Stani Kulechov: Aave V4 Is The Most Resilient DeFi Market In The World (...And Why)

Transcript

All right, you guys. We are back live at D5 Day here in Cannes at ECC. It's day one with Stani. Obviously a big day. Stani, how do you feel, man? How How does it feel to get this out there in in the wild? I know the team's been really on it, man. It's been amazing. Obviously four we've been working for like 2 and 1/2 years or so and getting it out new generation of a protocol and and also Ave Pro that is um the the also the interface for that. It feels uh incredible. So, it's a milestone for sure, but it's just the beginning in its own way. Oh, yeah. Oh, yeah. It's It's It's a new dimensions for the Ave protocol to have new types of use cases and and collaterals. We're We're super excited

and it also opens up the whole architecture of Ave enabling anyone to come and actually build new use cases as as well. So, that's that's really cool. We're going to see a lot of development not just from the Ave team but community developers and third-party developers that want to tap into the Ave liquidity. Yeah. Yeah. And so, this was the first kind of restructuring of the way the protocol works in several years. >> Yes. Um how do you think about that from a a risk perspective? I think one of the things that Ave is known for is its resiliency and its ability to to manage risk very effectively. We've seen even just recently uh vault exploits and different kind of like D5 mishaps. How do you think about

the risk kind of parameters when it comes to this new iteration? I know you guys spent almost what a whole year kind of risk testing this thing. How How do you think about that? Yeah, I think what Ave is really known for is the resiliency. Obviously, it's the protocol that has been seeing multiple market cycles. We saw FTX, we saw a lot of market down cycles and Ave has been able to be extremely resilient and it showcases that the protocol works really well and the parameters that are always pre-vetted and applied to the protocol has been has been done correctly.

And Ave V4 simply introduces new tooling for risk managers and the the Ave community to manage the risk. So, couple of features, for example, risk premiums allows now to actually price the risk per collateral asset where it's useful and applicable. So, every borrower doesn't necessarily have the same rate when they're borrowing a particular stablecoin. Second is dynamic risk configuration meaning that now configurations can be applied to new positions without affecting old positions. So, this is really fundamentally new tooling that didn't exist before in Ave. And the architecture itself isolates risk into these spokes and

liquidity is tapped into from a hub that gives credit lines to spokes. So, it's a way of actually ensuring that we don't fractionalize liquidity, but we have a good amount of segregation of risk profiles in Ave. Yeah. And so, when you have this kind of hub of liquidity and these spokes of different kind of different risk profiles for different collateral assets, how is the how is the kind of delegation of liquidity kind of how does that choice get made? Is that just based on user demand for that type of asset or how do you kind of allocate the capital in this pool to each spoke? Yeah. So, first of all, there's three

hubs. So, there's a prime that is the the sort of lowest in the risk curve and then there is core that is more of a risk adjusted and then plus which is risk return. And each of those hubs have connected spokes depending on their use cases. And it depends a lot on that hubs risk profile. So, core is where you have the risk adjusteds markets connected to that hub and the idea is that there is the deepest liquidity. And then plus is where you have more sort of tail end opportunities and and then prime is is kind of like the lower end of the risk curve. So, it all goes by risk assessment,

but now what's is different with Ave V4 compared to existing Ave markets is that you don't have only one entry point. You have multiple selection while still keeping the capital relatively um concentrated in a particular risk profile and allowing to tap. So, the way the decision actually works is that it's still a governance decision how much capital is allocated from a hub to a particular spoke use case and that's done by a risk assessment as well. So, it's kind of it's kind of look like the tranche model in finance with like a junior tranche as as one hub, a senior tranche much less risk as a separate hub

and then you've got a third as well. Exactly. You kind of tranche it out. Exactly. And there's sort of scalability there. So, every new use case can also start from a plus connectivity, but as that use case actually matures, it can be then connected into into the core hub and credit line can be issued from there. And and that is actually really interesting because one of the biggest challenges for D5 builders has been to ensure like when they built incredible innovation, how to actually boost up their product and liquidity. And this is the perfect way where if you build something really exciting and really cool, that can be connected into existing

liquidity in Ave. Yeah, because one of the things about Ave was that it's been notoriously difficult to get your assets on Ave. Yes. Which is by design Yeah. because of kind of like the pool structure of V2 and V3. But now essentially you're you're saying, okay, the gates can open to more risky, but innovative ideas in the specific tranche effectively or this [clears throat] specific hub and then those protocols, if they succeed, get access to the other the other capital in that tranche or or in that hub and then potentially other users on Ave of other hubs who may want to, you know, increase their risk limit or try something new as well. Yeah. It will be still hard to get liquidity from the the most sort of resilient and

