We had a peak of 76 billion in net deposits last year with 30 billion in outstanding borrow volume. I think it's already happening. We are already seeing the conversion. The world is already converging and tokenized assets are a key part of that. I think there's two really important technologies for the future of finance. Obviously, one is AI and the other piece is basically moving the businesses as much onchain as possible. You have much better pricing, you have less friction, more availability, more empowerment, and more financial wellness for everyone. And this might be the first ever crypto product that can be used by your friends and family.
Hello and welcome to Lair 1 podcast. My name is Kelvin Sparks. This is my co-host John Woo, president of Ava Labs. Joining us today we have Stani Kulechov, founder and CEO of Aave Labs. Welcome to the show. How are we all doing?
Awesome. I mean I'm always excited for this but today especially because Stani and his team at Aave have been great partners with Ava Labs and Avalanche for many many years now and I can't wait for this conversation.
Super excited as well. I think Avalanche has been always a big supporter of DeFi and particularly Aave. So it's amazing to get always both of these communities together.
Yeah, I really appreciate you taking the time to chat with John and I today. But before we begin, Lair 1 is a podcast focused on the intersection of crypto in the real world and it's brought to you in collaboration with Avalanche. Nothing we say on this podcast is investment or financial advice. Make sure to always do your own research. And in today's episode, we'll be talking about institutional DeFi and Aave V4 deploying on Avalanche. So, before we jump in, since we're on the topic of Avalanche, I'm pretty amped for the Avalanche Summit. That's going to be September 16th and 17th. Speakers like Guy from Athena, I believe Luigi, Stani from your team is going to be there, Rep Paul from Coinbase Institutional, as well as many others from institutions like Franklin Templeton and so on. So, John, maybe a few comments from your side on the Avalanche summit before we jump in today.
It's going to be awesome. It's in New York City, so it's easy to get to. We have had all our summits overseas in the past. This is the first one in New York for the US community and for the world but now the US people don't have to travel as much and we have great speakers from many of the biggest platforms and players in the space of blockchain and crypto both on the traditional finance and on the crypto native DeFi side. I've been also in the Avalanche summits in Buenos Aires and London and elsewhere and it's always has a really strong atmosphere and it's sort of like where you have a lot of the community members within Avalanche but also a really strong institutional presence and I think in New York I believe that this will compound quite a lot and it's going to be really institution heavy.
Definitely looking forward to it. So Stani, since you're the star of the show today, Aave's made a lot of headlines from V4 to Horizon growth as well as disproven rumors around large discounts around token sales on the timeline. Can you get us up to speed on what you and the team have been working on in the past few months?
Yeah. So obviously Aave has been kind of the flagship protocol on decentralized finance. So, Aave functions simply as a lending and borrowing protocol where you supply cryptographic assets, for example stable coins, to earn and other users borrow them against collateral. And what is interesting is that Aave so far has been quite successful with native crypto assets using for example bitcoin and ETH as collateral and borrowing against these assets. We had a peak of 76 billion in net deposits last year with 30 billion in outstanding borrow volume. And that is incredible because that's simply in a category of 40-30 top banks in the US for example. And now we've been trying to think about what is the future for Aave, how does it look like, and it's a lot about using the infrastructure that we built, the protocol itself that is successful with native crypto assets, and applying that to all asset bases that are coming on chain. And this is an enormous opportunity with RWAs and we're going to talk a little bit about that in the future. And one of the markets on the horizon is a sort of large initiative on this category of using tokenized assets as collateral to borrow against securities at a size of half a billion at this point. And a lot of effort has been going into Aave V4, which is the next generation lending protocol. And why it's really interesting for Aave is because it's at the same time a market structure that can be used on Aave with certain improvements to the previous versions of the protocol, but also it allows to create custom markets, whether fully isolated instances and markets or with shared liquidity. And why this is really exciting in the context of Avalanche is because the biggest market that we are planning to build is actually on Avalanche and it's going to tie into the native crypto assets where Aave has been very successful but also the new use cases which is being able to lend and borrow against securities and later securities lending. And this is the big opportunity for us. And as of today, Aave V4 has reached 250 million in net deposits, which is quite remarkable for a new deployment and a new infrastructure that has been built.
