When it comes to DeFi, it's this machinery that just keeps working in the background regardless of market cycles. We had a lot of liquidations, but what it really proves is that these DeFi protocols, they are extremely resilient. They work really well, and they generate revenue. We went from DeFi is experimentation to DeFi protocols sort of are the future to DeFi protocols are making revenue. For Aave, we did almost 150 million in that revenue. Now, we're even in a more exciting phase where we're starting to see institutions thinking about DeFi.
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Welcome back to the show, Stani. It's a pleasure to have you here. Before we dive into everything surrounding Aave, I would like to digest the entire market at this point in the DeFi market. So, there's been a lot of stuff happening. We had some guests on the show that say that the on-chain markets or the on-chain data are super depressed at this point. But then, a few days ago, the news came out that the Aave activity has just suddenly spiked. So, I would like to know from you where is DeFi at this stage? Is it still alive, or how do you see it?
Yeah, I think Michael, when it comes to DeFi, it's this machinery that just keeps working in the background regardless of market cycles. So there's always technological progress, but also it proves its resiliency. DeFi obviously consists of different sort of use cases. You have the trading use case, you have the perps, you have lending. And lending is sort of an engine that powers all the use cases. Lending is also interesting because it is a market-neutral tool for a lot of the users. You need the ability to use your assets as collateral and borrow against them when for example the markets are in good shape for leverage. And then on downside cycle markets, you use lending and protocols like Aave where you could unlock liquidity when you don't want to dispose the assets and positions. So it acts in a market-neutral way, but the more important piece here is that when the markets move up or down, and particularly down, these protocols are stress tested.
Especially during last year during the 10th of October, hundreds of millions were liquidated in Aave in a complete, transparent, decentralized way in a few minutes. Beginning of this year, we had a couple of market moments where we had a lot of liquidations, but what it really proves is that these DeFi protocols, they are extremely resilient. They work really well. And they generate revenue. Not all of them, but protocols like Aave. Not only revenue from lending and borrowing, but also liquidations and other types of revenue.
Regardless of this year, and obviously last year was an extremely great year for Aave. We did almost 150 million in net revenue. We're doing now 140 million annualized revenue as well, going towards the same direction as last year. It just showcases that the resiliency and the DeFi protocols can actually produce revenue and viable businesses. So we went from DeFi is experimentation to DeFi protocols sort of are the future, very interesting, to DeFi protocols are making revenue. And the next stage is basically using DeFi protocols beyond the native crypto assets like Bitcoin and Ethereum, using tokenized assets. So eventually moving towards using Aave not just for crypto assets and lending against and generating yield, but all asset bases in the future. So it is an interesting stage of this process.
Are you enjoying this phase more than the previous periods in like 2016 or 2020? How do you go through these types of stages of growing a business or growing a protocol?
I loved the most the stage of the very early stage of DeFi summer. The reason for that is not only the high yields, but the conditions that led DeFi to become first time something, right? So I started building Aave before that year, then in 2016, 2017, and at that time it was a lot of experimentation.
2020 and when DeFi summer happened, we had really extreme conditions. We had COVID was starting up, interest rate environment went to zero. So people were sitting at their homes concerned about the financial future, didn't have yield opportunities in the traditional sense. They were finding DeFi, the technical users, right? And you had these DeFi protocols distributing governance and creating this interesting yield infrastructure. And that was for me exciting because we saw a lot of innovation opportunity in DeFi coming to existence. So that was exciting.
But I feel like now we're in an even more exciting phase where we're starting to see actually institutions thinking about DeFi, hiring people who are experienced in DeFi, understanding DeFi protocols, understanding stablecoins. We have stablecoin regulation in the EU, stablecoin regulation in the US. We're close to getting clarity, the Clarity Act, regulation and clarity for crypto as a space, first regulation that touches upon decentralized finance. And Europe is starting to look into decentralized finance, and the UK. So we're in a place where if this clarity is becoming true, that invites a lot of institutions and fintechs into the space. Never before has it been an exciting moment to build.
