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Aave: The Road to a Crypto-Powered Neobank

Jan 12, 2021 ·

By Jose Maria Macedo


Chain Reaction Host Jose Maria Macedo sits down with Stani Kulechov – Founder & CEO of Aave. Aave is one of the leading DeFi protocols with nearly $3B in TVL and $4B in loans originated. Originally known as ETHLend, Aave launched its ICO in 2017 and unlike most, built through a brutal multi-year bear market that saw its price drop >90%. The team’s persistence was rewarded with a truly epic 2020 as TVL grew 1000x (from $300K to $3B) and market cap grow ~150x (from $10M to $1.5B). Most importantly, the team has continued to innovate at breakneck space, pioneering features such as flash loans, delegated credit lines, collateral swaps and entirely new governance structures.

In this conversation, we skip over much of the now well-covered Aave back story and focus on covering new ground. We discuss things like:

  • What makes a good protocol founder & CEO,  
  • What Stani looks for as an angel investor, 
  • How Stani sees the competitive landscape,
  • Aave’s e-money license and plans to become a neobank,
  • Aave’s biggest mistakes in 2020 and focuses for 2021,

…and much more




Interview Transcript

Jose (00:00:00):

Hi, I’m Jose Maria Macedo, a partner at Delphi Digital. I’ll be co-hosting episodes of the Delphi podcast with a broad focus on economics, governance and incentives. With our guests, I’ll explore different sometimes radical economic perspectives and how these affect what we value as a society and how we organize ourselves to achieve it. Ultimately, my goal with these conversations is to expand our perspectives in ways that allow us to build better systems going forward. As a reminder, nothing said on this podcast is a solicitation to buy or sell any security or token or to make any financial decisions. I or Delphi Ventures may hold token mentioned on this podcast, and you can see our show notes for full disclaimer. First, a quick word from our sponsors before we dive in.

Tom (00:01:00):

Hi everyone, I want to tell you about our new podcast sponsor, LVL. LVL is releasing the first free Bitcoin exchange in North America. The LVL mobile app allows you to buy and sell Bitcoin with no trading fees or hidden spreads. With LVL, you get free Bitcoin trading, a host of Bitcoin wallet, an FDIC insured personal checking account, wires, checks and direct deposits, and even a MasterCard debit card. If you use their premium account for $9 a month, you get autopilot, automatic trading, chat with a dedicated private banker and even a metal MasterCard. Check them out at or check them out in the show notes below. Now, back to our show.

Jose (00:01:44):

Hi everyone. Today, I’m thrilled to be speaking to Stani Kulechov, founder and CEO of Aave. Most of our listeners will be familiar with Aave, which is one of the leading DeFi protocols with nearly three billion in deposits and four billion in loans originated. An overnight success, three years in the making Aave, which was originally known as ETHLend launched with the 2017 ICO and build through a brutal bear market which saw their price drop 95% before going through a truly legendary 2020, and increasing their market cap more than 100X from 10 million to 1.5 billion today.

Jose (00:02:18):

We’ve worked with a lot of teams in this space and I can honestly say the speed at which Aave ships and the quality of the community put them in a league of their own. Personally, I’m a Stani fan boy, and I’ve listened to most of his podcast appearances. So in this conversation, we skip over much of the now well-known Aave backstory and try to cover some new ground. I asked Stani stuff like what makes a good protocol founder and CEO, what Stani looks for as an angel investor, how he sees the competitive landscape through Aave, Aave’s e-money license, and plans to become a neobank and much, much more. I hope you enjoy the conversation. And as always, please hit me up with any questions or feedback.

Jose (00:02:55):

Stani, thanks very much for being here today.

Stani (00:02:57):

Thanks Jose for inviting. I’m happy to be here, and share my thoughts.

Jose (00:03:01):

Awesome. Yeah, I mean, to start with, as researchers and investors in the crypto space, we’re always trying to profile what a successful founder looks like. Initially, I think in this space, a lot of people were looking for the Silicon Valley stereotype. So the Stanford computer science, fan company on the resume, all that kind of stuff. However, what we’re seeing with you, Kane and Robert Leshner is a different kind of founder. A more crypto native founder, which is driven less fitting in a box and more so like following their intellectual curiosity. And I think your path exemplifies that. So I’m curious if you could just tell us quickly what you were doing before crypto and how you ended up coming across crypto.