low risk pools, but it opens up the the sort of like a tail side of new markets, new hubs and and also down the line even hub factories where new hubs and spokes can be created completely tailored to, for example, B2B or institutional use cases. So, it simply opens up the whole system into faster onboarding. And then when these use cases or assets gets proven, then they can access deeper liquidity by accessing these more larger hubs. Yeah. And and this is This is different model than V2 and and V3, but also different than having like a lot of different individual tranches or individual vaults per per asset or

per collateral type. Why choose something more in the middle between like a pooled model and an individual vault model? What do these two models, your previous and and kind of this individual vault model, what do they fail to achieve that this V4 model allows you to do? Yeah, I mean the infrastructure we V4 enables all of the models, but the the chosen market structure, the way we compose the hubs and spokes, um take the best of the both worlds. So, the one entry point model has worked really well for Ave, but also bootstrapping new use cases has been more challenging. So, with this model liquidity is concentrated in hubs and

new use cases can be bootstrapped much more faster. So, users will have the choice on what kind of risk they want to subscribe to. Um and that is important and that choice um allows to take less risk or a higher risk and that that is fundamentally what's different, but also we believe that it is difficult to navigate hundreds of vaults and also have enough information. So, there is a still a governance managed risk unless it's a some sort of like institutional use case that is deployed separately. So, I think it takes just best of the both worlds.

>> Yeah. And I think a lot of the mental models that the industry has had for valuation heuristics and just generally thinking about D5 protocols and companies on chain is specifically for crypto assets, right? So, we've got a couple trillion dollar TAM here of Bitcoin, Ethereum and a bunch of other types of tokens. These These assets, some of them are on chain on Ethereum, on L2s, L1s. Some of them are in D5 protocols. So, it's kind of like it gets smaller and smaller and smaller as you get to eventually using these assets. We were just at DAS last week and it was very very clear that large asset managers are coming on chain and they want to take their assets and put them into yield generating opportunities on chain. Whether that be treasuries,

equities etc. What does V4 enable for that next cohort, right? And I know that you you gave a talk earlier about this kind of abundance framing with regards to AI, energy, infrastructure. We're We're almost kind of going through a new adoption curve within the on chain ecosystem in in crypto of like this abundant new capital coming in to a certain extent. How does V4 set Ave up to kind of be the home of tokenized treasuries of equities and kind of do this do more with your, you know, trad fi asset? Let's say. Oh, it's it's quite a fascinating because Ave has been able to grow because you couldn't go to a bank and give them your Bitcoin or Ethereum and borrow, right? You had centralized lenders doing

that at the same time as Aave, but you didn't have the transparency. And that is why Aave has been able to eat all that market share. Now, we are strong believers that native crypto assets like Bitcoin and Ethereum are going to drive a lot of value and it's going to be the bread and butter for Aave. But we also know that there's going to be a lot of value coming outside of the native ecosystem. And that will happen through tokenization, yield-bearing stablecoins, and also lending not even against ERC-20s or 721s, but against data directly. So, using DeFi as a capital allocation layer and channeling that liquidity into real-life credit opportunities. So, Aave

V4 essentially is a credit protocol. And I think this is really fascinating because we're tapping into 400 trillion asset base that already exists in the On top of that, we are uh we see a lot of uh um benefits in lending against infrastructure that is creating this new transformation where we're heading towards, which means people having abundance of intelligence, abundance of energy, uh abundance of labor with robotics compute and um this infrastructure effectively is what is the direction we're going to go towards the next 50 years and being able

to uh bank that infrastructure and fund it um is a way to actually capture over 80 trillion worth of market value and move that into DeFi and create the most transparent credit market. So, I think if you look at the old like banks how they started JPM and so forth, they they obviously they funded rail rail railway companies, they funded education with Edison and Tesla. Uh you had the industrial revolution. And now we have a new transformation towards abundance economy. And these infrastructure assets are abundance assets. So, it is a big opportunity.

It's maybe not something that we are going to tap into the extremely near future, but that's where the world is going towards. And that is a big opportunity for DeFi and for Aave. Um and RWAs in general is going to be a big part of Aave's story. Yeah, and I think even more so in the near future that these kind of tokenized equities or RWAs will be kind of part of that uh near-term story as we evolve into more digitized versions of the of of AI infrastructure, energy infrastructure, figuring out ways to kind of package that and tokenize that is more on the longer term. But I think right now we're seeing people are interested in doing more with their you know, equities or their treasuries or looping and all these things are

happening. Is there going to be a pool specifically that is going to be in that risk uh kind of basket for these RWAs, equities? Like is there like a a specific pool? Is it different? How do you How's that going to work? No, that's a excellent question because now with [clears throat] Aave V4 we can actually use the market that we have, the Aave Horizon, uh where you can use RWAs as a collateral and borrow stables and lend stablecoins against traditional assets on chain. So, in V4 we can actually create hubs and spokes where collaterals can be isolated based on asset categories into different spokes and decide how much credit line and exposure each hub gives to each spoke. So, it is a really

a big opportunity to manage risk more better on chain and expand the RWA business for Aave. And the Aave native cost go stablecoin plays a big role because go has a full 100% margin as there is no LPs. And go is going to be crucial of these credit use cases, whether it's against uh tokenization or against lending against yield-bearing stablecoins uh or even against let's say credit itself.

