As CEO of Aave, an up-and-coming decentralized lending protocol, Stani Kulechov and the Aave team have helped fuel the rapid rise of decentralized finance (DeFi) in 2020 and 2021.
Ian Simpson: There’s no doubt that DeFi is hot. Has the rapid growth taken you by surprise – even though you are deep in the space with Aave?
Stani Kulechov: DeFi has gained enormous traction in 2020 which has continued into 2021. At the start of this year the total value locked in DeFi as a whole was approximately $15B, and now 4 months later it’s over $55B. The open source nature of DeFi means that code is easy to access and developers can build at lightning speeds, so the pace of innovation is much faster compared to the traditional financial space which is more closed off and opaque. This, along with the fact that DeFi tools and services are composable—meaning that they that plug into each other—allows the ecosystem as a whole to grow at such a fast rate.
IS: Do you think the world is taking DeFi seriously enough? There has been rapid growth, amazing innovation and so on. Meanwhile, some people still dismiss it as a fad and point to some of the funky names (PancakeSwap, SushiSwap) as a sign that it’s not “real”.
SK: It has been an interesting year, because institutions, banks, businesses, and other established traditional entities are starting to seriously look at the value proposition of DeFi for supplying and borrowing different digital assets from various protocols. Custodians, wallets, and investment platforms like Bitcoin Suisse have already built the technology needed for institutional adoption of DeFi, and with companies like Tesla adding Bitcoin to their corporate treasury, the next step is for these tools to enable institutional DeFi access.
Since there are no financial intermediaries involved, suppliers can earn historically higher interest rates than they would normally in today’s low and negative interest rate environment, making DeFi an attractive alternative for corporate treasuries, hedge funds, and more looking to maximize their yield.
There are definitely some funky names out there, but DeFi is maturing and making a name for itself, and traditional finance is taking notice.
IS: Right now, (almost) everything in DeFi is happening on Ethereum. Can we expect this to change, with interoperability protocols, some other “ETH-killers” or for some other reason?
SK: The strong Ethereum community was a huge catalyst for the growth and development of DeFi, and this also bolstered the composability of different DeFi projects. However, today block supply on Ethereum is limited and the demand for using Ethereum is ever-growing, resulting in high transaction fees. The foundation of DeFi is to build a sustainable and inclusive alternative to traditional finance, so it is important that all users can use DeFi (not just users with larger portfolios).
Sidechains like Polygon are gaining traction as a scalability solution, and I think we will see DeFi move in many directions here. There’s no “winner take all” solution, and in DeFi where protocols are community governed, I think the community will have a large say in the future of scalability.
IS: What are some interesting new developments in DeFi that you have seen lately?
SK: One interesting development is the intersection of Non-Fungible Tokens (NFTs) with DeFi. For example, NFTs can be used to tokenise real world assets, such as real estate property, which can then potentially be used as financing for someone who wants to borrow cryptoassets from a DeFi protocol further down the line. Using NFTs as collateral would open up new types of liquidity, so this is something a lot of DeFi communities would like to see.
IS: Where is Aave looking to grow? What is the next step for you?
SK: The next steps for Aave – the company – are to broaden institutional access to DeFi by enabling institutions to supply and borrow in the protocol. In terms of development, Aave Protocol is a community governed protocol, so community members are able to create proposals and vote on updates. There is also a community led proposal for a grants committee to support developers building in the Aave ecosystem, which is very interesting. The community will drive the next stages of building through the Aave governance.
IS: What are your thoughts on L2 scaling on Ethereum? Will DeFi protocols choose the same L2 scaling solution to maximise interoperability?
SK: L2 scaling is important so that DeFi can be the inclusive financial future it has aspired to be. There is now an Aave liquidity pool available on Polygon, a scalable sidechain of Ethereum, so this means users can interact with the protocol for a very minimal fee. DeFi is all about choice, and one of the main pros of DeFi is that projects are interoperable with each other. The protocol has a multi-market approach, and users will be able to choose the scalability solutions they like best.
IS: Currently there is USD 44bn locked in DeFi. If we assume that TVL will crack USD 100bn in 2021, what will be the driving forces that push it up – retail investors, institutions?
SK: DeFi is an interesting solution because it appeals to retail investors and institutions alike. Products like user-friendly wallets have made it seamless for retail customers to start earning interest with DeFi protocols, and custodians have made the same possible for institutional clients. At the beginning, DeFi and the rest of the crypto space was positioning itself as an alternative to traditional finance, but there are actually a lot of synergies here to explore. Institutions, banks, and corporate treasuries are looking into how digital assets and DeFi fits into their strategy, and it’s easier than ever to acquire digital assets and onboard to DeFi.
IS: You are continuously innovating and adding new services and functionalities to Aave. But what is Aave’s long term goal? What is the big picture objective in 5-10 years from now?
SK: Long-term, Aave’s goal is to bring DeFi into the mainstream. DeFi players have built a backend infrastructure that is now merging with front-end FinTech to make finance more flexible and accessible for end-consumers and institutions alike.