Stani (00:03:40):

Yeah. So somehow finance has been always something that I’m very, very curious. And before entering into the DeFi space or actually crypto space, I was actually … Way back ago, I was building [VEP2 00:03:55] financial applications. So practically what the mainstream finance calls FinTech, financial technology, which is mostly changing the interfaces, the interactions, how mainstreamers are using finance. And this is kind of like, there’s a big gap that traditional legacy finance has left and what FinTech is trying to fulfill and is doing also quite a good job in that sense. And this is why different kinds of neobanks have been built.

Stani (00:04:28):

So one of the applications I had is practically allowing working capital finance to gain app developers, app publishers. So there’s this thing when you deploy your application in terms of traditional technology in App Store, or Google Play, you practically, when you get revenue, you have to wait 30 days, plus let’s say 15 days or so. So there’s a waiting period. But then you have bills to pay in between.

Stani (00:04:59):

So what my application did back then is we calculated the upcoming revenue streams and then financed against that revenue for developers to get the payouts earlier and get them to grow quicker. That was very fine but the thing is, I was probably like 15 years old or 16 years old back then. So I was very into building things, but I wasn’t very good at commercializing and making actually products. I just wanted to build things that were very cool in terms of finance and I was quite too young back then. So two years I built various other applications. I never had an intention to actually build a startup.

Stani (00:05:48):

And actually I went to law school. I studied in the University of Helsinki in Finland, in the Nordics where I’m originally from. And I chose law because for some reason programming mathematics was always about rules. Then there’s this other field in finance, finance is very regulated. And I just wanted to understand more how those regulations and those rules worked. Because they obviously work a bit different way. So mathematics is more about consensus made by lawmakers and so forth. So I wanted to understand more.

Stani (00:06:29):

And during my studies, I think it was probably last semester or something like that. I started to get more involved in dispute resolution and I loved contract law and I started to research more about how we could make contracts more efficient. And somehow I started to read about Ethereum and smart contracts. And when I understood about the concept of self executable contracts that practically … Self enforcement in smart contracts that practically blew my mind.

Stani (00:07:08):

So what I realized is actually that you can make agreements between arbitrary amounts of parties and just those contracts are enforced as they’re written. And that was something that just practically created a lot of ideas in my head. And then I wanted to build something and I obviously, while I was working with finance previously, I wanted to create practically first on-chain lending application, where the borrower has an incentive to repay the loan because of the collateral that they set there. And what was born back then was the ETHLend, short for Ethereum lender, which was the first lending protocol on-chain. And for some reason, I don’t know why, but it became just like a bigger project. I really wanted to just do this one thing and continue with my life. But it just escalated. And somehow it became bigger and the community grow quite fast. So this was very different than I was expecting.

Jose (00:08:13):

That’s awesome. Yeah. I mean, in a hindsight your background seems like it leads perfectly to crypto, right? Like builder, finance applications and then studying law. But I guess it was all just following your curiosity and ending up here.

Stani (00:08:29):

Yeah. One thing I would say that in this space, what’s cool is that you find people with developer backgrounds, law, economics, people who work with risk game theory and it all boils down together. So even wherever we come from, you try to do a bit everything and that is where the sweet spot is. So that it doesn’t really matter, what’s the background, it’s just like, what’s your aim. And then what ingredients you need to understand to build a product. So that was something quite nice in DeFi, because here I learned more about economics game theory. I learned quite a lot about risk. And things that I wasn’t actually doing previously. And I think this is what makes the space very fascinating.

Jose (00:09:22):

Yeah. I think that’s certainly what attracted me to the space. And I think a lot of us is, it’s just the learner’s paradise. Crypto touches so many areas, whether it’s economics, law, history, computer science, it’s just a learner’s paradise, I think. And I’m curious, you’ve been hiring in the space for a while, but you’re also an active angel investor. I think we’ve co-invested on a few deals on the Delphi side. What qualities do you look for in projects and in founders before investing? I mean, obviously, as we said founders in crypto look very different from traditional markets and I’m curious, what are your indicators that someone’s a good founder that’s worth backing in the space.

Stani (00:10:00):

Yeah, I definitely the angel investor moments have been something pretty new to me. I’ve been doing them for, let’s say a year and a half, almost like two years. But what’s important for me is my investment thesis is pretty simple. I want to give as much as possible back to the ecosystem as I can and I can afford. So practically I believe that when the ecosystem is big enough, it starts to thrive in a way that the traditional finance wants to join the ecosystem and take advantage from the network effects that you can have. So it’s very difficult, for example, for traditional finance to create a parallel ecosystem, for example, that is somehow replicating DeFi, but there’s some properties that are tweaked in a way that it’s favorable for them and might be less favorable as an open ecosystem.

