Aave V4: Supercharged DeFi

Transcript

[Music] [Music] Hey everyone, nice to be here in the etc at I think this is my uh eighth time. So I've been here since the very beginning and uh pretty good that it's in a really nice location. and I really like Paris and and Brussels, but uh this is really cool. I get got to wear my shirts. Um so enjoying very very much. Um but u uh place for for all of us. It's a great venue to get builders together.

This is where a lot of innovation uh gets built. Um a lot of interesting solutions and and technicalities get debated. It's a place where actually a lot of defi has been uh born and a lot of work that we've have done um in a in the past um has come with the discussions that we have in the previous years. So I hope you really enjoy and today's talk is all about um supercharging DeFi and about a big opportunity. So this is not just something that's uh we're building from a and and and focusing on um improving our own stack uh or improving DeFi but actually unlocking really new

interesting opportunity that's that any one of you can actually build and and and participate. So one really interesting um development in DeFi has been that I think an environment today for DeFi is is really um positive in the sense that there's a lot of uh TVL that has been growing. There's a lot of innovation at the moment happening and a lot of DeFi is actually built upon native uh crypto assets. Um but at the same time uh there's a one big category that is keep keeping building up is the real world asset category. So real world assets aren't really um

in the sense that they aren't really something um that complex. Um it's pretty much about bringing value that exists in the traditional world uh traditional finance uh bringing that on chain making it more transferable uh programmable um and uh accountable and now what we're trying to achieve is to use the exact technology that we've we've buil we we've been building so far agnostically to any types of uh assets that we will see in the future on chain.

So I see the finance progression moving if you think about like tens of thousands of years being uh prescripted to playboards for example and later finance moved into uh paper which made it lighter to carry for example uh coins and and whatnot and recent decades into digital. Um and every single medium adds a different type of a property. Um and these properties can be used in a different way. So finance being on dig dig digital in the past um decades means that everyone has access to that information uh can read that access and

can actually trade uh across globally. Now the finance is moving on chain which at the same time means that you have a new type of substrate uh a new medium uh that has a new types of properties and those properties are about creating something that is more resilient uh less single point of failures um more transparent and more auditable. Um if you look at the past uh few decades of uh the evolution of finance, we've seen a lot of uh finance moving to digital uh in different ways. Starting with internet, with e-commerce uh getting actually suppliers uh sellers to to be able to pay with um uh on online.

And later we we saw for example Stripes uh making it really easy to actually uh put your credit card online feeling trusted. That's innovation on a experience level. And and then you see different kinds of uh peer-to-peer payment applications like Venmos, cash apps. Um and thanks to horrible banking experiences, we've seen a lot of finance coming into fintech and fintech applications being able to capture a lot of market share. And now the past decade we've been working on is how to actually get all this uh utility into uh more decentralized uh mediums. Um and we saw

the evolvement of of Bitcoin in in value transfer. We saw the involvement of uh Ethereum as a programmable computer um the best programmable in computer if you ask me because it's the best place to build uh at the moment with with tooling that you have uh as a D5 builder um and now more recently few years these just finance so all these algorithms that we've been building as a community and and tokenized assets so it's interesting to notice that most of the people are online at the moment.

So they are living on a digital uh substrate. Um it means that essentially over 60% of of of the population has some sort of a digital wallet. It's not on chain but they have some sort of a digital means of of interacting, settling transactions. Um and we have over five billion individuals uh online today and it keeps growing. A lot of the adoption has happened in digital finance at the moment and the continuation that we do is is how to bring this mass into uh onchain.

So why are we doing this in the first place? eight years ago or let's say nine years ago when I started building Eatland um the idea was to build something really cool and exciting something that achieved uh like a personal goal. it was a more of a hobby but I was building finance before that namely fintech and what started as a hobby u as a small project became a bigger project um became a community uh became a what it what a is today and and be becoming a really large category uh on chain so defi for me as of today for example it's it's more about um building

efficiency, efficient algorithms. It's about creating also fair financial services, global access and DeFi is the only technology that actually can do that in a borderless way. Um it's a way to distribute yield financial opportunities uh equally and actually preserve uh wealth in a world where uh wealth is eroding, payments are eroding, pay payroll is is eroding and we're moving to a world where everyone has to think about their financial uh sovereignity and what is better place to do finance than a open protocol an open environment like

