Effectively, DeFi has the infrastructure, it has also the capital. They can move faster on a smaller startup scale compared to big financial institutions, and that is why I think it's a massive opportunity for DeFi. And obviously, specifically, it's an opportunity which is between 15 to $50 trillion.
This episode is sponsored by Canton, the only public permissionless blockchain built for institutional finance. We'll hear more from Canton later in the episode. Blockworks Digital Asset Summit is back in New York March 24th through 26th. We'll have top speakers from leading asset managers, financial institutions, DeFi protocols, crypto companies, and policy makers all under one roof. Think BlackRock, Coinbase, Robinhood, and more. Follow the link in today's show notes to buy tickets and make sure to use code Bell200 for $200 off at checkout. See you there.
Hey everyone, quick disclaimer before we get into today's episode. Nothing said on Bell Curve is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only and the views expressed by anyone on the show are solely our opinions, not financial advice. Our guests and I may hold positions in the companies, funds or projects discussed.
All right, everyone. Welcome back to another episode of Bell Curve. Today I'm joined by the man, the myth, Stani Kulechov, the founder at Aave. Stani, welcome.
Thanks for having me here, Michael.
Yeah, this will be fun. We're talking about a month out from DAS, so I'll see you in person in New York soon as well. Are you spending a bunch of time in New York these days? There's like this theme about the institutional pull of New York, but how much of your time are you spending there?
Quite a lot, actually. I'm going to be in New York next week, so yeah, quite a lot. There's a lot of institutional demand at the moment. RWAs, with what we're doing with Horizon, that has a lot of connectivity there. So I'm really excited about that because I think now more than ever before we have the highest institutional interest at the moment on-chain. So I'm super excited.
You know, I got to be honest. We talked about this, and this will segue into what I would love to start with, is this blog post that you wrote, 'Aave Will Win' as a jumping off point, 'Funding Abundance' actually is the title of the blog post. But you know, I've been saying this a couple times at DAS over the years now that there's a real divergence in between, there's always been kind of the crypto-native side of crypto and then the institutional side, and the sentiment divergence is so wide at the moment. I mean, people in the crypto-native trenches are not doing quite so hot, but on the institutional side of things, stuff is just flying. And you must see that firsthand from your seat at Aave. But yeah, what does it feel like on the ground talking to some of these more institutional players?
No, and I think like on the native crypto side, you know, like for example, DeFi has grown significantly. And if you look at for example the growth that Aave has had last year, we peaked at 76 billion net deposits, 30 billion outstanding borrows, and most of that was basically native crypto. So growing as the native crypto assets are growing, but in the context of RWAs, we're extremely early. So DeFi has peaked to 220 billion, it's now 120, and when we look at the RWA market cap, that's 25 billion and it's very early. And it feels that every institution that we're talking to, bank, asset manager, fintech, anyone who wants stablecoin commerce, there's this sort of a trend that every institution is having their own digital asset team. Some of these banks and asset managers had that for years now, but now it's becoming almost like table stakes.
Actually, I completely agree with that and maybe this is a good way to transition into this blog post of yours and this new massive $30 trillion market that you're attacking. So the title of the blog post that you wrote is 'Funding Abundance' and you started the blog post by kicking off your perspective on the state of the union of DeFi and what the bottleneck is in general, which is kind of on the demand and the capital side. But before you get into the opportunity that Aave is attacking here, can we just get a sense of, yeah, state of the union, what's working, what is the bottleneck that still exists, like how are you thinking about especially the borrow-lend space in general these days?