Um yeah, that's awesome. And go's been growing consistently and will continue to to do so drive revenue for Aave as a protocol. When it comes to the actual growth of the kind of Aave brand and the and the Aave ecosystem as a professional kind of leader in this space, I saw you guys had a quarterly call recently. >> Yes. Yes, we had. >> Which I think is part of this thesis that a lot of folks have that is like tokens are going to start to look a lot more like equity structures where they'll have these quarterly investor calls or like shareholder meetings almost of sorts.

Just quick takeaways there, highlights. What what was on that call for folks who weren't able to make it and you know, just any thoughts on this kind of maturation of the Aave brand as as a part of of the larger shift in the industry. Yeah, in in general I think tokens are a great way to govern a public infrastructure um in a the most transparent way. And I I think that's in in general we're going to a direction where execution matters more. Um and also there's a lot of professionalization in in in our space. And I think it's a big contrast from the early days where we were still trying to figure out where DeFi is going, how these protocols

are um you know, what's what sort of like are their positioning. And now we're going towards direction where actually this is a resilient viable infrastructure and could actually back all financial use cases. And then the question is how to make this as transparently and accountably as as as possible. So, Aave um Aave builds and operates in public. Definitely. And what were some of the key kind of takeaways and things that folks may have missed if they weren't able to attend that that quarterly call?

It's a lot of about actually the looking towards like the existing Q1. Obviously we've done um we're on track of doing the same amount of revenue we did last year. Um also we had a lot of new market deployments, new partnerships. One of the biggest integration that happened was actually integrating Aave uh into WAP together with Plasma, Veda, Previa and all these and all these partners. And it's such an interesting integration because it's the first time fintech at this scale integrates DeFi.

And we're talking about 21 million users being able to access Aave through WAP Treasury. Um and thanks to all the partners that we also have in this project. And that is a significant. So, it's effectively a fintech in the front and Aave in the back. Uh and I think that's going to that sort of integration cycle is going to continue. And also uh we believe that going directly to consumers is important and bringing DeFi closer. And that is what we're doing with the Aave app. Obviously Aave Pro is focusing on existing DeFi users that need more sophistication. And Aave

app is simply abstracting away whole DeFi experience offering self-hosted wallets uh with the ability to sign up with an email, phone number, uh abstracting away all the complexity, net forks, gas, stablecoins uh being able to link your bank account and deposit directly to Aave. That is the the value proposition that consumers can handle. But I got to ask how did that WAP thing come to come to fruition? How long did that take? That is actually that took quite a while. Obviously it's a really big project and and uh a lot of work has been actually done by the the Plasma team, by the Tether team, and the Veda team, and also Aave team. Um so,

it's been a really uh uh interesting collaboration in general. And I think what WAP actually did, they set a a really good precedent on how fintechs could actually leverage DeFi lowering their cost structure and then being able to take the middleman out of the equation and use more programmable solutions that become their become more scalable for them. Yeah, and so WAP gets WAP users get exposure to the assets that are on the Aave iteration on Plasma.

Things like syrups, syrup USDC, USDT, other yield-bearing tokenized treasury assets. And just that they're able to kind of get this idle yield on their holdings in the app. Um you know, they spend it on anything from clippers to graphic design to hiring, etc. They don't even know that they're using DeFi. And on the front end of WAP is there like an option to get yield? Is or is it just natively embedded? Yeah, it's it's it's basically natively and it happens and and the deposit happens quite natively. And I think this is the right way to integrate DeFi. It's simply a invisible infrastructure. Yeah, awesome.

And then you guys also just announced I think yesterday or today the integration with Chainlink's SVR. Yes. >> This is something that I think folks are somewhat you know, akin to, but don't really kind of understand Oracle MEV. It's kind of like a it's something that when people get liquidated on different positions, there is searchers and block builders that are able to kind of sandwich these positions and get basically extract MEV from the liquidator itself. >> Mhm. Um Aave's chose to to work with Chainlink's SVR product. I'm just curious how much revenue you expect to pull from that integration or just kind of like generally what that looks like from a business line line standpoint. Or if it's just helping your users, you know,

you know, save save more of their own capital. Yeah, it's actually it helps all the users. It also helps the the Ave treasure as well because they're it's a balance of uh uh being able to get Ave as a community to to capture some of that revenue that um liquidations occur with the MEV directly into the Ave treasury. So, um it is quite helpful from that perspective and it's a way of mitigating also the um the Oracle MEV. And now it's live with the Ave it's been live for quite a while on the Ethereum mainnet and now it's live also on for example on Arbitrum with the new integration.