Ethereum where any everything is connected whatever you build. So if you think about it, we achieved so far at the moment with with DeFi, but there is a really big opportunity that we have to achieve. Um, and this is a multi- trillion dollar uh opportunity to bring these traditional assets, traditional value uh on chain. Um there's real estate, there's government government bonds, um there's equities, there's bonds, corporate bonds, and there's a bunch of other categories of assets out there um that could be more efficiently handled on a

transparent ledger, more programmable uh environment. And this is just what exists today. So if we actually are able to get all this legacy stuff on chain and create these uh efficiencies, what we could actually build uh beyond that what could exist that doesn't exist because of these inefficiencies, lack of trans transparency and most important especially for developers, lack of programmability. So my statement is is that DeFi will win and I keep saying that. Why? Because DeFi is not really known uh publicly. If you ask your friends, do you know about

DeFi? Well, maybe your friends will know what what is DeFi because you're all friends and you travel to these events and you all are using a or other DI uh protocols and whatnot. But you know if if you if you ask outside of our community a lot of people will say that you know they don't know but they know the fintex while in the meanwhile defy is growing quite fast. A as a protocol has more value than asset under management of of some of the biggest uh fintech brands. We we we know we don't have as a whole segment in in DeFi the equal amount uh of users not even close.

Um but that's something where we're going towards. A has a particular uh positioning in the sense that we focus quite a lot on bringing DeFi to become more accessible, more easy thinking not just the the protocol angle but also the product angle. how we make this infrastructure very robust but at the same time very usable whether it's institutionals or whether that's uh retail and avid has been a great examples of of uh a decentralized organizations um that has been able to achieve a revenue

generating decentralized protocol um something that is actually sustainable and there are a few other great examples in DeFi and we're very early up on and just to explain how important this is as a startup founder uh you might understand how basically uh difficult it is to actually make a successful startup and make that sustainable but it's even way more harder to actually create a sustainable DA coordinate with all the participants and actually produce revenue create something uh sustainable that then can produce more value into the ecosystem.

Yeah. So what's holding us back from uh mass adoption? I think we're getting closer in terms of uh the interest that it is today. So there needs to be clear value proposition. So what we're actually building and solving real problems and having good solutions. Um and I think it doesn't really we don't get far if we solve cumulative uh issues. If we want to compete with traditional finance, if we want to change the world, we want to do things 10 times better. Your product needs to be 10 times better. Everything we do needs to be much more better than the old world. Um especially when we bring the traditional assets, the traditional

value on chain, we have to offer something that is much more better. There needs to be a better value proposition. Simplicity and accessibility is a key thing. Who are we building for? And the audiences and how do we get towards the consumer audiences. And I think now is the best time to build DeFi. The the best time to build DeFi before that maybe was two years ago, but now it's it's the best time to build DeFi. There's more regulatory clarity now than ever be before. And there's more interest in in DeFi, not just for in our space in general, but from institutions and even from from governments. But this

doesn't mean that it's really there there's full clarity on regulation. There's still organizations that think that CBBDC's are uh the way to think about finance money in the future. And I think that's a radical uh threat for decentralized finance because decentralized finance is about giving the power to you the people whereas central bank digital currencies are about controlling more of that value that you create um even further. So one important aspect of of this usability is that what if DeFi was actually easy

and I think we have different challenges um when it comes to decent finance and these challenges range from actually the user level interaction level the the the application level but also how we build uh protocols. Building protocols is always hard because you always think that you are building something that is unopinionated. But no such thing actually exists because whenever you touch something, you always add an opinion and it's a question of how much and how little at the same time.

So what I think is that all these challenges are widely known. We come to these events every year to talk about about the UX fragmentation of of liquidity. We see more L2s. Uh I'm pretty sure there's another L2 being launched today or tomorrow announced and day after tomorrow and we have this fragmentations and we don't really know what to do and obviously we have static risk or or dynamic risk and how do we add parameters around those um that type of a risk also what is the developer incentive actually to build and I meet a lot of developers

every year that actually build amazing things that actually progress the space. And one of the challenges is actually how you can incentivize your users to use your product. What is the the actual way to drive liquidity? That's a really big problem at the moment. And that problem is a good one because it means that there is a lot of innovation happening in these rooms. And then we have another uh angle which is the institutional angle. So institutions might have different types of uh requirements. Customization, how do they think about compliance?

Should they even think about compliance in the first place? Uh permissioning uh permissionless architectures, how to navigate um that whole set of uh elements. So when it comes to av4 there's few principles when we designed um and architected the whole uh protocol and a lot of the previous versions were built around capital efficiency risk management and I would argue that before basically is in between somewhere you have a lot of capital efficiency with the emotes um you have more granular uh

risk management um features as well. So one important thing for us and this was the paramount is that what we want to build is something really secure and resilient and resiliency is something that also grows over time. So a being able to actually host u over 43 billion net deposit really tells that people trust a and they trust DeFi and that is a really big statement. If you go few years back um even participants in our space necessarily weren't using um DeFi they were using the centralized alternatives.

