Hello and welcome back to CryptoClarified. My name is Vin Tran, responsible for business development at WisdomTree Digital Assets.
And I'm Dil Schlinskita, responsible for digital asset research at WisdomTree Europe.
To start, $3.5 trillion in lifetime deposits, 60 plus percent market share in DeFi lending, 6 years of operation with zero critical failures. Our guest today built all of this starting from a law school dorm in Helsinki. Today we are joined by Stani Kulechov, founder and CEO of Aave. And right now, Aave sits at the intersection of the three biggest conversations in crypto: institutional adoption, real world asset tokenization, and bringing DeFi savings to mainstream users. We're covering all of this today. Please welcome Stani. Hello, the one and only Stani. Welcome to CryptoClarified.
Thank you. Thanks for having me here.
Absolutely. For those listeners, this took a while. For those who don't know, it's been quite the year in crypto. This took many months of prepping. So Dil and I could not be happier to have Stani on. And to kick off on a fun note, right now it is World Cup season. The world is watching Stani. So, I hope you're right, because I made a fool out of myself with the prediction I had on a prior podcast. Who do you think is going to take it all?
Before the World Cup started, I had my heart on Argentina. I think it's a team that plays really well. They play really good offense. They have proven to have a little strength and there's a sort of never giving up attitude. And I think Messi has played really well throughout the whole World Cup. And I think the last game proved really well how they went from zero to two to three to two. It's really remarkable. Who did you actually predict?
Oh man, I said and I was wearing the USA jersey while doing this. I said the USA, we're going all the way. And unfortunately, we got knocked out this week by Belgium. This podcast will be released way afterwards, but it's fun to see what the predictions are like. Do you have a prediction?
No, I'm not that close to football at all.
Fair enough. Fair enough. All right. Well, to segue, talk about hard work, talk about resilience. Let's get right into it. Stani, you grew up in Finland. You dropped out of high school at 15 to learn how to code. You went back, you studied law, and you built a multi-billion dollar DeFi protocol. That's not a very typical startup story. How did growing up in Finland shape how you think about things?
Yeah, I guess Finland is sort of, I would say equality is a big thing in Finland and access, particularly access. Finland is known for providing access to education, healthcare and a lot of these services. So in certain ways it creates a lot of opportunity for me growing up. Obviously I grew up online. We got the first computer in, was it '95 or '97? Probably '97. And whenever the broadband became better you had more capacity, you could do more things online. Obviously I started to read a lot about accessing information globally. And then commerce became global as well, internet stores, Amazon, eBay, and I think that made a big impact for me personally because I was really fascinated about this idea of being able to live in any sort of location and being able to have access to information, access to the same items and goods. And then later I got more excited about finance and the idea of what if finance can also be accessible in the same way. People in Finland or Argentina, in APAC could get access to the same financial opportunity and that was very interesting for me in my early 20s when I did my first startups in fintech, which failed, and I went back to university. Actually I had to go back to finish my high school to get into university. And then seeing the idea of Ethereum in my 20s, now you could actually program on the same substrate and build financial products on the same substrate. There's no concept of segregation or fractionalization that we have in today's financial world. That was for me the calling for DeFi.
Amazing. And when we could kind of hone in on the Aave problem, when you came up with Aave or at least ETHLend at the time, what was the main financial problem that you were trying to solve? You talk a lot about access, but what does DeFi really mean? Because I find that was the birth of DeFi almost.
Yeah, and I think that's what is truly fascinating from a developer point of view. You can build and deploy an application that is then accessible to anyone. And DeFi, especially the early days of DeFi, was about being able to build once and just distribute to all audiences. ETHLend was simply a mechanism to have a loan transaction on Ethereum, fully collateralized. You put ETH as collateral, or tokens as collateral, borrow ETH. This was way before stablecoins. And then later when stablecoins came, being able to borrow the cash, the stablecoin on the blockchain while putting collateral in. So effectively what Aave or ETHLend solved back in the day is the ability to create interest rate markets. Earn yield on stablecoins and then also borrow liquidity against assets, mainly digital assets that are more native like Ethereum and Bitcoin, but now more recently tokenized assets as well, which I think we'll talk about later a bit more. But I think it's the biggest growth opportunity for Aave.
