DeFi Needs a Demand-Side Revolution

Transcript

So, the typical dilemma for DeFi lending is um you want to concentrate capital um to simply um make capital more efficient um in in whatever opportunities that you you might have. And at the same time um you want to segregate risk and isolate risk. That creates a challenge with uh fragmentation of of of liquidity. And obviously going to these two different directions wonders we work. So, you have on the other side of the spectrum uh full isolation, fragmentation of liquidity, and the other side obviously you have concentration of of of liquidity and um you don't have isolation of of

risk. So, the solution for us and uh Aave V4 that we've been uh uh solving over the over the past uh couple of years is to figure out what is the best middle ground. How do we actually ensure that we can tap into uh existing liquidity pools uh and take the benefit of the pooled model that DeFi has been uh very successful and and and build upon. Um and and also how we then can create from that shared liquidity model a market structure that serves any sort of like a credit uh use cases. And we came up with a modular architecture between hubs and

spokes where liquidity is stored in in hubs and then the spokes are where all the collateralization, the borrowing logic uh is happening um and the use cases are. And these uh hubs are then allocating credit lines to these spokes that are individual use cases. And this model uh sort of taps into two important things, uh liquidity concentration and uh avoiding the the the fragmentation of liquidity while being able to isolate isolate uh risk further.

And why we actually built this, so obviously we want to have a ability to tap into uh use cases that are beyond uh what we know today in in DeFi. And something that I like like about DeFi and what keeps me uh in the space is that um I feel that every sort of a year or a cycle there is uh new primitives on-chain primitives, but also interesting opportunities that are coming from uh tokenization and and credit in general. And when we started uh Aave even back in the Ethlend days, our goal was to solve credit uh not just simply lend against let's say Bitcoin and Ethereum and native crypto assets, but actually think

about like how smart contracts and how DeFi could be used uh to to back all kinds of uh credit opportunities. And I think there's just different audiences in in general. So, um there's the degen audience like me and and some of you all if if not most um that love the way DeFi works today. Uh there's certain improvements that can be made. Um and there's also institu- institutions that are looking to understand how to use DeFi in their own existing products.

Um they need for example isolation, uh risk management is important. Um you have also RWAs. Uh that is a whole big category with sub asset categories and all its own peculiar environments and and in overall everything that we build needs to be resilient uh at the same time. So, what we are actually planning uh with with Aave V4 is to understand how value um how value can be actually collateralized. And and the typical way that happens is through tokenization. Um

that is one option. The other very popular option is uh yield bearing uh stablecoins. Um we also believe that there might be no tokenization as well in the future. Um and we want to tap into those uh credit use cases with uh with Ave. And Ave V4 is basically here to serve that. So, what we're looking to do is to make Ave um a credit layer for all financial use cases in the future, uh whether it's against uh native crypto assets, against tokenization, or simply against uh data that can be brought from uh consumer finance, uh businesses, uh any sort of like uh real-life use

case. And the idea is to actually use what DeFi does really well, aggregating capital, creating better cost structure for um lending lending or trading or any other uh um uh a use cases. And at the same time, then finance a lot of these opportunities. So, Ave V4 for us is something that will uh ambitiously try to achieve and and back uh all the credit use cases in in traditional finance. Um and what is most exciting for us today um and I'm really proud of is that uh Ave V4 uh is live today.

Thank you. Do you want questions or Yeah, we want questions. I'm I'm holding a contest to ask a AMA with Stani. Now's your chance. This guy first. go for it. I have a mic. Thank you very much. Uh my question would be going to one of the first slides, how is spoke allocation determined within one liquidity bucket, one liquidity point?

That's a really really great question. So So there is a few things to to consider. Uh liquidity hubs are governed uh um they have a governance and that governance and risk assess- assessment determines um how credit line is allocated from the hubs into the spokes. And another thing to um to to realize that is really uh interesting is that every spoke can be a custom implementation. So when I earlier mentioned that um the RV4 can facilitate a model like lending against ERC-20s, it can also facilitate against ERC-71s, but also lending against uh data that might come from a a a a outside

blockchain resource such as for example credit data or obligations um and it shows sort of how flexible the architecture is to any kind of a credit uh use case. Another question. We have a social decentralized wallet now. How is the best way for builders, founders, and us to integrate the V4 via API into our product?

Yeah, there's different ways. Obviously, the the most classical way is to um integrate directly the smart contracts. Uh the another way is through the Aave kit, which is the um API endpoints that gives additional um makes it as as easier easier to integrate with ready-made um as the SDKs. And one interesting thing about for for developers about uh Aave V4 is that um from us from a community standpoint, we wanted to have a version of Aave where um any developer or development team can come and build and expand the protocol. So, what that means is that because the architecture is modular, um we can add different kinds of spokes

into the architecture for different kinds of uh uh use cases, whether it's lending on chain or or or something else. And the Aave V4 as an architecture looks might look very different in 6 to 12 months or 2 years from now just based on these uh community uh and and public uh contributions. Over here, Stani. Hi. Thanks for your presentation. Uh what about the current Aave Aave V3? Will you incentivize users to migrate to Aave V4?

Yeah, we've done uh uh now three three migration strategies, and this is the fourth one, and we follow uh the very similar path as with the previous uh migrations, where the users have always the choice uh to migrate. Um there's not going to be forced migration or or or sort of uh uh push there. Um and obviously it will take time. So, V3 is going to be here around for uh years to come. Um technically, V1 and V2 are still around, and uh and that's the beauty of DeFi in the blockchains because applications can run forever, and then users can actually choose what they what they want to use.

