Decentralized Lending - A Conversation With Stani Kulechov from AAVE
What's your background? How did you get involved in crypto/blockchain?
SK: Even though I have always been passionate about finance, my background is actually in law! I was getting my masters in law at the University of Helsinki when I discovered Ethereum and got involved in the community. As I learned more about the technology behind Ethereum, I started thinking of different ways that the transparency and immutability it provides could be incorporated to build a more equitable and efficient financial ecosystem. That is how the idea for Aave was born.
What value does Aave bring to users?
SK: Aave is an open source and non-custodial liquidity protocol where users can earn interest on deposits and borrow assets. Open source means that anybody has access to the code, and non-custodial means that you maintain control of your funds at all times. When users deposit an asset in Aave Protocol, they automatically start earning interest on that deposit as it is loaned out to borrowers. Users can also borrow any asset from the protocol as long as they put up enough collateral in another asset to support their loan position. This gives borrowers flexibility, and they can pay their loan back whenever they want as long as they have enough collateral. However, if they cannot pay their loan back or the value of their collateral falls significantly, their collateral can get liquidated or sold off at a discount to reimburse the protocol. This ensures that the funds in the protocol are safe.
Where do you see Aave five years from now?
SK: Aave Protocol launched last year, and already the protocol has grown to over $4B in assets and borrowings (market size). The DeFi space has also gained lots of traction, growing from $600M at the beginning of 2020 to over $30B at the time of writing this. It is clear today that DeFi is getting more attention from institutions and banks who have started to explore how it can be used to complement the existing financial system. We are starting to see DeFi move from a relatively niche space with a dedicated community toward the mainstream arena.
What are the most common misconceptions you hear about decentralized lending?
SK: One big misconception is that all loans are overcollateralized, so only people with existing capital can take out a loan. Aave brought Flash Loans to market, a tool that allows developers to borrow instantly without any collateral, as long as the liquidity is returned within one block transaction. Flash Loans became a popular DeFi building block and there is a tool called Furucombo that lets non-technical users do a Flash Loan. Credit Delegation is another innovation from Aave that lets one party deposit in the protocol and delegate their credit line to another party who can then borrow against it without needing to put up any collateral of their own. Uncollateralized lending is becoming more popular and new building blocks are coming to market to unlock more liquidity from DeFi.
What’s next for decentralized lending in 2021?
SK: In 2021 we will see the decentralised lending space grow even more. The open source nature of the ecosystem encourages rapid innovation that you don’t see anywhere else. Since everyone has access to the code, developers are able to build new products that complement each other and foster the growth of the ecosystem by giving people new options for financial tools and services. This innovation will drive more people to DeFi.