Aave has been around for quite a number of years now and you are the dominant decentralized finance lender. A lot of crypto projects flame out. They do not last as long. So what's your secret? What did you manage to capture that you are as successful as you have been?
I think resiliency is really important. And also risk management. Resiliency, what it means is simply that finance itself is such a slow-moving industry because of how fragile finance is. You can't just go and rip out the old financial infrastructure. You can't just take these more traditional payment rails or basic securitization models and just rip them out and replace with new technology. You have to do things by incremental steps. For us and for Aave, everyone who works with Aave shares the same vision that it is a long game and the vision is to actually use Aave as the backbone for all finance, for lending and borrowing. But to get there you have to have steps. The first steps for us obviously was to provide and show that this protocol model is successful with native crypto assets and proving that there's resiliency. These markets fluctuate but still Aave is there and it's able to actually do what it's supposed to do. That is the important thing, now that it works for these native crypto assets. The next step is to imagine how we take what we built and expand that into RWAs and securities and so forth. What Aave requires is a very focused approach, long-term thinking, and incredible passion towards the space and into DeFi that you can actually believe that at some point we will see mass adoption. And I think we're not that far away from going into this chapter.
Super, super, super interesting. And what was the moment that you realized that Aave isn't just building a crypto lending protocol but also infrastructure that could eventually support traditional financial assets on chain? When was that moment?
I think the moment was when we started to actually see more tokenized assets coming into the space. Aave has done a lot of proof of concepts. We did the project guardian with JP Morgan a few years back, and a project with the central bank of Brazil, and other countless initiatives where we basically tokenized some form of transaction and used Aave for that, whether it was on a private or a public blockchain. But actually seeing that more tokenized assets were coming into the space and seeing bigger names and more buy-in really made us think that now we're moving into a direction where this is becoming a reality, not just proof of concepts but there's actually utility of holding a fund on chain or holding T-bills on chain and then being able to use the next step which is being able to borrow against those assets. A really big significant paradigm shift for me personally was when we saw institutions going from deploying on private blockchains into deploying on permissionless blockchains. And BlackRock was a great example with the BUIDL fund and countless other asset managers and credit institutions. That was the realization that this is going to go somewhere and we're going to see tokenized assets playing a pretty big role in the coming years.
Fascinating. And you mentioned T-bills, you mentioned all these other types of products. Obviously, WisdomTree being one of the first pioneers in the space with our own tokenized products on permissionless blockchain. It sounds like that paradigm shift that you mentioned, you're talking to different audiences now. You mentioned crypto natives, you're talking to Wall Street institutions, even now mainstream mobile users with the new developments that you guys are having. So, how do you build one protocol that serves all three of these types of audiences?
It's a really interesting and key question. The way we think about the infrastructure is that infrastructure has to be neutral and applicable to all distribution channels. The way we believe is that the more nodes you have in a network, especially when it comes to lending and borrowing, the more benefits you have for each participant. That means lower cost of capital, better liquidity coordination, lower coordination costs, less fractionalization or segregation of liquidity, better terms for borrowers, better terms for lenders. And that is a key component of why lending works really well, or actually in its best form, as a network. And a network is an infrastructure. Once you have this baseline network, it's all about how do you distribute a network to billions of users over time. For us there are two really important paths to get there. One is going directly to the consumers with a non-custodial offering that is very similar to traditional fintech offerings. That is basically the Aave app where all the wallet management, stablecoin, gas networks are fully abstracted away from the experience.
And then the other important distribution goal is actually institutions, fintechs that are looking to move more and more of their business on chain and benefit from that improved cost structure. The way I think about that is that there's a big thesis around automatization and the more you can add automation into your business the better you can actually affect your cost structure and scalability. The two prominent automation technologies today are AI and on-chain. Being able to use smart contracts, you can reduce a lot of the cost structure. Example, Aave has had over three trillion in deposits so far, one trillion in borrowing, fully automated through smart contracts. So you have less back office, less management paperwork or even digital bits to manage. Fintechs that see this opportunity and traditional institutions are able to leverage in scale down the line and improve their overall business cost structure. And that is the key value proposition. Now we see DeFi being transparent, resilient, and guaranteed execution through smart contracts, strengthening that value proposition of actually moving the transactioning into on-chain.
