8btc Interview | TVL Top One Aave Enters V2, Here’s Everything You Should Know
Of all the lending protocols in the market, Aave provides the most diversified DeFi collateral. With strong liquidity and Nexus Mutual (insurance) support, we have seen Aave take a significant market share in the DeFi lending market in 2020.
When Aave V2 went live in the middle of this month, it surpassed Maker in total locked value (TVL) to take the top spot at DeFi with $1.6 billion.
In order to further promote the decentralized development and create a new experience of seamless finance for users, Aave V2 has launched new functions such as repay with collateral, debt tokenization and native credit delegation.
More significantly, Aave protocol will allow to open private markets to support a variety of tokenized assets to meet institutional needs. Cooperation between RealT and Aave is ongoing to further promote DeFi and provide mortgage for Ethereum.
On the afternoon of August 27, Aave founder and CEO Stani Kulechov was invited to join ChainNode AMA, further illustrating the ambitions and future of Aave, as well as the current state of DeFi.
Here are the highlights of the AMA:
About Aave Lending
What is the difference between Aave’s DeFi lending protocol and most popular DeFi lending protocol?
The main differences between Aave and other DeFi lending protocols in the space is that deposits in Aave are tokenized as “aTokens” which are pegged 1:1 to the underlying asset and accrue interest in real time directly in your wallet, so you can actually see your balance increasing every second! Aave has a focus on innovation and empowering developers with liquidation tools, Flash Loans (first uncollateralized loans in DeFi!), and more. Additionally, new features like native Credit Delegation are unique to Aave. Aave also has multiple markets with different uses and parameters, and Aave is very aware of the risks of these markets and loan to value ratios and other factors like that are determined accordingly. Finally, the upcoming Aavenomics is super cool because AAVE token holders can stake their AAVE for the safety of the Aave Protocol users in return for some staking rewards.
At present, the mainstream DeFi loan protocol in the market all have variable interest rates, and interest rate fluctuations will cause the risk and return of both borrowers and lenders to be uncontrollable. How does Aave’s DeFi lending protocol ensure the predictability of interest rates?
Aave Protocol has a stable rate for borrowers, which provides this stability and predictability of interest rates. Borrowers can choose between stable and variable interest rates, and switch between them at any time. Aave V2 plans on introducing fixed rate deposits, so lenders will also have a clear guarantee of income not bound by market fluctuations.
Aave’s launched Credit Delegation (CD) service allows users to make unsecured peer-to-peer loans. What are the advantages compared to mortgage? What is the meaning to the large-scale application of DeFi?
The idea of credit delegation is to allow Aave depositors to delegate their credit line to people they trust in case they don’t borrow themselves. Usually in pooled lending 25% of depositors are exercising their credit lines. Credit Delegation allows depositors to earn more since the person who will get credit delegation will pay additional interest for borrowing without a collateral.
The interesting part of DeFi applications are the fact that they are permissioneless, accessible by anyone. This permissionless nature allows DeFi to scale to wider extent when the application has found product market fit. Credit Delegation allows unlocking more liquidity which means that you could delegate credit to a smart contract as well with pre-defined functions. This allows the scaling for Credit Delegation.
You can delegate credit to traditional businesses. For example, I could imagine that Aave depositors could delegate credit into one pooled borrower, who can be a money lender or financial institution, that sources affordable liquidity from DeFi and lends those funds further to consumers.
At present, Credit Delegation (CD) is often used for inter-institutional (B2B) lending. Are there any considerations to develop to C in the future? How to avoid credit risk?
Yes, our goal is to expand credit delegation to smart contract-based delegations. This means that anyone can create a smart contract for a strategy in DeFi and Aave depositors can choose to delegate their credit into these smart contracts that will generate them more yield.
In Credit Delegation, the terms and conditions of the credit loan are laid out in a legal agreement using OpenLaw. Therefore, if someone defaults on the loan, then they face the legal consequences that they signed in the agreement.
Moreover, in the credit delegation to smart contracts, there will be no additional credit risk since the smart contract has only pre-defined functions. For example, there could be a smart contract that only allows to do certain operations such as farming tokens.
About LEND Migration
According to Aavenomics, the new token economic model released by Aave, the new token AAVE will replace the original token LEND at a ratio of 1:100, which is equivalent to 100 times deflation. What are the use cases of AAVE in ecology?