Yeah, what we did extremely well in DeFi looking at the past few years is that we sort of were able to create this very efficient capital allocation layer. So LPs and allocators any part of the world can actually create strategies, allocate whether it's lending or market making or any sort of yield or P&L opportunity. And this is very significant because in a DeFi world, liquidity moves in a sort of a fluid way. So if there's an opportunity, theoretically it should be captured. So if there's the same risk-adjusted opportunity elsewhere, newly created capital should be able to move there and reallocate. So DeFi sort of fixed this whole, and not just fixed, but made it efficient to allocate capital. Now where we kind of have more challenges is sort of on the demand side. So this challenge actually has come because DeFi has been able to grow so significantly within these crypto assets. So if you look at most of the growth that for example Aave has had over the years and DeFi in general, it's to do with these crypto assets. So lending against Bitcoin, lending against Ethereum, Ethereum looping strategies, and now more recently yield-bearing stablecoins, which is sort of a new category. But a lot of this growth has happened because of these native crypto assets and the space has been growing. And now because we have solved really efficiently the capital allocation part, the supply side, we basically need more opportunities. And the opportunities can come by going beyond the native crypto assets. So we're very bullish that crypto assets will grow. And I think what we did really well with Aave specifically, we proved that this protocol works really well and it's very resilient, and we battle-tested it with the most volatile dynamic assets. So going beyond that, we have to go into RWAs, and that is sort of like the axiom of this whole funding abundance. And when we think about these RWAs, there's in my opinion two different categories. So the first category is the ones that fit into this sort of a Horizon bucket where you have asset managers, banks, and they have existing financial products that they're bringing on-chain for whatever reason, for existing users, attracting new customer bases, and that provides the ability to borrow against those assets at 24/7 basis and then for stablecoin supplier perspective to lend stablecoins on-chain against more traditional risk profile instead of against sort of crypto assets. Category one. Category two is this idea of, well, what are the assets that are not really traded and existing in the traditional world in this like highly liquid, accessible markets? What are those assets? And in this asset category, can you find assets that are basically future-proof or in some ways backing the future that we're basically going towards? And when we look at all the innovation that is happening at the moment with smart contracts, automation, with basically AI intelligence, we see this sort of a common theme that every person on the planet is going to have some sort of very more evenly distributed resources. So AI has proven that really well that anyone can have enormous amount of intelligence and compute. Then we have for example robotics coming. So at some point there's going to be a limited amount of labor, and then we're going to also move to very cheap, low-cost energy which powers everything around us. And all these categories together create this sort of a future of abundance. And then the DeFi opportunity comes into tokenizing them as assets and then using as collateral and then accelerating this transition to abundance, which is going to take up to 2050 or beyond. But by using DeFi, we maybe can accelerate this by 10 to 15 years because it's starting to become more of a finance problem instead of innovation problem because a lot of this technology is matured. But to understand, and this is like one important point, is that to understand the difference between the new and old is that abundance is about this sort of new future and where we're existing now is based on scarcity. So banks and capital allocators allocate to mortgages, which is real estate, corporate bonds, which is these traditional companies, and also funding governments that are taking more and more debt. So what we're proposing from our sort of vision over the future is that the winners of the future are the ones that can bank abundance when we are moving away from this scarcity economy because in the future you don't care where you live. You can build a lot of infrastructure, housing, buildings very cheaply, easily any part of the world, and you don't need this concentration of people and capital into cities effectively. So that is the whole idea of like what is the funding of abundance all about.
Stani, if maybe if I could sum this up and tell me if I'm being too simplistic here, but in the two categories that you mentioned, there's one, some kind of more traditional assets like yeah maybe mortgages or treasuries, and these issuers are looking at crypto as kind of a new distribution channel for them. Mostly they're like, hey, and maybe it's easier to get funding or like a loan against it or something like that, but they're kind of a well-established category of financial assets and you know you're looking for some of these benefits, distribution, ease of access to capital, maybe lower cost of capital in the future for existing assets. But then there's also this new category. There's all this new interesting and exciting technology in the world. And the growth perspective from crypto is to be able to offer financing and grow alongside for instance an exciting new category like solar or you know AI GPUs or something like that. Is that roughly kind of the right way to think about it?