Yeah, that's an incredible metric. One trillion on-chain. No small feat. And I think to double click on the tokenization aspect when you talk about institutions, you launched Horizon last year with a lot of serious names behind there too. Circle, Ripple, WisdomTree of course. So when you think about institutional growth of these assets on chain, what does that look like? And can you walk us through the flow of how can this actually benefit a player like WisdomTree that has tokenized funds?
The Horizon market is very simple in terms of borrowers can post collateral which is permissioned by the asset issuer. After acquiring an asset they can post the collateral and borrow stablecoins, and then lenders can supply stablecoins into these pools in the market as needed. For lenders it provides a yield source that is very traditional in the sense that they're backed by these traditional assets. What it means for the borrowers is that they get additional utility for their tokenized assets. When you tokenize assets that's just one step and the second question is what you can actually do with your asset, and lending and borrowing is a really good use case. I think October 10th last year when we had a major stress test in the digital assets space, we noticed that a lot of users were actually posting their RWAs as collateral to borrow stablecoins to rebalance their positions across the ecosystem. And this was happening Friday evening outside of trading hours. It showcases what kind of benefits you can get when you have a financial system that is available 24/7 with instant settlement, and that is a big opportunity. When users are able to unlock liquidity they're able to make more expansions on portfolio diversification, it improves and creates other types of opportunities for this user.
So tokenization, it's a very very big topic. Every single event I go to now focuses on tokenization. But I think you will agree, Stani, that the much bigger opportunity is in building credit markets around tokenized assets rather than simply tokenizing assets. But what does building credit markets at infinite scale actually mean? How would you explain that to people who are not close to the space and how does Aave, and especially Aave V4 I believe, make it possible?
I think infinite scale is an interesting concept because we do a lot of things at internet scale. Payments might be one of them, commerce as well. There's a bunch of examples where data moves at scale. And credit somehow is very localized, fragmented, regionalized. What we want to achieve with Aave, especially with V4, is to basically be able to create the biggest, the widest lending market where anyone can plug in yet also bring various different types of collaterals. What we want to achieve here is basically bring a scale for lending and borrowing that can cater to internet scale, where we can issue credits and underwrite globally on any kind of valid use case and become a liquidity backbone. Aave V4 is a modular architecture where you can create market structures for lending and they can be fully isolated, they can be shared liquidity models, they can be something in between. Every different lending use case requires its own approach. I think the most scalable markets have a good concept of liquidity sharing. You might have different RWAs that are very different amongst each other that you want to have segregation, but you might want to be able to share some of the liquidity up to a certain cap to benefit from the liquidity network effects and reduce liquidity coordination costs. What we're talking about is that payment rails are global, there's still a lot of work there, data is moving globally at internet scale, lending and liquidity should move at a global scale to wherever there are risk-adjusted opportunities. It's basically combining the financial world and credits all together, reducing the cost as low as possible, and giving all these benefits and funding opportunities for billions of people in the world.
Interesting. And if tokenized assets grow by as much as a number of industry players expect, which is trillions of dollars over the next few years, what do you think is the greatest value accrual? Is it issuers? Is it trading venues? Is it credit markets built around these assets? Where do you think the value will go?
I think the value will go to the users. I think we're sort of moving into a direction where markets are going to become more transparent, more predictable. And when they're more transparent and predictable, risk is easier to assess. You can be more precise on the risk and reward. Eventually who will benefit is the user because they have a lot of flexibility. They can move around. But it's also a business opportunity for a lot of issuers, banks, asset managers, particularly asset managers because it allows them to build products at a very global scale, but also have programmability into these products and creating access to different new audiences. It also allows creating products where inflows and outflows matter less because an outflow can be in a native stablecoin but later a money market product. I could imagine that money markets might replace stablecoins in terms of what people will hold. And the fact that if you have a money market product on one platform and if you leave that platform while still holding that product, the money market fund, and go to another platform, you might still be in the perimeter of that asset manager's platform. It creates a lot of new dimensions and opportunities. But the actual winners are the users and the customers. That is actually a really big thing because every business that is in the business of improving customer experience, the product, reducing cost is always on the better side of the race. And this is an opportunity for those asset managers and institutions who understand the technology and are early enough here to build and create the foundations for the future. That is why I think it's a great opportunity.