I think that is super exciting. A lot going on there. I love how you just mentioned effectively trying to change how securities lending is going to be done. I came from the world of hedge funds and I know how opaque and how the prime brokers make it so that it's really hard to understand whether your securities are lent out or sometimes you have to opt in and to get some of the yield but still the yield is not transparent for your lending your shares out. All of that stuff is going to be far better if it's onchain and it's transparent and then the value occurs to the individual not necessarily just some intermediary for the sake of being an intermediary. But before we get to all the specifics, if we look out 5, 10 years, Stani, is it going to be a world where the DeFi ethos absorbs real world assets or is it become continued to be two separate worlds but some sort of convergence where there's always going to be DeFi for the sake of DeFi and then some sort of middle ground where it's like a convergence of part institutional rules, part DeFi ethos?
I think it's already happening. We are already seeing the conversion. Aave for example has been integrated into fintech platforms like that is basically a digital platform for creators to build and monetize their businesses online. Creators can basically use Aave within that product's treasury offering. And we see similar integrations obviously you see in the centralized world of crypto and slowly going more towards the trustfire world. And on the trustfire world we are seeing also stable coins issued by fintechs, also credit institutions, also seeing consortiums of stable coins with traditional credit institutions and also asset managers are increasingly looking what to do on DeFi and particularly on chain. So I think the world is already converging and tokenized assets are a key part of that. I think John you really hit the main important point here about the cost structure and how something like onchain infrastructure can really improve that or even disrupt over a scaled scale. So if you look today into the obvious model, particularly lending against native crypto assets, as of today you can borrow at a 4.5% rate from Aave over a long time horizon and that is much lower cost of capital compared to for example lending or borrowing against your crypto collateral that is held in qualified custodians that can be anything between 7 to 12%. Now why it is more efficient is obviously there's a lot of automation that is happening. Aave has processed over 3 trillion in net deposits and over 1 trillion in borrowing, fully automated smart contract basis. And if you look at a similar business model doing that off chain, obviously that comes with a cost. And then when you look at securities lending or security givebacks loans, you sort of run into the same problem: you have very little transparency on the cost of capital, fee structures, and there's a lot of terms and conditions and a lot of manual backend work which basically back office work which has to justify the fees. So I think there's two really important technologies for the future of finance. Obviously one is AI which is pretty much everywhere and the other piece is basically moving the businesses as much onchain as possible. And both of these technologies are about automation, removing middleman, unnecessary layers, streamlining the processes of lending, making more transparent so global market participants can participate. And I think this is the future where we're going, taking what's really been working really well and applying that to traditional assets and improving the cost structure, the cost of capital, and even it serves really well the traditional markets participants like prime brokerages or banks because they may be required to use less of their balance sheet capital when they get plugged into DeFi for example down the line.
Stani, I was curious. So you recently announced that the launch of V4 on Avalanche is the first deployment outside of Ethereum. So this is a dedicated credit market for tokenization. But why was Avalanche selected as the first destination for Aave V4 beyond just the Ethereum world?
Well, main reason for that obviously is the fact that Avalanche has an extremely strong DeFi ecosystem. That means not just only projects that are building DeFi and primitives that are built on top of the Aave protocol but actually a really wide range of DeFi users. So that is really important for building a base liquidity. And when you look at a lot of these leading market deployments on different networks over the years, Avalanche is the actual network and the obvious Avalanche market on V3 that has been able to retain a significant amount of liquidity and you have compounded innovation that has been built on top. So that is really important. And then the second aspect that comes into that is the integration aspect or building primitives on top of Aave is that you want also low transaction fees. You might have integrations into fintechs in the future or into these traditional financial opportunities where you want these transaction costs to be as little as possible. Especially when the deposits on products like Earn, which is a simple deposit into Aave, can range in size from tens of dollars to millions in that spectrum. So those play a really vital role. But Avalanche also has an extremely strong institutional angle. And this is something that has been baked into the ecosystem over the years. I think the Avalanche team is most recognized for being able to build a lot of the bridging between the traditional finance and the onchain world. And now those discussions and initiatives are actually coming all together and the connectivity is starting to happen. And I think at this point every single major financial institution or asset manager has some sort of a DeFi team or digital asset team, and that includes also some DeFi initiatives as well. Some of the teams might be hundreds of people, some might be as little as one or two persons. But that is sort of an example of where we're heading. And that institutional angle is really important for Aave and the user base that Aave is expanding towards. I think what Aave is doing, correct me if I'm wrong, is very interesting because the way you're setting this up, you're solving for that initial liftoff in liquidity and getting liquid and activity going because, you know, everyone's tried this, but getting the demand side of the equation has been very, very hard. And what you guys are doing is you're taking the institutional assets or the real world assets that are going to be KYC, KYB, and properly vetted, and yet the borrowers into the stables or whatever using stables are going to be more permissionless. So between that and the way you've set up this hub and spoke way is basically how you're going to jumpstart liquidity. Whereas others have tried this and it's not been done well because the demand side's just so hard to get. And to this point, I think Avalanche has a community where because we've always been talking about trying to become the bridge to institutions, they're used to this, so that community probably has more awareness of the benefits of real world assets and can help in Aave's effort in jumpstarting the liquidity, if you will.