Stani (00:11:01):

And this is my thesis. So I try to put back capital into the space as possible, and also know-how that I received and learned during my own experience with Aave and ETHLend. So the idea is that I wanted the space to grow, the ecosystem to grow and create new opportunities. And when it comes to actually the project itself, there’s two things I’m looking into. One thing of course, is the innovation. So what is the innovation that is at hand? So how it improves, how it makes finance efficient, how it uses the properties of decentralized finance, transparency, interoperability and for example, the interoperability or governance advantage that it makes finance better. The finance we know in traditional world, or it can be actually these days, a better DeFi than we used to have.

Stani (00:11:58):

And this comes to the second point that I’m looking into is usually the founder and the team, what are the capabilities of keeping up with the rate of innovation? So you can innovate as much as possible in a particular product. But the thing is that especially in decentralized finance, anyone can participate in the ecosystem not just by using products, but also building them. And that means that anyone in the world can build, the next Aave could be created by someone from, let’s say, Asia, at one person, two person project. Or something to that direction. So what I’m trying to look in terms of team and founders, is that how well, looking at what they’re doing, how they’re thinking, what they’re building, how they can actually keep with the rate of innovation in the future.

Stani (00:12:51):

And this is something very important because the space is constantly moving forward. And if you don’t keep up you basically start to deflate. And this is something that is important to every founder and every builder to understand when they enter into the ecosystem. That you can build things but if you want some long-term horizon, you need to have this constant innovation and not take it as a stressful way that you have to come up with new things all the time, but thinking it as a natural thing. So if you’re innovating constantly and this is part of how you design things, build things and work on products, there will be always innovation that comes up. And these are two very important things I’m looking in terms of the angel side.

Jose (00:13:42):

That’s really interesting. And I mean, as a protocol CEO, we’ve been working with you for a few months and just seeing the sheer amount that’s going on, on the Governance Forum, whether it be money license, all the things you have going on. I’m curious, how do you think of your role as CEO? I mean, you’re the CEO, but obviously being the CEO of a decentralized protocol is a very different proposition than being the CEO of a company. And so what are some learnings that you’ve had on that and how do you see the role of a good protocol CEO?

Stani (00:14:12):

Yeah, I think as a protocol CEO, you have to have this kind of like a stake back approach in the way that you have to make decisions and also bring topics to the community that are in line with the centralization goal. In the sense that you try to also take the space further. So it’s not enough that you are looking like what’s the current state of decentralization and stick with that. As a CEO, you need to think how we get closer to become more de-centralized or more efficient in terms of what we’re building on the product side and how we get more adoption and so forth. So you have to always think on what will be the next step in the narrative that you need to take, to go towards these principles of decentralization and the efficiency that realize in DeFi.

Stani (00:15:14):

So I think when you compare on traditional CEO position, one big different is that you are not in charge of the company, you’re just one stakeholder in the protocol. So over at the end of the Genesis team, it’s practically just one stakeholder. What we are doing very well as a team, we’re basically shipping code. So we’re good at shipping products, production-ready, which basically means that we’re shipping secure code. And that is why the community trust us.

Stani (00:15:50):

But also the important thing is to understand that we are just one kind of a building block in the whole community. And in the future, there might be multiple themes like Aave, actually building and getting their code integrated into the protocol. So you’re just a member, whereas in traditional financial company, you’re trying to run an objective and trying to kind of like … It’s a complete different perspective I will say. And still it’s very early, it’s very hard to say, how things will evolve. But there’s a narrative that you need to follow and your guidelines are pretty much the principles that DeFi has and decentralization in general.

Jose (00:16:36):

That’s cool. And so do you see yourself deprecating your own role in a few years, is that kind of the go for the CEO no longer to be necessary? Do you think there will always be that role in guiding all the stakeholders and being that coordination point?

Stani (00:16:50):

I think we’re already in the point that I’m no longer necessary, which is a good thing for decentralization protocol. But the thing is I lived the past where I’ve seen very good teams building protocols where it’s a blockchain or practically application on blockchain or a protocol there. And once they have build and shipped their product, they practically give it to the community and they step back and they pretty much rely that the community takes the charge and so forth. But what I think is more important is that you still are part of the community. So even though as a team, when you ship things, the committee takes charge and oversight and whatnot, it’s still important that you’re contributing into the protocol.