So what happened between let's say 2020 2021 and 2024 and 2025. So FTX is one thing that happened right. We also saw a lot of centralized lending protocols or C centralized businesses that provide loans um provided yield for example that actually went bust during that period and at the end were managing their risk so horribly that they couldn't they were using DeFi in the back end because that's all they could actually do at that point because they couldn't add any value. So virtually all lending that existed mainly in these centralized platforms moved into DeFi

which is amazing and I think DeFi has a stronghold now on this category and I think the same will happen with with with with trading with swaps and and other types of instruments with with per uh pretty heavily on onchain utilized uh and so forth. Just to give you an example, in a really downcycle turn, AVA liquidates over 200 million worth of value just in a few minutes. And that is and automatically regardless if if um everyone is sleeping or awake. The the protocol just executes the code and you have participants that are taking these opportunities automatically. So resiliency is is the key. How do we

build more resiliency because that means more safer protocols, better defy and less problems for the space. And then modularity. How do we actually um create a protocol that allows connectivity? So if you if we build something that is really interesting empowers you to build how someone else can come build another block and that could that block could actually be integrated into the protocol providing more value and becoming modular and also customizable. So how do you c take few of these blocks and customize for yourself to your use case and also the big problem that I

mentioned before how Do we reduce the issue of liquidity fragmentation? How do we serve everything that exists on chain provide value but at the same time we don't fragment uh the liquidity and then more tools for risk managers how we allow third party risk managers to come and have additional tools. So these were the the the main pillars of AVA v4 when we're thinking about design. So W4 is completely new architecture, a new types of design that we basically learned uh over time and we're thinking

about with our team. We spent actually um roughly a period of uh year with our SVP of engineering Ailio and our smart contract engineering team to think about now that a has actually proven its product market fit within DeFi. What will be the next step? How do we c cater and ensure a could be a technology that could be used agnostically not just native crypto assets but also more um traditional assets as they're coming on chain. So the big architectural change is to move to a modular hub and spoke model. So this architecture allows to innovate new

types of borrow configurations and reducing and segregating the risk while at the same time all these different borrow configurations and and customizations have the same access to the liquidity. So the the liquidity becomes accessible to any innovation that will happen in the future uh within the a ecosystem. And also thinking from the interest rate perspective, instead of having one rate for all, how do we actually create interest rate markets within the a protocol that are subject to actually how much risk you're bringing uh into the protocol. If you're bringing less risk, you should pay less.

If you're bringing more risk, you should pay more for that, but not the other way around. And governance is a really interesting part of well how we actually create resilient governance and at the same time benefit of the opportunities that a decent DAO provides while actually add a lot of uh configuration and flexibility how each of these um hub and spoke combinations can actually be uh governed and capital efficiency comes from the aspect that even if you have segregation on the risk, you have still access to a

common pool of of of liquidity. And the way to think about the modularity is that a v4 will be more like a plug-and-play system where innovation will happen really fast because um you can add these spokes that are bringing some sort of a novelty into the protocol to tailor a specific use case whether it's a happening natively on chain or uh is an institutional use case. So the main kind of like uh architectural change is the unifying liquidity of of the a protocol. So how does it work? So effectively every user that we have that is coming and and

supplying liquidity into a um and borrowing always enters into the protocol through a spoke. So here we have the user and this is uh what we call a liquidity spoke. Here's another one. So a liquidity spoke is a configuration of a borrow strategy. So it has all the elements of a loan to value ratios uh what kind of assets could be listed uh to borrow against um liquidity and and all these risk uh related parameters. So when a user comes supplies into the core spoke for example um those assets are

then held in the main liquidity hub and this liquidity hub actually then can give credit lines to every spoke that is attached to that liquidity hub and you can attach multiple spokes there. So what what's happening here is actually the liquidity is stored in one location while at the same time the risk is actually categorized and isolated in these spokes. So essentially the liquidity hub can determine that the core which is today the a core main market um can can give a few billion worth of um credit line to the spoke. So atomically

the the core spoke has access to that uh liquidity hub. Then you might have some more novel uh spoke that is more riskier or higher on the risk curve. And in that case the a core liquidity hub can give a credit line but with a lesser amount. So the liquidity hub can actually control by its governor how much liquidity is allocated to to what type of innovation and borrow uh configuration. And this is a uh what we call e- mode. So you can efficiently go with a correlated assets um borrowing it against staked ET or borrowing one type of a stable coin