Awesome. And couple last things for you in the in the Ave post you guys summarized that all of the existing users of V3 and other kind of iterations of Ave or it's perhaps it's just just V3 do not need to switch over to V4. If I'm if I'm an Ave Ave user, what does this mean for me? Do I need to change my assets? Is there any advantage to shifting? Like what is the what is my protocol here? Yeah, V4 V3 will live as long as it's needed. So, the way we approach always every single iteration of our protocol is it's going to live as long as the blockchain is available. So, we still have

a deployment of Ave V1, V2 and uh uh V2 obviously and and it also it's user choice to to to migrate. It gives opportunities for users different hubs and collateral compositions that gives more opportunity uh for the users. Um but end of the day there is no rush obviously. We have a controlled launch where we are focusing on security rather than growth in the beginning and we want to ensure that everything works really well.

And Ave V3 is perfectly working system. There is there is nothing wrong with that. So, it it all will take time and and we want to be to be as organic as possible. Yeah, awesome. Um last thing for you on my side kind of a a left field one here. I was in Davos and there was this there was this guy Austin Campbell came on our show and he gave this take and really curious your thoughts. He said you can only have two of the following three. Permissionlessness, smart contracts, and RWAs including stablecoins. Suggesting that in any sort of DeFi protocol in a permissionless blockchain environment like Ethereum, like Ave, anytime there's a RWA so like a USDC, a USDT, any sort of like

tokenized asset, uh there's always this risk of a a federal judge or an agency seeing that there's some illicit activity or some sort of, you know, something happening and just bricking the the protocol or that pool specifically and telling the the folks to go figure it out who are involved. And he just he this is kind of this kind of comes into in the lines of this broader debate that's been going on on Twitter about permissioned blockchains versus public blockchains and the lack of privacy versus the kind of database nature of permission chains and how institutional allocators and regulators are thinking about these things.

And so I'm just curious like from Ave's perspective from your perspective, how does the permissionlessness, the smart contracts, and the RWAs how is there a seamless integration of the three? Do you agree with this take? Do you disagree? Um yeah. I mean there's every single asset has some sort of a trust assumption. On Ethereum itself as an Ethereum network the trust assumptions are so that it's, you know, it's very economical to save, right? It's it takes a lot of uh energy let's say coordination to actually break uh Ethereum and and result in the same opportunity. So, you have to get every majority of the nodes for example. Um maybe that's less in in stablecoins that are genius compliant for example.

Um but at the same time I I do think that's um you can achieve resiliency even you stablecoins and typically stablecoin issuers they don't really make changes on you know, if if an assets are in the protocol they can freeze accounts if if you withdraw and there is a reason to do so, but otherwise I don't believe that's a major concern for now. And I do think there is also a more decent this option. So, Ave's native gold stablecoin is purely uh well, it's more mainly backed by Ethereum like assets and it gives sort of opportunity, but if you if you have a

a stablecoin fully backed by native assets obviously the scale is going to be limited there. So, um it's all about how to create trust minimization and and how much is sufficient amount that you have a operational system because it always comes with a cost. Ethereum running Ethereum has a cost and that sort of needs to be balanced as well. Yeah. [clears throat] So, you see so you do see future of immutable blockchains highly decentralized chains with permissioned assets on them in running in a uh kind of congregated or commingled pool with kind of like non-RWA assets from on that same chain

like you see that future happening. Yeah, I mean sort of exist like there's sort of assets that are issuer based and and actually that's great because you can push the liability on asset issuers instead of protocols. So, protocols shouldn't have any sort of uh uh liability. I think market should work in a the most resilient way and shouldn't be interrupted for any kind of activity and that should be handled on asset issuer level. So, I think that's sort of actually good for DeFi protocols because um you know, you want them to be resilient. Yeah. Yeah. Yes, I I fibbed one last thing. I put out this this post saying if the tokenization thesis is correct and trillions of dollars of

assets come on chain, which company will benefit the most? And the resounding kind of set of answers that I received was DeFi protocols specifically on the lending side. Um Oracles and exchanges. Curious if you agree with that or if you have a different take. Well, I think where Ave is sitting is in the middle of DeFi, stablecoins, and RWAs. And I think those three components makes the future of finance. Beautiful. Stani, congrats on V4 and amazing uh one day of that here in Amsterdam. It's been great. It's a little different than last year's villa, but I think in the right way.

High signal, good good conversation. So, thanks for joining us. Thank you so much. Cheers, Stani. Cheers.