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Hello everyone and very much welcome to another Breaking Banks Europe. We're here at the takeover at Money 2020 Europe in Amsterdam and I'm really happy to be speaking to you today together with a very distinguished guest, Stani Kulechov. Stani, very much welcome.
Thank you. Thank you for having me here. Yeah, great to be here on the show.
You just flew in here, right? From London, I believe. So it was a bit of a rush, but how was traffic for you?
Really good. Just made it on time, so pretty good.
Wonderful. Wonderful that you made it. I'm really happy that we can talk a little bit about today the crossovers between the crypto world and the real world, where I think a lot of exciting stuff is happening at the moment. But first of all, let's make sure that people understand who you are. So can you tell me a little bit about what you're working on these days?
Yeah. So mostly I'm known, or our company, Aave, that is part of a bigger company called Avara, is known for building decentralized finance and being a major contributor. So we built the Aave protocol, which is effectively a lending and borrowing protocol on the blockchain, mainly on Ethereum and a few other ones, and that has roughly 43 billion worth of net deposits at the moment. So you put cryptographic assets as collateral and you borrow stablecoins. And now we're expanding to actually also include real world assets. So these are more traditional assets that exist in the real world, for example equities, private debt, and private equity as an example, and tokenizing that onto the blockchain and then using that as collateral and borrowing stablecoins against it. And we make this possible for the users.
Well, exciting times. So do you see that you mostly focus on illiquid assets that you want to make liquid? Is that mostly the thing that you do? Because if you talk about equities, you can talk about already liquid tradable assets, but I guess you focus on more private versions that you want to make liquid somehow.
Yeah, there's two approaches. One is definitely looking at existing asset classes that don't have the liquidity that they could be having. And that's very interesting because there's two components there. One is basically looking at something that can be brought on-chain and making it more liquid, and that increases the ability to use that asset as collateral against credit. The second aspect of it is access. So there's a lot of real world assets, or let's say traditional assets, that investors or users around the world don't have the same access to. For example, a great example is being able to invest in companies like SpaceX, Stripe, and Neuralink. So what we're trying to do is take this technology and provide wider access and democratize some of these illiquid assets or just less accessible assets. The second part is actually then also liquid assets. So things that are traded actively but there is some sort of a programmatic benefit. For example, a good example is that treasury bills might be traded during the week but you can access liquidity during the weekend. So you could use them as collateral to borrow against over a weekend, and that adds more flexibility for the users.
So that's indeed where there's a limitation to liquidity somehow in time space. You could actually solve that with this. But is that actually the biggest problem that you solve then with the technology? Because in a lot of cases also it's about a certain scale that you need to drive liquidity, either it's too big or too small. How do you solve that? So do you see that there's really a market for everything?
Not for everything. I think where the sweet spot is, is basically looking at inefficiencies in the traditional financial world in these different asset classes and understanding that if you bring that asset on-chain and open it up to wider markets or this kind of programmable infrastructure, would you actually get more economical activity onto that asset. One great example is energy infrastructure. So there is obviously energy infrastructure funds, but what tokenization allows is to focus on certain types of projects, could be for example here in the Netherlands, wind, solar, that could be tokenized and then made more liquid on-chain and then extending capital against that asset class. And the idea there is that by this behavior, you are able to extend more credit into the same asset class and expand the financing of these assets. So I think making liquid is one part of it, but also taking advantage of some of these inefficiencies and making them more accessible and programmable by using the blockchain and decentralized finance.
Yeah. No, I think there's really a good benefit. I think in a lot of markets would really grow by implementing that. One of the challenges I always see as well is that I think in the end, in a lot of financial markets, there's some kind of intermediary at least playing a role to match up supply and demand, right? Like corporate finance advisors or merchant banks or so. How do you see that role evolve as well? I think now from crypto it always has been a really technology-driven market, but in the end I think it's really to be able to find the buyers for any kind of liquidity that you create, you might actually need to refer to more traditional players as well. How do you see that interaction?
I think overall, the technology doesn't replace the existing market participants. It just creates them another type of a venue. I would say I think blockchain or decentralized finance is a new type of a medium for financial transactions. So the same way as we went from writing transactions into clay boards, then later into paper, and then into digital, and now more into blockchain, every single medium creates additional properties that can add benefits. And what we use a lot is so-called smart contracts. So that allows transacting without intermediaries, but actually that just creates a little bit more security on transactions and predictability. So we can understand what the smart contract can and cannot do once it's coded and deployed into the blockchain. So the traditional market participants will simply participate and be the agents as well in this ecosystem and have a more transparent and more programmable environment to interact. So they're definitely not going anywhere.
Yeah. But do you see the uptake there? So do you see that they're open to work with these kind of solutions at the moment or is it still because I think the market is still fairly small compared to traditional asset classes.
Yeah, very small. I think decentralized finance itself is the size of hundreds, maybe 20 billion. Aave as a protocol has a significant market value of that. But we see more asset managers entering into the space such as BlackRock, tokenizing treasury bill funds, money market funds, and some other participants. So there is a big uptick there, but end of the day, finance is such a big space and DeFi and real world assets is a small drop in the ocean. So it will take a lot of time. And also I do think that DeFi will be the venue of getting the best financial opportunities because you have this environment of algorithms that are codified that compete for the liquidity. And RWAs is a way to bring value from the traditional world, the same way as we were putting value into databases. This is about putting value into the blockchain, and stablecoins are actually a way then to consume that value. So using something as collateral and borrowing against, or basically getting yield against. So I think those things, RWAs, DeFi, stablecoins are important. And I think stablecoins will overgrow the native crypto assets that we know as of today, and tokenization with RWAs will overgrow both categories. So we'll see more and more securities being issued directly on the blockchain.