And I think finance is sort of very connected into banking the future, whatever time it is. So if you go back in time for example and look how for example JP Morgan became successful, that was funding innovation, funding Edison, funding of electrification, that was basically a paradigm shift for everything. We had the same thing with industrial revolution and railways where capital was taken from the agriculture landscape and reallocated into the sort of industrial revolution and building factories, and that changed the whole world. And now we're moving towards a new paradigm shift where we're going to start having unlimited amount of resources. And this transition is going to take a lot of time, anything between 25 to 50 years, and being able to finance that, and who basically banks to this future are the winners effectively. And I think from like the traditional financial institution angle, they will obviously also fund similar types of technologies whether it's like data centers, GPUs, and solar, batteries, water desalination. So I think it's going to be happening everywhere, but where it can be actually, who can move really fast on this category is DeFi because effectively DeFi has the infrastructure, it has also the capital, and they can move faster on a smaller startup scale compared to big financial institutions. And that is why I think it's a massive opportunity for DeFi, and obviously specifically it's an opportunity which is between 15 to $50 trillion size. And if you compare that to for example JP Morgan has $4 trillion in asset management. BlackRock has basically three times more of that. So we're talking about the amount that is significant there and actually can rearrange the sort of financial institutional landscape over a long period of time.
You know what, I also, I'm not sure if you, but I also, I think something that a trend that benefits DeFi with some of these new technologies is that for the first time in a long time these are balance sheet intensive investments that companies are needing to make. Like if you just look at the capex from the hyperscalers, it's crawling up somewhere around $700 billion a year. And I saw that JP Morgan just released a new framework for stocks which they're calling Halo, and that's heavy assets, low obsolescence. So this includes capex and supply chain bottleneck beneficiaries, robotics and sector staples. And it just strikes me that if we could tokenize, if you could tokenize this, DeFi is really well suited to this because historically, you know, the world of lending has been pretty undercollateralized, right? But now that there's a demand for some of these harder assets, you know that you can also collateralize them and lend against them, DeFi is very very well suited. And I know in your blog post you call out some of the reasons why solar is a particularly interesting opportunity that's well suited to DeFi. So maybe we could get into you know why you're attacking this market and then I'd love to cascade down into you know what levers you're pulling to you know to pursue the market.
Yeah. And of course the opportunity is incredible and obviously at the same time you know we're focusing on what is important near term, still growing the crypto assets from our perspective, growing also RWAs that are coming from the traditional world that already are traded somewhere, so through Horizon. So these categories will still grow. The reason why we think solar particularly is really interesting is that one thing about the technology that always follows is the economies of scale. So when you get into a certain point where the prices of the units are dropping significantly, the asset becomes more and more investable. And solar particularly is a low-risk technology but at the same time it is heavy on the capex and extremely low on the opex. So it sort of is a perfect asset for financing because you need a lot of upfront but then once you clear the upfront you have a very simple sort of operational profile. And if you can use something like Aave where you can tokenize this asset even to a sort of a portfolio where you have a lot of diversification of solar farms across globally, you can start actually borrowing against that collateral and expand that leverage and reinvest and build faster solar. So there is incredible benefits there as an asset. And I think the same model will also follow with batteries. I think batteries are 10-15 years sort of where solar used to be. And that is why it's super interesting. But what it also does for a sort of technological like a distribution perspective is that Aave is building the Aave App which is a consumer-facing app, Aave Pro for the sophisticated DeFi users, and Aave Kit for enterprise and fintech integrations. So what it allows us to do is that we are able to create in some ways opinionated yield, opinionated financial products that we're comfortable to know that these are the resources that are needed to bank the future and distribute that yield all the way across all the user bases. And why it's important is that today all the financial opportunities are very commoditized and they are in between categories of lending for governments, lending to basically financial institutions who are allocating capital into mortgages, funds in sort of that scarcity economy financing model. And this provides something new and also uncorrelated within the existing financial system. That is why I think it's a really interesting hedge compared to what exists today.
Before we get back into the episode, here's a quick word from our sponsor, Canton. The only public permissionless blockchain built for institutional finance.
TradFi wasn't built for 24/7 markets. DeFi wasn't built for regulated institutions. But Canton is where the power of finance meets the promise of blockchain. The only public blockchain with institutional-grade privacy, true composability. Real assets, real markets. Why reinvent finance when Canton makes it work the way it should? Canton, where finance flows.
