How do you evaluate whether you would like to partner or integrate with another DeFi protocol?
Stani: DeFi composability is one of the coolest parts of the ecosystem, and we try to make sure our partnerships and integrations always bolster this composability. We see a lot of synergies with many projects in the DeFi space, and we think it’s cool when projects build on each other to boost the user experience. Of course, we must evaluate the security aspects of integration, and we take these very seriously.
Interoperability
SR: Do you see blockchain interoperability as meaningful development that might boost DeFi?
Stani: I do. Currently, the DeFi liquidity is located in Ethereum, which is great for Aave. However, we believe that in the future it might be so that the liquidity will be spread between a few various networks and that would require efforts from us so that we are able to catch that liquidity.
Bitcoin and DeFi
SR: What kind of role does Bitcoin play in the DeFi space in your opinion? 😉
Stani: There is substantial potential in unlocking the Bitcoin liquidity in DeFi. Conservative cryptocurrency holders are usually holding Bitcoin and there is not much that you can do with Bitcoin in its own network. Being able to utilize that value in DeFi will bring a lot of liquidity into the space and increase the growth of DeFi. End of the day, Bitcoin could work as an onboarding tool into DeFi.
Evaluating collateral
SR: How do you identify high-quality collateral assets for DeFi?
Stani: Before adding any asset to Aave Protocol, our Risk Management team does a thorough Risk Assessment following our Risk Framework, which I mentioned above. If you read our Risk Framework you can find all of the currencies available in Aave Protocol and explanations for why they can be used as collateral (or not). Currencies only enabled for depositing and borrowing (not usable as collateral) present a lower risk for the protocol, so if an asset is going to be used as collateral, it must fit a more strict set of criteria.
Furthermore, each currency added to the Aave Protocol as collateral increases the protocol risk of insolvency, as it means the protocol is more exposed to fluctuations in the market. Additionally, a centralized currency accepted as collateral exposes the protocol to a centralization risk (having a currency that relies on a single point of failure adds risk for the Aave Protocol). Basically, we first look at smart contract risk, which focuses on technical security aspects based on code. Then we look at counter-parties in governance (to assess how and by who the currency is governed) and then if those risks are not too high we look at market risks, including volatility risk and liquidity risk. These are the main things we have to consider before adding new collateral. Security is our top priority and we always want to ensure that a new currency will bring far more value than risk.
Future Plans
SR: Can you share a bit of the Aave roadmap for the coming year? Anything exciting we can look forward to?
Stani: We just released the second money market on Aave Protocol– the Uniswap Market! This is a big step for us and the second market (the OG Aave Market we released in January is the first) in our multi-market strategy. The Uniswap Market allows Uniswap liquidity providers to borrow against their Uniswap liquidity provider tokens in Aave, allowing Uniswap to be used in DeFi lending and thus increasing stable coin demand. Aave Protocol will be the protocol for money market creation, and soon we will introduce the Set Market and some more, but that’s all I’ll say for now 😉 Eventually you will be able to create your own money markets!
Additionally, in the next few months, we will be releasing our tokenomics or “Aavenomics” as well as our governance, where LEND token holders will be able to vote on smart contract changes, making the Aave Protocol ecosystem completely decentralized. Another interesting part of the Aavenomics is the ability to stake LEND into a safety module to provide a safety net for the liquidity providers against various protocol risks. Similarly, liquidity providers are incentivized to provide liquidity.
Credits
Many thanks to you Stani for sharing your insights and we are very much looking forward to interviewing again in one year.
Aave is a decentralized money protocol and has recently released Credit Delegation. We are glad to see such innovative features in Aave.