Do you, would you expect in the end all infrastructure to be replaced by this? Because I think there's a lot of benefits in the end, right? With the real-time settlement, basically skipping a couple of layers in the value chain as well to enable trade. So I think in the end all assets would benefit from this system rather than the traditional one.
Depends on the assets. Obviously, there's still financial transactions that are very convenient to do just on paper agreements, and it's still happening in traditional finance even though the technology has been available to do digital transactions. So necessarily you don't need it everywhere, but where you actually need some sort of additional security that comes from blockchain and you have a wider group of agents where you want to verify the rules of transacting, then it really works pretty well. So I think real world assets is interesting. Payment systems might be also an interesting use case as well, for sure.
And so also there I think one of the challenges, you say that the advantage of the blockchain is really beneficial on a technological level. I think how do you see the legal framework evolve around it? We see increasingly legislation popping up, of course with MiCA in Europe and also in the US there's now a couple of bills in the making and across the world. So there it's getting into a more regulated field that should enable more security of the system as well and compliance with sort of more standard financial regulations. But one of the challenges of course is always sort of the agency responsibility perspective. So who in the end is responsible for anything that potentially goes wrong in these systems? How do you see that evolve? Do you see that we've been able to solve that issue just yet? So yeah, because we tend to really like to have someone who's responsible for all the services that we use.
Yeah, and that's fair. I think there's certain benefits that for example decentralized finance by design solves, or for example the challenge of custody, giving assets to a custody. So you don't necessarily need that anymore because you can codify these smart contracts and program them in a way where there's no really an entity that is taking over the funds. So certain action happens regardless if a certain function is called in the codebase, and that's basically guaranteed. But at the same time it introduces new kind of challenges. For example, you have so-called smart contract risk or the risk of the codebase. What if there is some sort of an issue? Then if you have users that are self-custodying their funds, how can they do that safely? And that also doesn't really remove the angle of having qualified custodians providing this as a service. So I think that decentralized finance and blockchain, they will be the technology, but then you still have these service providers and businesses that are actually then providing regulated services. So I think in terms of MiCA, has been early adopters in the regulation and has been already regulating the space. Across, there's also regulation now coming up next year as well in the UK, and obviously in the US there's also stablecoins, there has been two stablecoin bills that have been progressing and one of them actually getting more traction. So I think overall, we will see a lot of regulation and clarity of how you use the technology, but also regulating the actually service providers that are providing services, not necessarily the technology itself.
No exactly. I think this is also what we've seen over the past. So the gateways that actually give you access to the technology, they're the ones that become responsible for anti-money laundering, KYC kind of processes. So I think that's a really good step in that direction. So also to help it become mainstream, and I think it could really benefit a lot of markets to provide liquidity. So yeah, definitely in favor of actually seeing how we can progress that forward and so hopefully these bills and legislation also help with that.
Yeah, and the space is very small, but it's been existing here for quite a while. I've been building myself decentralized finance for the past seven years. So it's actually quite nice to see that there's now actually interest in figuring out how this technology and these type of services actually fit into the whole financial system. So that then creates additional tailwind for institutions to actually then integrate the technology and also create services around it as well.
Yeah. So, and I think let's say one of the killer uses for crypto these days I think is the stablecoin, and I think it's becoming really popular. We see a lot of euro coins in all kinds of varieties popping up. We've been very dependent on US stablecoins for a very long time which indeed fortunately also getting into more regulated territory which I think is also a good idea. How do you see the evolution of that? So I think can we already oversee sort of how we are going to actually use stablecoins in the future and what kind of use cases and business cases are behind it.
Yeah, a lot of the narrative goes into stablecoins in the fact of stability and being able to provide some sort of stable value in economies where you have instability like Argentina, some of the countries in Africa and also in Asia. So I think from the Western world perspective and our European mindset, so I come from Finland and live in the UK at the moment. So stablecoins necessarily don't provide me direct value when you think about stability, especially if they're USD based. But one use case I think is very significant is that when we have decentralized finance, which is this incredible programmable financial environment where you can deploy protocols and they have different types of functions and they're trying to capture yield and so forth, stablecoins are kind of the only vehicle how you can access borrowing against those different types of assets whether they're crypto-native assets or RWAs down the line, and also earning yield from decentralized finance because you need something that is in dollar value stable and on the blockchain, and then you can actually consume and extract that yield opportunity. So I think that's going to be the big thing. So there's a lot of stablecoins and I do think that there's some sort of economies of scale going to apply and maybe there's a few big ones, but I would like to see more of local stablecoins. There's now Circle has EURC that has been very popular and a few other ones. So yeah, I think it's an interesting development now.
So wouldn't you also think that for example multi-asset stablecoins would actually become a favorable hedge against all kinds of fluctuations of currencies for example? Because now we still see indeed USD or euro related, but you could actually do like SDR, all kinds of stablecoins.
Yeah exactly. I think it's an interesting concept and I think partially or mainly the MiCA regulation in Europe was specifically tailored towards the Libra stablecoin that was some sort of a basket and didn't go through back in those days where it was very early. But I personally think that it could be an interesting way of packaging purchasing power or economic value of multiple nations which could make sense. But I'm very skeptical if it provides an actual use case. I think maybe for store of value, but you have to have such a large consensus of different countries and market participants to start using something like that. So yeah, I don't know where they will go for, but I would be open to look for any kind of innovation in that category.
Yeah. Also interesting I find in that sense for example is a gold stablecoin, right? Back to the Bretton Woods perspective that I like.