And from Aave's perspective, it's a really strong trend. And institutions, they want something that is resilient like Aave. And for Aave itself, it's a great opportunity to actually get into retail as well and into mainstream by creating direct experiences to consumers. So I'm extremely excited about this phase, even though it is not the shiniest moment to build, but also the most exciting technology and progress is made in times like this when it's not that easy and you have to stay focused.
I think it's a great reference to any retail participant that used DeFi back in the DeFi summer that was chasing those high yields, which isn't sustainable. And now they're all trying to chase the hottest AI stock or whatsoever. To me, actually, the current phase resonates quite well with the 2017 phase of smart contracts or 2020 of DeFi. Like, you can really see that the direction of finance in general is going to be on-chain. And it all starts to build up as a big cocktail and starts to get into the emerging financial world right now. And I see the recent case of SpaceX with the IPO was probably one of the first times that we saw on-chain securities having so much volume. How do you see that transition coming in? And what is the impact going to be for Aave when all those securities become tokenized?
I think that the tokenized securities, especially in the context of securities-backed lending, SBLs, and securities lending, SL — these two categories, SBL and SL, are the biggest opportunities for Aave. Aave really stood out by showing that DeFi is possible in a better cost structure, pricing, transparency, and ownership of assets is possible with native crypto assets. Now, we're taking the same exact infrastructure that we built, even our latest innovation with Aave V4, that is the state of art of lending protocols, and applying that to these traditional assets.
So far we've been able to grow significantly lending against traditional assets. We have Aave Horizon, which is half a billion almost in market size, where you can supply stablecoins and lend them against tokenized assets. As for borrowers, they can unlock liquidity and sort of use the Aave Horizon market as a repo market. Now, going forward, the biggest opportunity here is that as more and more assets are coming on-chain, they need utility. And the greatest utility of all is the ability to unlock capital and liquidity out of these assets. So that is where being able to borrow against securities is quite a big opportunity because it's also underserved geographically, globally the same way as stock markets are underserved globally.
Also, in the western world, the offerings for being able to lend against equities or any sort of traditional assets is very limited. And it's a service product that is case-by-case provided by banks or brokerages. Aave actually brings in a very viable market structure and a product for securities-backed loans and also doing the same for securities lending and improving the margins, the cost structures and doing it better over time than the traditional market structures that we see today or the services that are provided by the traditional financial institutions.
Would you say that we're still going to be calling it decentralized finance in 5 years from now, or are you putting yourself into some sort of niche box and it's actually just going to be finance?
I think already the terminology of DeFi, decentralized finance, is fading away. And there's a concept of on-chain finance or something else because the actual point isn't the decentralization — it's actually being able to build something better, faster, stronger. And that comes from resiliency, transparency, guaranteed execution that smart contracts can provide. If a smart contract can replace hundreds of thousands of functions in a back office on a scale, that is really appealing.
As of today, for example, Aave has been able to process over three trillion in net deposits, has been able to also do the same for one trillion worth of borrowing as well. But that just showcases how much velocity the protocol had over the years. And imagine doing the same with tokenized assets and doing it in the traditional world, how much it takes. You don't end up in the same cost structure opportunity. That is why I think it's all going to be finance in the future. But we need to sort of have some concept or name for what is happening here. And what is actually achieved from that resiliency. So I think it's either open finance, on-chain finance, whatever that is. It's happening now.
And what are going to be the key participants that are going to unlock it into saying that it's going to be finance? Is it going to be banks that are going to be deploying DeFi or integrating protocols within their own systems and then we just use stablecoins everywhere? How do you see the next phases when it comes to DeFi?
I think banks will definitely be a big part of the story and they will start using DeFi protocols like Aave, financial institutions, and that helps to establish good network effects. Every node that is added into Aave, every entry point for lending and borrowing increases the liquidity, reduces the cost of capital. But I do think that you need a DeFi team to actually break through the retail. You need basically a great DeFi protocol, really good design, really good experience and a good messaging around that innovation to break into mainstream. And I think that is something that Aave also wants to achieve to do in-house.
So how Aave is very different than anything else is that Aave has extremely good infrastructure for lending and borrowing that any institution can tap into and benefit from that. But also Aave creates direct distribution through the protocol layer. And that is the Aave app that is focused on retail, Aave Pro that is focused on sophisticated DeFi users, and then there's Aave Kit that is focused on integrations with B2B such as fintechs and traditional financial institutions like banks.
