If you’ve been keeping up with DeFi in recent weeks, you’ve probably heard of Aave – a new lending protocol which coined the term Flash Loans – those of which have spurred a surge of innovation regarding composability.
— Aave (@AaveAave) March 4, 2020
Seeing as they are the lead sponsor at ETHLondon, I was lucky enough to find time to sit down with Stani Kulechov – Founder and CEO of Aave.
Throughout this conversation, it became increasingly clear that Stani (and the whole Aave team) are incredibly talented, focused and well versed in all things Ethereum and finance.
In this interview, we covered a suite of topics including:
- Stani’s Background
- ETHLend – the first lending project on Ethereum
- Surviving Crypto Winter
- The Aave Rebrand
- The Importance of Memeing
- LEND Tokenomics
- Open-Sourced Initiatives
- Sponsoring ETHLondon
We’ve got a lot to cover so let’s dive in!
What was your background prior to blockchain?
I started programming when I was a teen. I went to law school and was very involved in a lot of fintech communities during my time at Uni. I witnessed the power of Bitcoin firsthand, but it wasn’t until I saw smart contracts that I got really excited about blockchain.
The idea of immutable code which could be used in interesting ways was very intriguing to me. I’ve always been in love with financial instruments and saw smart contracts as an interesting way to make products more efficient.
What was the first product you built within the ecosystem?
My first proof of concept was ETHLend – the first lending applications on Ethereum. At the time, DeFi was non-existent. We got tons of questions like:
Why would you want to lend you assets?
Why would you put up anything as collateral?
Remember this was all before stablecoins like Dai, so many people were confused on why over-collateralization was necessary. We experimented with USD-based loans – Borrow $150 worth of ETH and pay back $150 of ETH – without tokenizing the position. It wasn’t until MakerDAO and USDC came to fruition that we really started seeing growth in the DeFi sector.
When did you notice other DeFi applications taking form?
It was really when other communities started to form that we started to see the full picture coming into place. For example, DEXs like EtherDelta showed there were uses other than lending and there were cool projects like Variable from Consensys doing tokenized options back before the term “DeFi” was ever a thing. We even saw initiatives like EthOptions which were ultimately integrated directly into Etherdelta to limit the barriers to entry.
You guys have been around for a long time – how did you survive the past few years?
I’d like to say it was our knowledge, value and community – all of which played a role in waiting to find product-market fit. We were very focused on following the DeFi narrative, while also making sure to build the next steps in the same house.
Whatever you’re building, you have to have composability. That’s the beauty of smart contracts – everyone can interact with one another in a permissionless fashion. If you can do that, you get adoption and network effects. Ultimately, that’s what DeFi unlocks – liquidity as a network effect.
Let’s talk a bit about the rebrand – Why Aave?
With ETHLend, we were bound to “ETH” and “Lending”. With Aave, we can do much more than that. Similarly, we really wanted to build financial products that people need, while also having some fun. The term “Aave” is Finnish for “ghost” – where I’m originally from.
In traditional finance, people have to be conservative. With web3, we are building systems that are trustless – we don’t have to have a serious-sounding brand – just diligent coding. When we have smart contracts that are public, people can verify without having to trust an underlying entity.
With the rebrand, we wanted to capture all these ideas – creating a playful brand that provides DeFi uses beyond lending and only using ETH.
Let’s talk a bit about Aave’s memes. Why is this strategy so important?
Memes are a great way to get communities excited. Don’t try and alienate out of the system you’re building. The network effect does not need to be that big – It just needs to show personality.
— Aave (@AaveAave) January 24, 2020
Behind the technology, I love the notion of human composability – there are people behind these projects and we finally have an opportunity to connect with them on a personal level.
Generally speaking, a lot of sector leaders tend to be a bit more conservative. Here at Aave, we are always trying to think – Who is our audience? When we think of themes like education and risk, it’s important to present them in an engaging manner so our users can digest the information in an enjoyable fashion.
Who is Aave’s target user?
Our target is people who are already engaged in the community but aren’t too conservative. We have a very strong focus on developers as they are the ones who can build products and business models on top of our protocol. Once we’ve delivered confidence that our set of tools are working properly, those same developers can start to do some really novel stuff.
Let’s talk about Flash Loans – what’s the 411?
There’s a huge narrative in DeFi surrounding Total Locked Value (better known as TVL). Now that we’re started to see DeFi take off, it’s important to look at traditional assets and recognize that their true value comes from being moved and utilized – That’s what provides efficiencies.
Flash Loans are the epitome of this. You can move and utilize capital faster in larger volumes than we’ve ever seen.
How do you reutilize assets?
With Flash Loans, it’s now possible to borrow capital through smart contracts and use it in an automatic fashion. Seeing as there’s little to no risk of the funds not being returned (the transaction fails otherwise) we can extend the offering to allow new use cases to form.
— Aave (@AaveAave) February 21, 2020
As flash loans start being used between different protocols, we’ll see more yield opportunities while enhancing composability – ultimately creating a new market in yield hacking.
As I said before, the network effects are liquidity. We wanted to create tools to marry risk and reward with scale. An example of this is our stable rates – Lock yourself in a rate to get long term control over what you’ll pay.
At the end of the day, value-added tools drive usage of a protocol – By rewarding our liquidity providers, we can drive interest in the consumption of features like Flash Loans.
What do you think of the recent Flash Loan hype?