Stani (00:17:46):

It might not be code any more if there are other teams that are doing it faster, more efficiently and with better quality. But there’s always some aspects that you should be involved. And I love to always when I’m thinking about this topic. To think how, for example, Linux works and how Linux was founded and the role of Linus Torvalds. Which actually is funny because Linus Torvalds is also from Finland and he basically started in the same university as me.

Stani (00:18:20):

But what they were building also is open source, but operating systems. And still to this day Linus Torvalds is involved in the Linux ecosystem and the community. I think this is good example, how you should participate in the future, even though the protocol itself and decision making isn’t necessarily something that you are needed in. But you still should be involved because it’s pretty much you’re part of the history of the protocol. And I think especially if you have been involved in early stages, you have a lot of things to give and in the future as well. So that’s my opinion.

Jose (00:19:01):

Yeah. That makes a lot of sense. And it’s been a massive year for Aave to say the least now, going to Aave, obviously you’ve grown. I mean, the TVL, I think is close to three billion, market cap of over a billion. And unlike others, you’ve achieved this without deploying any liquidity mining incentives at all yet. Which is pretty huge. You’ve launched so many new products, I’ve lost track of them all. Now with Governance V2 and everything. And you’ve obviously done a lot right to experience this kind of growth. But I’m curious, looking back, are there any big mistakes that you think you’ve made or things that you wish you’d done differently?

Stani (00:19:36):

Yeah. I think we have more probably mistakes than … I think we make constantly mistakes, which is very normal. It’s very difficult to lay out a playbook and then just follow it in a way and play.

Jose (00:19:56):

Especially in this space.

Stani (00:19:57):

Yeah, exactly. Because people always love to talk about playbooks and how things should be done. It’s very good to standardize things, but it’s important to innovate. One of the things that, for example, in the beginning of 2020 I remember that when we came up with the version one Aave Protocol, a year ago. So we had this concept of A-tokens where, when you deposit into Aave, let’s say USDC you get in return A USDC which is practically a representation of your deposit into the protocol. And those eight tokens practically will increase in balance in your wallet, wherever you’re storing. So every second, the interest rate is credited to your balance, and then you can claim your underlying and the interest rate.

Stani (00:20:51):

So this was very controversial because the way that it makes very tricky to integrate the version 1A token. It’s very easy the version two version. But back in the days, it was more trickier and something new, and there was big debate about whether you should do this way, or you should stick and follow the very strict form of ERC-20 standard. And don’t add any kind of complexity. But we saw it as innovation because for end-user it’s practically, it meant that you have global permission on savings account, which is ready all the time to you, the interest yield. And for us, that was very powerful from the end user perspective. And it was done on a protocol level, not on the user interface.

Stani (00:21:41):

And we challenged the whole space a year ago that this is like … You shouldn’t stop in a way in things. Even if the whole community is against you, but if you really believe that it’s helpful and to remove inefficiencies, it makes finance better, you should not listen. I mean, you should still always listen to everyone. But you should not be afraid to innovate. That’s what I’m trying to say. And we should be glad to do it, now we have seen others are using the same concept. I saw a project that are doing payments in this kind of fluid balance increase where without calling the transfer function. And we probably will see a lot of additional things coming with the same concept.

Stani (00:22:25):

So I definitely say that we take a lot of risks in terms of product and try different kinds of things. We fail a lot, but we also win. And those wins with big risks is what matters. You need to take risks, you need to push forward. And that is reason why we were able to be successful till [inaudible 00:22:49] point. Because we tried to come up with new things, most of them that will not work. Some of them will work and very well. And that risk will pay off and it will pay off all the kind of mistakes that you do.

Jose (00:23:01):

Yeah. That makes total sense. And definitely a lot of lessons to learn there. And digging into some of the specifics that you’re working on, obviously you’re doing a great job serving DeFi users right now, but you’ve always had your eye on how can you hit traditional users and how can you expose more people to DeFi. I think one of the big things that happened this year, that we were super interested in is that you received your e-money license in the UK. And I think this is under reported, but as far as my research showed, and please correct me if I’m wrong. The only difference between an e-money license and a bank in the UK is that an e-money license can’t provide loans or keep deposits that accumulate interest. And since you’re doing that anyway, it seems like you’ll basically be able to operate very similarly to a bank. I’m curious, what’s your goal with the e-money license, what can we expect next year? Are you competing with Revolut and these other neobanks directly, is there something else? Just give us a little bit of color there.