So, can we get into the Aave App as well? And I'm very curious like one, you know, observation of mine over the years is a lot of the DeFi 1.0, which like the Aaves of the world, the Uniswaps of the world, are still, you know, kind of have much better longevity than like almost every like DeFi 2.0 category, remember that acronym from a number of years ago, hasn't done quite as well. I'm actually curious why that is from your perspective. But another thing that I've noticed is many protocols that started out purely as protocols and as kind of infrastructure backend are moving up the stack and vertically integrating. And that could be you know anything from like Uniswap launching Unichain, and obviously they have their own front end and their own kind of intent-based trading system with Uniswap X. Then also I'm noticing the same thing with Aave right? There's the Aave protocol like V3, I kind of think of as one managed protocol, we'll talk about V4 as kind of a broader, more modular approach to lending, but then you're also controlling the front end as well with the Aave App and it's almost like this very almost like a fintech sort of approach with your own back end. Like how should listeners think about the whole strategy here with Aave's offering?
It's really interesting because I think that's the way for Aave as a protocol to succeed is to have infrastructure that is really widely utilized. And the way we see it, you have to pretty much go into two directions at the same time. So one direction is that you make the protocol as accessible as possible, easy to integrate across the ecosystem, existing native DeFi products, fintechs, and for institutions as well. And the reason for there is that unlike the traditional like a SaaS models, DeFi protocols like Aave, when users are supplying liquidity or borrowing liquidity against a collateral, they're actually reinforcing the network effects of the protocol. What it means is that even if you have multiple different fintechs contributing liquidity and sort of offering almost like similar types of products, they're reinforcing the available liquidity on the protocol which reduces the withdrawal risks and reduces the cost of capital for borrowers. And that creates more attractive utilization for borrowers. And you can think the same thing other way around. And what we notice is that these integrations are really important and it's going to happen in the next couple of years. And now they can be a backbone of sort of all of the financial lending at its sort of best. But at the same time we have to bring more users and take a bit more proactive stance on actually bringing more users in. A way to do that is to enhance the user experience so that Aave is accessible to any mainstream user. And to get there, you need an experience where you could download a simple application on mobile, login with your email or your phone number, and then link your bank account and deposit into Aave without any sort of thinking about wallets or gas fees or any sort of network forks. Everything is purely abstracted away while still preserving your control over the funds. And then on the more sort of web interface, we want to ensure the highest possible experience for sophisticated DeFi users that have been in the space since the beginning and is also expanding user group to do more sophisticated usage of Aave and DeFi. So they all kind of play towards the same direction of increasing the network effects which benefits everyone. And I think it's the first time ever in fintech or like finance where these network effects are so obvious. For example, another example besides Aave on the lending context is stablecoins. So for example PayPal has its own stablecoin, PYUSD. And typically when you think about stablecoins and inflows and outflows, so if you have an application, a fintech app and you have outflows, typically that is a loss of business, right? But if that outflow is in your native stablecoin like PYUSD that is just used in some other application like Aave, that simply means that that user is still in the ecosystem of PayPal and generates also revenue for PayPal. So we're moving away from this world of sort of competing positioning into more like a compounding network effects of working together and expanding the whole pie which helps everyone else in the supply chain.
Awesome. Well, I agree with that framing in general and this reminds me of a kind of a long debate, right, around where value is going to accrue at the app layer or the protocol layer. And you know there are some analogs I guess and just I guess there's no really one right way of answering it but you know and to get into maybe the 'Aave Will Win' debate that was going on between you know Aave Labs and the DAO, you know you can look at these examples of maybe someone like Nvidia as an example where you have a software component and a hardware like two potential lock-ins, right? And you could either like Nvidia has shown to give away the software CUDA to lock in the GPUs, kind of similar thing with Apple as well between their network, you know iOS and the app store and the phones. But you can kind of choose where you want to monetize there. And it seems like the alignment that Aave has focused on and centered around is monetizing at the protocol layer and trying to direct, you know, fees, trying to direct fees down into that protocol layer via the app and being flexible at that layer. Is that roughly the right way to think about it?