We knew the power of flash loans and expected it to grow, but the recent hacks made it go viral. Creating memes on that timeframe were quite fun and as a result, we’re seeing tons of projects working on Flash Loans during this hackathon.
Behind the scenes of a @MakerDAO collateral swap using @AaveAave Flash Loans, @UniswapExchange and @chainlink oracles 📸 @daveytea @RyanSAdams @econoar @nanexcool @EthereumMemes $LEND $LINK $ETH #Woah pic.twitter.com/NyKo1JHV6x
— Jordan LG 👻 (@JordanLzG) February 20, 2020
Think about it – Flash Loans allow anyone to leverage tons of liquidity without actually having that capital. It’s the capability and creativity that make them so unique.
I like to say that we’re entering the Flash Loan Era in which projects will need to become flash loan resilient – ultimately battle hardening the DeFi sector and Ethereum at large. We’re even seeing auditors trying to identify flash loan vulnerabilities in their security diligence.
Seeing as Flash Loans let anyone do crazy transactions and act like a whale, I expect tons of different versions to pop up over the next few months.
Aave is unique in the sense that it’s one of the few lending projects with a protocol token. What’s the main intention behind LEND?
LEND is a governance tool that controls the protocol. Over the next few weeks, we’ll be introducing insurance-like functions to further expand our value-added use-cases.
The cool thing is utilizing a token model allows us to build freely – we have a ton of flexibility to iterate how we’d like. Over time, LEND provides the ability to get rid of the central power and transfer it into the hands of our community.
The founder of IP protocol had a great quote:
“The most important things in life are open source”
Using mySQL and Linux as an example, great things come when you build products that are meant to be open-source and accessible. Seeing as London can be viewed as the Wall St. of Europe – it’s funny to imagine 8 people sitting in a cafeteria making incredibly important decisions like interest rates. To me, that’s not sustainable. When finance touches everyone and they can influence the system, then they truly have a voice.
We’re now starting to see a spectrum where companies try and decentralize but still control the underlying code. I believe the only way to make these web3 systems truly work is to have an open-source protocol, making things like pull requests open to anyone. Then we tie in governance in which no one party can put claims on the underlying protocol for future changes. Without that, there’s always a risk that someone can charge. When we remove the possibilities of claims for participation, truly novel systems can emerge.
Walk me through the rebrand and revitalized token economy. What did those discussions look like?
I owe it to having a smart team. When you have smart people in the room, all thinking how can we make this fit into the future that has the most value? It’s easy.
The way we look at it is the more value you take out of the protocol and tokenomics, the more that value has to go somewhere else. That’s why equity + token models are difficult because value capture will get divided. With us, everyone was on the same page. The DeFi narrative is clearly going a certain direction so let’s improve and capture it.
By having mechanisms for additional risk tolerance through things like insurance using a protocol token – we can start to offer really unique incentives.
What’s it like being the lead sponsor for ETHLondon?
We’re based in London. When we heard there was an opportunity for an ETHGlobal hackathon here, we really pushed for it to happen. When things were finalized, we decided to go all in. We started cooperating with a number of sponsors seeing as they were London-based as well.
As for the responsibility of being a lead sponsor, you have to make sure that everyone is engaged and having fun. We strived to contribute as much as possible. It was an amazing event and we were doing a lot of stuff. We had three developers solely helping teams 24/7 throughout the whole hackathon.
It’s also nice to see that over 65% of the attendees are from London, which is super important . The growth of Ethereum in London is also super important. There’s a huge Fintech scene which is quite historic. I really want to help evolve the DeFi landscape within London – especially in sectors like Shoreditch – to help contribute and cooperate wherever possible.
— Aave (@AaveAave) February 28, 2020
It’s extremely refreshing to see tons of young people. This is many of their first time dabbling with Ethereum and it’s exciting to see that they’re interested in learning more.
What can people expect from Aave in the coming weeks?
We’ve got a governance paper rolling out soon. We’ll be outlining our roadmap which some enhanced tokenomics like we chatted about earlier.
From a wider lens, we’re looking to keep growing fast as slowly as we can. We’re always going to innovate and I’m very conscious of keeping security in mind.
If we do it right, I have no doubt we’ll see DeFi TVL at $10B by this time next year.
For those who are just now hearing about Aave, I hope this interview can display Stani’s intelligence, focus and dedication towards fostering the long term growth of DeFi and the Ethereum ecosystem as a whole.
Following our interview, Aave selected three winners for their ETHLondon sponsor bounties which we’d like to share with you here.
Grand Prize: ($2500 aDai) Daj – Collect future lending interest up front by locking collateral to maturity.
Runner Up: ($1500 aDAI) GoodGhosting – A no-loss savings game using aTokens.
Third Place: ($1000 aDAI) Flash Dash – Flash Loan dashboard to easily see what’s happening.
All in all, it’s clear that 2020 is bound to be a huge year for Aave. Even over the past week, we’ve seen the project soar in terms of TVL, currently placing them 7th on the DeFi Pulse leaderboard.
For more news on the project, we recommend following them on Twitter.
To stay up with Stani and where he’ll be next, we recommend following him here.
Cooper is the Editor of DeFi Rate and an active contributor to leading DeFi media outlets like The Defiant, DeFi Pulse, and Bankless. He works with early-stage teams through Fire Eyes DAO to incubate governance models and grassroots community development. He is an ambassador to Set Protocol and an author of a weekly publication called Token Tuesdays. To stay up with Cooper, follow him on Twitter.