Stani (00:24:00):

Yeah. So I think we started the process, we have our integrations entity in UK that we launched a couple of years ago and practically the idea was that we have different kinds of crowns for integrations to get the protocol widely adopted. And one of the things we noticed that there wasn’t easy and efficient. There’s always a way, but efficient way to a end user who is holding some national currency, if you have currency to convert into a stablecoins and enter into these interests finance. And of course, when you’re dealing with fiat currencies, there’s the compliance and whatnot. But the main interesting point is that back then we started to work on the license and we fall for it. And it took quite a lot of time.

Stani (00:24:51):

There was, of course ripples in general its something that’s isn’t straight forward for regulators. And also there was Brexit at the same time and things took quite a lot of time. And also that wasn’t our main focus in the sense. I mean our goal practically is that if there’s a person in that jurisdiction that actually wants to get DeFi yields, how? We can make it possible without taking, let’s say 20 different steps to achieve that role, that goal. And we decided that one of the ways that we could do is just actually get the license, and that is what we did. And today there’s different kinds of on-gramps. And at some point, the idea changed a bit that especially now that when we launched the Aave Protocol beginning of last year, what was interesting is that we understood based on user experience and so forth that many users like what we are doing on the front end as well.

Stani (00:26:02):

So we, of course been always focusing on the protocol level to make the protocol very good, very secure and sufficiently get documentation that it’s easy to integrate. There’s probably over 60 or 70 access points to the protocol, different things built on top, but one of the access points is actually a user interface that we also operate. And we have put a lot of focus on making good UX, and we have had a little feedback and based on that feedback, we’ve been improving and a lot of good feedback. And we see that Aave is becoming actually a brand in DeFi. So when you deposit into Aave you have certain kinds of expectations when it comes to user experience, security and efficiency and yields even. And this is pretty funny because the idea of those finances that you don’t need to think about branding, you don’t need to think about this kind of stuff it’s the code you don’t need to trust just verify. But human mind is built in a way that you kind of like once you get used to something you establish this psychological trust.

Stani (00:27:18):

And when we understood that point is that actually, like one of the coolest things we want to also have is the end to end relationship with the user and providing the efficiency and transparency, interoperability that DeFi provides. But also ensuring that the very first touch we’ll start from the user to us. And there’s that end to end pipeline. And still the protocol is available to everyone. And so that pipeline could also be an example for others. I don’t want to use the word playbook because in my opinion, there is no playbooks. You have objective and the goal and you just need to innovate your way into it. But this pipeline could be just an example, an inspiration for others, front end or it might be centralized exchange applications, how they could plug into DeFi and how they could establish this customer relationship and have a customer base. And that is probably one of the things that we are trying to expand it. And having end to end relationship with your user base, it’s very powerful, I think.

Jose (00:28:32):

Yeah. I think end to end relationship is huge. The whole Ben Thompson Aggregation Theory is something we look at a lot. I’m curious, how do you see that working then? Would it be, there’s like an Aave application layer, and then there’s the kind of protocol layer that’s separate, or yeah. How do you see that working?

Stani (00:28:50):

Exactly. So the protocol is decentralized, it’s governed by the Aave Governance, the Aave Token holders practically. So the actual application is just access points into the decentralized protocol in the same way that there is access points from, let’s say, DeFi Saver in Slab and all the other front ends. So it just will be one additional access point that basically opens a new user group into Aave Protocol and not just Aave Protocol, but in DeFi general. So what we’re doing actually here is we’re unlocking a completely new market segment into our space. And for us, it’s not like … Even when I talk about end to end, I’m practically referring to the experience that you have when you start from there, and that’s your first touch into decentralized finance. You have the experience from converting your fiat funds into stablecoins and depositing this experience.

Stani (00:29:58):

But our goal is actually even wider. Once that’s happened, that particular end-user becomes DeFi or Crypto DeFinative user, and they can experiment everything that’s happening in this space. Of course, not all DeFi is equal, it’s very important that DeFi will build very secure things and still keep innovative aspects in it. And that’s one thing what we know it is in Aave, is that it’s very easy to prototype things. You can build things in hours from days, but making it production-ready takes a lot of time. It actually takes months even to actually get something very, very production-ready, and enough diligence that you’re comfortable putting it on the main net. And when we have this kind of a new user segment there’s of course the educational process of educating, the DeFi is completely open in the sense that there’s everything, and you can try everything they need to understand, when you’re trying different things what are the risks associated, what kind of financial products they are? It has to be like education that they accumulate.