Um so, that that can happen um pretty organically. So, if we ignore US Treasury bills, is there an asset class that you think could actually make Aave and Aave 4 grow and offer yield to people on chain at scale, like something that's really scalable and could be tokenized and brought on chain and actually sustain growth for the protocol without the US debt? Yeah, I know no one likes US debt, right?

But um yeah, I think uh the scale comes from actually um diversification of of different assets. And uh one thing that the the new architecture will help is that uh because of the hub and spoke model, you can have multiple hubs. So, on the launch of Aave uh V4, uh we launched also Aave Pro, which is the um new interface for for Aave. And I think there's a few developers there actually launching it there and testing it out. And so, you know, no sweat. Um and it's going to be also live in uh in a in a few minutes. Um but I truly think that uh the initial configuration is that there

is Prime, which is a uh lower risk market, and then there is Core, which is risk-adjusted and plus for risk return. But over time, they can be more uh hubs for particular types of collaterals. And Aave already has a RWA-based market, Horizon, which is also going to be ported to V4 uh with additional flexibility because you can add and move move different asset classes to uh separate spokes. So, I think that's actually uh the the future of the scale is to have a diversified set of uh hubs and spokes and and collaterals uh that create that uh scale for yield and scale also for these uh borrowing opportunities. But I

don't count any scale until we actually hit two mainstream uh credit use cases and actually can um uh produce uh credits uh to minutes of people and that's a sort of a scale we're going towards with Ave V4. Thanks Stani. You actually addressed my question originally about Horizon moving over to Ave V4 because I know that you're already leading the way in terms of financing tokenized RWAs. How do you think about the pipeline from TradFi to on-chain? Right, so bringing some of the paper that's already out there on Wall Street to and Main Street to on-chain investors in DeFi.

Yeah, I think tokenization also plays a big part of that and I I do think that's especially RWAs that necessary aren't traded in an active venue are interesting form of collateral especially if the risk the the risk assessment allows that and that is because it creates higher utility for for these assets compared to assets that are already traded very actively. But something that we're excited with with Ave V4 is that we're building a spoke where actually the the collateral can exist

somewhere else besides in the Ave protocol and can access the liquidity of Ave V4. An example is that the collateral can exist in a qualified custodian whether it's digital assets, crypto assets or traditional assets as well and this opens up opportunity to actually onboard a lot of assets far more quicker by simply issuing credit lines towards those opportunities and bypassing the whole step of tokenization itself and I think that brought brings a lot of scale as well.

I have a simple one. What's the feature that gives you FOMO personally of Ave V4? I think that one very interesting feature is um this built-in sweeping mechanism within the Ave V4 pools. Uh which means that uh the float the the the float liquidity that is in in Ave can be um reallocated into risk down opportunities. So, if the rates are lower in in Ave, they can be allocated into, for example, T-bills. I know this this guy here doesn't like that hearing that, but um it just showcases kind of like the versatility of of uh Ave V4 and

the capital efficiency you have. The The another uh really interesting feature is risk premiums. And normally when you borrow from uh uh DeFi lending protocols, you borrow an asset at a certain price. And if it's a pool model, um everyone, depending on their um regardless of their collateral composition, are paying the same rate for borrowing a stablecoin. So, risk premiums allows to price the borrowing cost for the users uh based on their uh collateral as well. And I actually think that it might be even more useful for RWAs where you have new types of risks that are not native for uh the on-chain world, such as, for example, duration, and you want to um

price that risk according accordingly directly to the uh to the asset and reflect on the borrowing costs uh directly. I'm wondering if you already have an idea about Ave V5 and how it's going to look like. I know I I think our our our our engineering team is is always uh thinking kind of like the next steps and uh and obviously like it's it's a RV 4 itself has been like a big workflow for us over the past like a couple of years and it wouldn't be possible without our engineers. So they've been working really hard for for quite a while.

And and I think that the the progression for RV from now on is basically increasing new modules as innovation comes. So there there will be less frequent upgrades. There might be no upgrades in the future. Instead there might be just simply better hubs, better spokes to be deployed. That have has certain new features for example and that's the beauty of a modular system because you don't need to necessarily make changes into the existing code base.

Yes, in terms of credit products, do you see the introduction or reintroduction of the fixed rate borrowing on RV? Yeah, I think fixed rate is it was basically our first love with Ethland and it's something that we're we're also working on. And I think the existing architecture is really interesting because it allows to create fixed rates as a spoke and tap into existing concentrated liquidity pools which makes it with the hubs and makes it really efficient. That is also something that we're working on and quite excited about.

When mortgages on RV? I mean it's a good question. I mean um with the with this new architecture it's far more easier to onboard new assets. But also I think what RV 4 solves um is is this challenge whenever we have new markets you have this incentivization problem that you have to bootstrap the markets and incentivize the liquidity somehow and you have fluctuation on liquidity and rates. And something that we really love about the new architecture is that anyone can build a new spoke, have new set of collaterals, have conviction that may be

can be listed even completely in a permissionless way and if it gets traction it can be actually that spoke can get liquidity from the main liquidity hubs. So Ave V4 is also an opportunity for a lot of builders and it's been surprising that during this week and the week is still early I met a lot of people that are already building spokes, native spokes and use cases and also RWA use cases. So that is now possible to do in a more scalable way and also isolating the risk accordingly.

All right, go one one last chance. Going once twice. All right, sounds good. Thanks Stani. Can we get a round of applause, please? Thank you. So up next Stani's not Okay. Good afternoon everybody. Thank you for coming along and joining us. A big warm welcome to Jean Marc Stenger who is the