Renewed Interest: A Conversation with Stani Kulechov

The way Aave works is that users come into Aave, and they deposit stablecoins.

And stablecoins are just one form of digital assets that are sitting on the blockchain, and these are typically fungible assets.

So users deposit stablecoins, and other users are borrowing these stablecoins against a digital asset collateral.

And that digital asset collateral can be crypto collateral, for example, Bitcoin that is wrapped in a form that is existing on Ethereum or Ethereum staking derivatives.

And now more recently, we expanded also into tokenized assets, meaning that you can also put as a collateral a tokenized stock, tokenized money market fund, and these types of assets as well, and borrow a cash leg, which is, in this case, stablecoin.

And what users typically do is they simply put their assets as a collateral, they borrow, and they might convert that stablecoin into a dollar currency and then finance an opportunity that is existing in real life, or it might be another finance or arbitrage opportunity on the blockchain itself in decentralized finance.

One particular difference, what Aave is doing compared to more traditional way of enabling this sort of like collateral-backed lending, is that the whole system is running on certain amount of code, essentially.

So- What we're doing is that we're compressing settlement resources, the settlement teams, credit teams into smart contract code, and that code executes autonomously on the blockchain, meaning that when a user wants to borrow, these transactions happen automatically.

And also the protocol is kept healthy by ensuring that there's always over-collateralization.

And if positions get close to under-collateralization, what happens is that there is automated liquidations as well.

And we processed over one billion of liquidations, and the way it works is that liquidators might come in, repossess the collateral, and putting back stable coins into the protocol against a fee, and this keeps the protocol balanced and healthy.

That makes total sense.

It seems like we have a two-sided market.

You explained pretty well, like, why the borrowers, like, where their opportunity lies, why they might use it.

Why would someone deposit assets into Aave to begin with?

What Aave creates when it essentially creates these markets for lending, borrowing, it creates interest rate markets.

That means that with Aave, as you deposit funds into these pools, and these are not peer-to-peer transactions, there's always a pool in between, and that pool typically has also a utilization curve, meaning that ninety percent or ninety-two percent of the funds are utilized by the borrowers, and rest is sort of like float in the smart contracts as a liquidity sleeve that depositors can withdraw from the protocol.

Depositors get interest for the stable coins that are-- they are lending into the protocol itself, and that is an opportunity, since that's a way for stable coin holders to earn on their stable coins interest directly on the blockchain.

And then from the borrower's perspective, borrowers are using Aave since they want to unlock liquidity from their crypto assets or tokenized assets.

And where it works really well is that the protocol works twenty four/seven, including outside trading hours and over weekends, meaning that it's a way for a fund, for example, accessing liquidity on a time when, for example, it's outside of banking hours, simply depositing collateral and borrowing stable coins and maybe meeting a margin requirement somewhere else or investing into another opportunity.

Those are the example use cases for both lenders and borrowers.