The conversion rate from 100:1 is to simplify the token economics and the migration allows AAVE to technically upgrade the token smart contrat as well. It also introduces minting functionality that could be used in the future for incentives and it also serves as a backstop in case the staked AAVE does not cover a protocol deficit.
Yes it changes the token supply, but it won’t affect the token price.
Why did Aave migrate the original token LEND to the new governance token AAVE? Does it have any new meaning?
We rebranded from ETHLend to Aave a few years ago, and now it’s time our token rebrands too. LEND will migrate to AAVE at a rate of 100 LEND per 1 AAVE. The total supply of AAVE will be 16M tokens. 13M AAVE tokens will be redeemed by LEND token holders and the remaining 3M AAVE tokens will be allocated to the Aave Ecosystem Reserve. The AAVE token will be the governance token of the protocol, so AAVE holders can vote on governance smart contract updates. AAVE holders can also stake their AAVE in the Safety Module I described earlier and receive Safety Incentives in return for securing the protocol.
About DeFi Interact with OldFi
In the real economy, non-tokenized collateral, such as car loans, mortgages, personal consumption loans and other traditional lending areas, are there any use case for DeFi lending such as Aave? Or is it limited to the field of cryptocurrency lending?
We see the future of DeFi as interoperable with the traditional financial world. This is where Credit Delegation plays a role– party A can deposit in Aave and delegate their credit line to party B who can borrow against it without needing to put up any collateral. This is all done through a legal agreement through OpenLaw, which sets the terms and conditions of the credit loan. This puts DeFi in a position to be a source of liquidity for all of finance. For example, a credit delegator could be a DeFi fund looking for credit exposure, and a borrower could be a business, institution, government, etc.
Aave V2 will also have private markets, and we’re actually working with RealT right now to bring mortgages onto Ethereum– stay tuned for more news on that!
How to realize the tokenization of Tesla?
I think it’s a question of ownership. Anything can be tokenized and usually banks own most of the cars in the world, why not rather tokenize them and let people to trade that value on-chain and use as a collateral in Aave. Technicalities are simple, its more challenging to ensure that the tokenization can be done in large scale.
About Regulation and Decentralization
Aave’s UK subsidiary recently obtained the Electronic Money Agency (EMI) license issued by the Financial Conduct Authority (FCA) in the UK. What does it mean to get this license?
We’re very excited about this, and it’s a first step in bridging the DeFi world with the fintech world. This EMI license allows Aave to facilitate payments and currency conversions, as well as issue electronic money accounts for consumers and businesses. This authorization allows Aave to provide access to DeFi directly from electronic money accounts, opening up DeFi services to a wider mainstream user-base. Other EMI licensed companies include Revolut and Coinbase.
Will this go against the original intention of decentralization?
The protocol is open source, decentralized and permissionless. This means that anyone can access the protocol permissionlessly. The license in UK is a separate entity that intends to bootstrap more users into Aave over a period of time.
About Future of DeFi
Defi is currently lending, trading, and circulation. What else play way?
I think we will see the whole financial industry being built on DeFi.
What is the key of future development of DeFi?
This is very important for the overall strategy for where DeFi is headed long-term– we aren’t trying to build a product that just gets hyped up and then forgotten. The point of DeFi is to build financial tools that people can really use that are better than or complement the traditional financial system. The future of DeFi is interoperable with traditional finance, and we see the future development headed towards a system where businesses and institutions can actually draw liquidity from DeFi. Aave is constantly innovating to bring new features like mortgages on Ethereum, bringing new use-cases to the space. DeFi is evolving quickly and the user experience has improved a lot. Mainstream adoption could be coming soon!
Do you think the popularity of this wave of DeFi is a hype bubble or is DeFi supposed to be like this?
There’s a lot of hype around things like yield farming, but a lot of the hype is because DeFi provides infrastructure for building useful financial tools, and now the user experience is improving a lot so people are actually able to take advantage of these new products. People are starting to discover what they can do with their money and realizing that it should never sleep.
How to see the popularity of DeFi today, will it be a flash in the pan? How much real and sustainable borrowing needs does Aave have, and how do you see Aave’s next development?
I think it’s betting more widely popular and more people are interested. Aave will continue to build the Aave Protocol with more features and whatever the governance wants us to build.