The idea here is this. We need to take what we built and did really well, package it into a seamless experience — embedded wallets, simple onboarding, being able to link your bank accounts, pull the funds and deposit them into Aave and have it as an experience that feels like any sort of fintech application, but that is running on on-chain rails. That is the experience. If we get there, it's an enormous opportunity to onboard a lot of users into the space.
If you talk about the progress of Aave and the things that you're building, for anyone that is listening at this point, what is Aave V4 doing and what is the unlock there?
Aave V4 is actually a completely new generation lending protocol that allows to create market structure for lending and borrowing. That means that we can create lending markets where you can, for example, deposit certain assets as collateral and borrow stablecoins against those assets. It has a new architecture that is more modular and it allows to create completely isolated pools that are segregated, or completely shared pools, or even hybrid in between.
So it allows to create pools with stronger capital efficiency or strongest sort of isolation of these pools and lending opportunities. It's an infrastructure that can be used directly by supplying liquidity to these pools or can be deployed as new pools for certain use cases in a B2B context. So it simply is a modular architecture that can also be expanded with extensions as well. So it's two years of work where we wanted to understand what is the sort of protocol that we need to deploy where you get both of the best worlds. You get the highest capital efficiency or risk isolation that for example institutions might want to have and how we can give that in one single protocol. And that is sort of how Aave V4 was born.
If everything is segregated between or you can actually build isolated pools, how does it work? In terms of security and safety, how can the protocol guarantee that everything is safe essentially?
Yeah, the way you do that is that you codify the requirements and parameters into the smart contracts. And based on that, you can guarantee certain outcomes. For example, interest rates are completely directly written into these smart contracts, so they're guaranteed. It might be certain collaterals that might be listed with certain loan-to-value ratios. And then you can choose whether these are completely immutable configurations or if these can be managed or adjusted by governance, for example, like the Aave DAO.
And obviously when it comes to DeFi protocols, an important part of that is that there's a very rigorous process of designing and developing DeFi protocols. And that is what Aave is known for over the years. But also on top of that, you have certain audits that you have to do, technical audits, formal verification — it's a way of ensuring that the protocol functions the way that it was built. Formal verification is something that is used in other industries like avionics, space industry. And more recently, we use a lot of AI-assisted reviews, which allows to basically take AI and use that to improve the security of the code bases. It is an intelligent process to build DeFi protocols.
And then obviously there's the Lindy effect, which means that the more time and value that these smart contracts hold, the more likely they are trusted. And Aave obviously is a brand that has been in the space for multiple years. And the way we build DeFi is that we innovate, but we want to do it securely. And we see it always as a long game. It will take decades to actually get full penetration of on-chain finance into traditional finance and have this sort of merge over time.
There was some news that came out recently where Aave V4 on Monad. I would like to give you some time to elaborate on the news that just came out.
It's quite exciting because Monad is basically a network which is EVM-based, has the Ethereum Virtual Machine, means that it supports the type of smart contracts that Aave has built and deployed. But that network particularly is focusing on high throughput, which basically is substantially different from the underlying Ethereum network because of the decentralization and resiliency that Ethereum has, that also acts as a way of why people trust Ethereum for that sort of resiliency and certainty that it brings. You need also speed. And Monad is the only that can actually bring that.
And what's interesting about Monad's launch is that you can actually support lending use cases that require high throughput. That can be, for example, perp trading, anything where you have a need for faster settlement. It can also be payments, where lending use cases can actually be very useful. So that is why I'm always excited about deployments where we have speed and higher throughput.
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I just want to, going out of the box of Aave for a second, because there's been a lot of debate on the use case of Ethereum, or at least on social media with some people that are saying Ethereum is not — it's done, essentially. It's the Cardano of this cycle, or whatever chain you would phrase there. I'm in a different camp because I think that ultimately institutions will go to the safest place, and then they go to Ethereum or they go to Aave, depending on what use case they have. What is your vision on Ethereum? Why is it lagging behind, and how do you see it progress over the coming years?