Exactly. And I think that real world assets adoption will basically follow liquidity. And a simple reason for that is that once you tokenize these assets, the next question is what is the utility for after the tokenization. So what is the reason for an asset to be on chain? And moving permissioned assets for example might be a bit harder for onchain trading, at least at the beginning. But being able to actually borrow against these assets is a really valuable use case, especially because that necessarily isn't a product that is served across all prime brokerages or platforms, or are served very selectively with one-sided terms and conditions that aren't appealing for these borrowers. And we believe that as more and more assets are moving on chain and being able to unlock that liquidity from these assets, it becomes a sort of first use case for tokenization. And that by itself creates very interesting liquidity network effects. For that to happen, you have to see the liquidity in the markets and you have to have already a really strong underlying DeFi ecosystem. And the best part about DeFi is that while liquidity moves from one vertical to another over the years, it does compound into the safest opportunities that are available and that creates deeper liquidity pools that then can be utilized for these new use cases. And with the Aave V4 architecture, one of the benefits of this hub and spoke architecture allows is to create new use cases through these spokes that are simply markets for borrowing and then sharing liquidity across the hub into these different opportunities. So you can use the liquidity that has been built by the more native use cases and route that liquidity into these RWA opportunities. And I think that is a really big strength of bootstrapping a lot of these markets and reducing volatility on their interest rate and pricing.
I can tell it's important to you. I see you and Carlos going back and forth, Carlos from Securitize, going back and forth on the timeline a lot about how big the opportunity is. It seems like a lot of folks haven't grasped it yet either. Yeah, I think maybe Horizon is a great example where it is sort of a half a billion market size, but I think that any asset that is really existing at the moment, whether it's liquid or not, there's opportunity to actually unlock somehow out of that liquidity. Obviously, the more liquid asset is, the more market size there is and vice versa. I think over time, as more of these assets are coming on chain, that creates a really strong opportunity for Aave, and I think this is really good for Aave, it's really good for Avalanche, very good for issuer platforms like Securitize as well because it actually makes these products or protocols bigger than the whole crypto space. Because if you can apply the same technology towards an asset base of 400 trillion, that is an incredible opportunity. And then the next step is to think about how do we go one step further from here, how do we basically fund the future we want to live in. And I think a big part of this thesis is also being able to fund infrastructure that is backing this future of abundance. So abundance is about abundant amount of computation, energy through solar, energy storage, and these similar technologies, GPUs, as well, and being able to actually use the Aave protocol as a way to obviously tokenize the assets first but then use the protocol to unlock a lot of liquidity and reinvest into the infrastructure that we need to build this sort of abundant future. And I think that's the direction we're going to go in towards 2050, and maybe by using Aave and onchain we are able to get that future closer. So the first step was using crypto assets. The step two is using all existing assets. And the step three is like you know what, banks are not willing to necessarily bank as today but is really important. Infrastructure might have a slightly higher technological risk for traditional financial institutions to tap into but could be really interesting for these global liquidity pools that are living on the Avalanche market. So that is our vision that we're going towards.