Stani (00:31:14):

And I think this is important part because a traditional finance falls in a way that you just trust and you get certain yields and you don’t know what’s happening in the background. But this is not the idea of DeFi. This will happen as well and people will do the same thing. But the end result here, the objective is that people will become finance aware in what they’re doing, why you’re holding keys. And that’s what we are trying to achieve here.

Jose (00:31:42):

That makes sense. So this application layer, you’re going to leverage Aave the protocol of course, but you also see yourselves integrating other DeFi Protocols and other DeFi experiences and just curating that for a non-DeFi user. Is that right?

Stani (00:31:57):

Exactly. So I think even though our goal is to get more adoption for the simplest protocol, where’s the pre-confident that if you open up the user base to other activities it creates more opportunities. It creates more traction in the space, but also creates new users because you find new things and more and more users come. And if everyone is doing the same thing, so if everyone is sharing users, us, we are actually doing now in DeFi. So many of the Aave users actually are using other things. They might use something like [inaudible 00:32:42], they might have a CDP, [inaudible 00:32:46], Uniswap, FireSwap. They’re using all of this things. And this is what makes them … Creates the ecosystem. When we started with a couple of years ago beginning of 2017, there was practically just one decentralized exchange, EtherDelta, and then when we launched there wasn’t practically anything else.

Jose (00:33:08):

Good times. I remember EtherDelta and full UX to say the least. Nice. Okay. And as a token economist, my brand just goes this way, but how do you see the value capture there. Is the application layer going to have an additional set of fees on top that are going to accrue to Aave, the application, have you ever thought about that at all, or you’re just thinking of growing it first and figuring that out later, what’s your plan there?

Stani (00:33:38):

I really liked the idea when you already said the token economics like a correct path in the very beginning. Somehow, I don’t like the model where let’s just build these things and let’s see later how we figured this out. I think you should be already tweaking something in the very early, and this is what we actually are doing. But we’re doing in the protocol level. So the idea is if you look at the Aave token economics, which you also have been involved in giving feedback and modeling and so forth. So what’s interesting there is that it’s all about the surface of insureability, what you can insure. So one of the things we tried to figure out in terms of token economics, is that what is the most important thing for the Aave community, were actually the products, the protocol itself. And one of the important things was to set the risk parameters correctly to avoid any kind of a shortfall events. For example, Fed liquidation and also half products that are good and secure in terms of when it comes to smart contract risk and so forth.

Stani (00:34:58):

So practically what we noticed that the Aave token holders are making those risk-based decisions. And the most important thing for adoption is that the protocol is secure or the depositors funds are somehow derisked. And what became up is that we have this staking facility called safety module where the Aave token holders in return of making those risk based decisions, they can stake their Aave tokens in the safety module and earn rewards in Aave. So practically, if there’s a shortfall event, 30% of the tokens can be slashed and practically auctioned and convert the deficits into protocol and also if the stake doesn’t cover, then there’s this passive risk mechanism, the recovery issuance where a new Aave tokens can be minted in a similar way as the [inaudible 00:35:50] had in back in March last year.

Stani (00:35:53):

So practically, the idea here is that as the protocol starts to grow and it grows because the products are good, it’s sufficient and derisked, the surface of insurability starts to grow. So, for example when we started in 2020, we started from completely zero. And now the protocol has roughly under three billion worth of value locked in the protocol. So this expansion of the value locked also means that the coverage of the insurance grows which actually should be priced into the cost of the insurance, which is practically the safety module at this point.

Stani (00:36:39):

So the incentive of the safety modules should increase to the extent as the protocol increases. And actually, this is something that the Aave Governance is voting during this week. And there’s a proposal going in to actually increase those incentives so that the safety module will grow. So this means that you actually want to stake Aave, obtain and stake Aave to get the rewards to cover the depositors risk. So the more we have front end layers applications it’s up to the front ends to actually decide how to monetize them and they need to monetize somehow to cover their costs, their expenses, and what’s important for the protocol is that more deposits are coming in, and also there’s a mechanism that we can expand the safety module and cover more of that critical deposits in case of this shortfall events. So it has this interesting feedback loop with the token economics, deposits and the size of the safety module.

