Fireside Chat with Stani on Future of DeFi I Stani Kulechov & Kartik Talwar

Yeah, I think every protocol iteration that we had in Aave takes roughly a little bit over a year to build. And the reason for that is that it doesn't really take that much time to write the code but actually then thinking all different kinds of use cases and edge cases and ensuring that the infrastructure is safe and secure. So Aave v4 has been already feature complete last summer actually during last scan. And the important decision for us is to also understand how we can actually adopt use cases beyond the existing use cases that Aave has. So the way Aave works is that you supply stablecoins that are lent out against let's say Ethereum collateral or Bitcoin. And this is sort of one of the biggest use cases and there's looping use cases of putting correlated assets like staked ETH and borrowing it and leveraging that position and yield-bearing stablecoins. But in the future what we believe in is this vision that DeFi could actually be used as a backbone for all credit in the future. And something that we solved really well in DeFi is that we have an extremely good capital allocation layer. So in DeFi liquidity moves programmatically into financial opportunities that are risk-adjusted and even so well that there's currently a surplus of liquidity in DeFi. The next chapter for DeFi is to figure out how to use this efficient capital allocation layer to finance some opportunities that exist in real life by issuing credit. And Aave v4 is a modular architecture where you can also lend not only use as collateral not only ERC-20 tokens, ERC-721s but you can also create custom modules and lend against data as well. And I think that's the world we're heading where we're going to use DeFi as a way of sourcing liquidity and financing real credit opportunities in the world.

Yeah. And it was basically an architecture overhaul. Typically the way existing Aave protocol works is that you can create a market and within the market you have different collaterals. Now each market is sort of a risk profile and if you want to create a new risk profile and a new market these two markets are fully isolated from each other and the biggest challenge always for any DeFi projects is actually aggregating and bootstrapping liquidity. And the way Aave v4 solves this challenge is that we have a hub and spoke architecture where the liquidity is stored in these liquidity hubs that then allocates with credit lines into these spokes and spokes are where you have all the borrowing configuration, the collaterals, and they can be also very highly customized. So the typical spokes are a similar lending model that we already have in Aave v3 and previous versions. But also anyone can come and actually build these spokes with custom implementations. We've seen examples where you can use native Bitcoin as a collateral through a system designed by the Babylon team as an example that can be then integrated into qualified custodians and you can use Aave to borrow stablecoins to lend to those use cases. You can build features like debt trading similar to what for example Fluid has. You can build fixed lending spokes and beyond. So I think that's where the next generation of innovation will come from Aave because now anyone can actually come and build and contribute to the whole code base of Aave by expanding the bespoke use cases.

Both actually. And the biggest problem that every starting DeFi project is explaining is that you might have really interesting product and innovation but it's hard to actually bootstrap your product. So now you can build a spoke and then request access to these liquidity hubs on Aave and get actually credit lines to bootstrap the liquidity. So there's a component of actually attaching new innovation that is happening in DeFi and rewarding that innovation with liquidity. So that's also a part of the liquidity management. There's another feature called reinvestment feature which means that if there's any float liquidity left in the pools that can be reinvested into low-risk opportunities like for example BlackRock's BUIDL.

I think now what's going to change quite a lot is that the equilibrium is so that there is a lot of liquidity in DeFi and I think a lot of the opportunities are very commoditized meaning that you have to come and find new collateral and that is what we're also focusing on at Aave trying to figure out what is the new type of collateral. And I think there's a lot of value already on chain and native crypto assets will keep growing. So, Bitcoin is going to keep growing. Ethereum is going to keep growing and even more new types of economical native on-chain primitives. But there is going to be a lot of value that is entering into the system outside of the blockchain and that is going to happen with three different ways. So one is tokenization with RWAs. The second is yield-bearing stablecoins and the third is then true data. And what I think is going to be exciting is to see a lot of the tokenization take off and being able to use that as a collateral in a more better risk tooling that we have with Aave v4 with the segregations of spokes and reusing liquidity by liquidity hubs and a new feature we call risk premiums where you can price the borrowing cost also based on the collateral composition of the user's positions. And then the last piece of actually the data piece is interesting because I think a lot of credit opportunities will exist without the tokenization and not every single opportunity will be tokenized and this allows Aave to actually then extend credit facilities towards lending to consumers, to businesses and also to institutions.