The way Stani described that progression from one step to another to another is exactly how this is going to happen. And the potential market size, regardless of what Carlos from Securitize or Stani, I think they both agree that it's potentially could be gigantic, especially if you unlock the trapped capital of real world assets and allow them to be collateralized and borrowed and lent. I think people sometimes forget that a lot of the securities in the real world scenario and real world assets, most people can only margin them in a brokerage account. And part of the reason why that was the only way to get use it as collateral leverage was not because people didn't want them to be collateral but because there were certain technological issues such as settling things did not settle and did not clear appropriately. So for the risk of not settling and clearing, it became very centralized. The byproduct was individual brokerage. Prime brokerages became the centralized hubs to control that. And then the byproduct of that was basically they made it perfectly not transparent, the most opaque, so that they can grab their spread and rent from the system. But I think if we had the technology of what we had today, which is basically transparency and a proper settling mechanism, you I think Stani talks about continuous settlement a lot and a lot of people in crypto talk about that. This opportunity wouldn't be where it is right now. And stocks for instance could be used to have be collateral for other purposes than just other stocks. This is what people at Ava Labs and Aave and others are going to unleash and that's going to be a bigger market than people realize in the future.
Yeah, well said. I think I saw maybe it was Luigi or Stani, one of you guys was posting about it was like this graphic going from the analog into the new world and how Aave fits into that disruption of the prime broker model. So Stani, I was curious if you could riff on that a bit more.
I liked where John was going. I mean for us it's quite a fascinating opportunity because we see that Aave could act as a sort of global pool for everything. But at the same time, we're going to see Aave being used as an infrastructure for a lot of these existing venues as well. So I could imagine that a prime broker for example wants to connect into a network where you might have tokenized assets already, or being able to use their tokenized assets or tokenizing them on the spot to be able to use as collateral. So one of the biggest benefits or tailwinds every sort of lending business can have is the ability to use margin. And using margin simply means that you are able to originate more loans than you have balance sheet. And I think that is quite interesting because as a prime broker, you can keep your own customer base for example while originating a lot of these loans where liquidity comes actually from the protocol itself. So this is really fascinating and it makes a lot of sense to create a more isolated infrastructure per brokerage base, but there's also even more benefit of joining a bigger network. So in some cases I tend to actually talk about Aave as a credit network in the sense that every single node that is joining the network is increasing the benefits for all the participants by increasing the liquidity and reducing the cost structure.
Thank you for illuminating there. And it seems like Aave's bet is to keep institutions on a public chain. Almost like keep them inside of their own walled garden. Pardon me. And Avalanche's bet is to give institutions their own permissioned L1s with connectivity to outside of these walled gardens. So maybe could you make the case for why staying on a public chain is the right call?
I mean this is really interesting, right? Because just going back a few years ago, we were in a place where I think every single financial institution that was looking into the blockchain world, the sort of main consensus was that there is this permissionless world that's great for the early adopters, but everything is going to happen in more private blockchains where there's more control and whatnot. And we ended up in a place where we had multiple private blockchains and everyone sort of was in their own walled gardens and you sort of didn't get the benefits of what the technology could actually provide. So I think in few projects that happened over the years like pilots, and then I think the BlackRock's BUIDL protocol is an interesting example where you saw a large asset manager actually starting to use public blockchains instead of private ones and sort of embracing the permissionless nature. And the reason for that is that in a permissionless world, in an open world, trade is much more wider. The more you reduce friction and restrictions over what can be traded and what can be moved, the more basically you have activity. And this same sort of understanding follows also crypto assets and that's what's happening on the permissionless side. A Horizon is that the assets are permissioned on the asset issue level but the market itself is permissionless, so you can supply stable coins in a permissionless way, but obviously to borrow and access to Aave you have to be qualified by the asset issuer. Now I think the future is going to go one step further where these assets are going to be more permissionless and we see some of these initiatives already in tokenized equities where to obtain that equity you have to go and actually be eligible and redeem it to an issuer, but then the secondary market transfers are possible. I think obviously this requires some changes in the policies and so forth. But I think the better future is that if all these assets can trade freely and we have better ways to manage all the risk associated to that. But the end result is that you have much better pricing, you have less friction, more availability, more empowerment, and more financial wellness for everyone. I personally remember opening up my first brokerage account. It was a disaster. It was so hard to onboard and couldn't even buy anything using different banks. They have limited offerings that might have higher fees. You're sort of a captive audience. Really difficult to shop around for financial services. So I think a better world is where everything is connected and that gives the best opportunities for everyone.