against another one to perform a more uh professional strategy. And the same way as you do with with av3 but the main difference between av3 and v4 is that all these configurations are in spokes. So they don't need to be integrated directly into the main functionality and this gives a lot of flexibility and also uh scale. So what you can build of course like we as a we particularly overlap team we can't build everything we can set down and lay down the foundations of of the new architecture. uh we want to see

innovation to thrive. We want to see more things being built in DeFi. And some of the things that could actually be built, some of them are already being worked, but some are completely new ones. But you could use for example uh LP shares as a collateral um as a separate spoke borrowing against AMM liquidity borrowing more cleaner way against BT assets you can have isolation and uh unlike previously in in a v3 where assets are listed isolation towards the uh main market you can create completely longtail asset

composition So what I could imagine is that in the future in the um a ecosystem we will have also uh longtail assets more riskier assets and we let actually the users to choose how they want to position them um on the risk curve essentially you can create um specific RWA walls for different types of uh parameters as well that you might have some sort of a specialized liquidations. You can enable different types of uh interest rate strategies. You can create fixed lending um fixed yield as well. You can create also permissioning for institutional use

cases. Um if you want to have some sort of credentials or it can be some other requirements that you want to uh whitelist essentially bringing back the a 2.0. So anyone who is in chat 5 will probably be excited about that. So from like the suppliers perspective typically when you enter into the a um app you most likely select one market you you don't really explore much uh but there are set of users that and that's the user user that wants the least riskiest yield. they trust uh and they trust DeFi and and what we built and

they want to earn yield on their stable coins. But there's also a significantly increasing amount of users that want to position themselves into the risk curve and that means that with the new architecture you can enter into liquidity hubs that has higher risk profiles. What it means for the borrowers is that borrowers have more choice and flexibility because spokes can compete with their strategies, asset compositions and and the segregation that it um enables.

One important feature that we also implemented is called risk premiums. So typically how the interest rate is settled in the A protocol is that everyone pays the same rate. for example, if they're borrowing uh USD USDC and I think that's not the correct way to manage risk and and reward and in the future what it means is that if you bring more risk to the protocol, you will be charged according to that risk. But if you have a very lean position, you're supplying only let's say in this case uh staked ET or uh Bitcoin or let's say just pure Ethereum, you're paying the base rate

and the the collateral composition of of of this creates a a computed algorithm that creates so-called risk premium that you will um pay here. So the the the pricing of the liquidity becomes based on the whole collateral composition that you bring. And we have a feature also called uh risk um liquidity premiums that the governor can also set based on per asset. And this actually should price the pool to become the best uh place to borrow. If you have least riskiest position or significantly more riskier uh position, you're priced more accordingly.

So essentially, V4 tries to serve pretty much everyone. For users, it means simpler UI and and UX. All these compositions of liquidity hubs and and spokes can be actually abstracted away with roing and making it extremely simple. Provides lower gas, better rates because of thanks to the risk premiums and for builders this means that you can create world customization. You can access direct liquidity. So typically what happens in in DeFi is new innovation is bootstrapped with rewards tokens or

renting liquidity. But what happens when you the the rent period ends the liquidity leaves obviously. But what happens in a is actually you can innovate a new spoke and then request access to liquidity and once it's granted you have scale of liquidity for your innovation and for institutions we enable RWA credit markets more compliance by customization uh permission pools if there's appetite so we actually see a wide range of innovation So building with V4 it's going to be highly flexible infrastructure.

We're going to have a devet uh very soon in fact next week. So we want to build publicly. We want to show the code base. Um if you're interested in contributing um you have some ideas. Um you can reach out and we can build together. uh you're going to have SDKs uh really good developer documentation and the most sexiest thing you can do is launch a spoke because that will allow access to liquidity and and you can innovate. So why this matters now in my opinion there's a lot happening now in DeFi there's there's more appetite from

governments from institutions um from even retail of on on decentralized finance and at some point DeFi will converge with with stratifi we'll have a lot of native innovation but we also need to get all this traditional uh businesses on chain and traditional um infrastructure replaced by by DeFi. Why? Because D5 is better, faster, stronger. We have more transparency. Um we have more auditability. We have more better capability to monitor risk for example.

And in DeFi, you can monitor and assess risk every single block which can be few seconds or a you know even a second. compared to traditional finance where you can audit these systems on a quarterly basis, annual basis um or not even at all. So V4 is here for meet the moment build something resilient, scalable, trusted and and very developer friendly. So yeah, we should build it together.

Everyone who is interested to participate, if you have any questions, I will be today at the booth. Uh we have a boot here and you can reach us out and we can chat uh a little bit more. And the last thing is that we have a last Java code if someone wants to uh participate. There's limited amount of um tickets left. In fact, just handful. Thank you so much. [Applause] [Music] [Music]