Jose (00:37:49):

Yeah. This makes a lot of sense to us obviously, this is how we think it should work as well in the governance decisions for lending protocol are very much like risk decisions. And so it makes sense for the people making those decisions to have skin in the game. And I think insurances is a natural way to achieve that. And then there are a bunch of questions around how best to achieve that and what we’re trying to work through now, and we’ll be presenting in the call this week. But I’m curious, do you see that safety module, do you see the potential for it eventually to become almost a separate business line, like an insurance product that can also be used by potentially other protocols, but even just stuff that’s built on top of Aave, like Aavegotchi, for instance.

Stani (00:38:28):

I think so. And Aavegotchi is quite good testing ground for it. Because the smart contracts that they have to use, let’s say if where [inaudible 00:38:36] users to deposit to Aave against that they’re unlocking the Aavegotchi collectibles is quite narrow so it’s interesting. One interesting thing is that, of course, the Aavegotchi they will be the deposit contract on main chain, and then they have the second layer matic actually where you do the transaction.

Stani (00:39:03):

So you’re covering also this layer two risks, which becomes quite interesting. And I think Aavegotchi could be a good example, and test how it could work in practice. But I think it definitely will form into its own kind of insurance bond that insures the risk. And maybe there’s some sort of a way that there’s community auditor’s or tools to check what kind of contracts could be insured. I think now there’s a couple of challenges when it comes to this kind of a business model. Well, let’s say protocol, vertical business model. However, when to call it is that now I think for example, when it comes to safety module, all the risk is piled together, right? So in traditional insurance you practically want to ensure certain kind of risk.

Stani (00:39:56):

You want to have insurance, let’s say, if you look at [inaudible 00:39:59] finance. You want to ensure smart projectories maybe in liquidations, but you want to separate them. So you want to separate what you’re insuring and also like … That’s something that we are working actually quite a lot with you guys at Delphi. Because we have to figure out, let’s say what could be insured and what could be the cost of insurance if depositors wants to deposit USDC how we could traunch those things separately. And that we don’t have this kind of common cost of everything. And this is something that needs to be solved next in DeFi in general as well.

Jose (00:40:42):

For sure. Yeah, exactly. It has to be more granular. Just shifting gears a little bit to another really interesting product that you’ve been developing for a while, delegated credit. So we see this is like a super important primitive for you because it means that kind of Aave depositors can take advantage of other like yield opportunities in DeFi or just yield opportunities, generally even outside of DeFi. And it turns you into a yield aggregator and goes towards that goal of owning the user relationship that you mentioned. Could you explain like how delegated credit works and where the developments are at there and yeah. When you see that launching, that kind of thing.

Stani (00:41:20):

Delegate credit is quite fascinating because it really opens a new credit extension actually in the DeFi ecosystem. So we already had it in version one. So we practically had built on top walled, credit delegation of what that could be used. And that was back in the times when Andre was working with us, Andre Cronje from Yearn. And we basically traded this wallet. And what’s interesting in all of version two is that we have credit delegation natively and how it works is that as a user, you practically … So that can address, you want to delegate your credit and then you basically increase an allowance them to draw. To basically borrow behalf of you. And this is very cool because what we’re working now is to make that possible in the user interface. So you could just insert someone else’s address or ENS name and let them borrow behalf of you. And then you can agree with the borrower how much additional, how much interest they will be paying you. So you’ll be earning from your deposits and from your delegations.

Stani (00:42:34):

And one of the interesting thing about during the version one credit delegation, was that we actually had one interesting use case where we had this kind of a closed loop, smart contract system. So you could delegate your credit to this [inaudible 00:42:49] called the YA Link. And in practically how it work is you deposited your eight tokens there. And then that YA Link [inaudible 00:42:57] drew credit from the Aave Protocol. So it drew something like … It’s still actually is active. I drew 15 million worth of USDC and deposited into curve to [inaudible 00:43:09] and then distribute the profits to the YA Link, [inaudible 00:43:15] shareholders. So you basically have a system here where the delegations are going to smart contracts that have one particular function, can’t do anything else. And then you can draw the credit line out of there. So you don’t have this kind of a credit risk, your credit risk is basically the smart contract-

Jose (00:43:35):

Smart contract risk.

Stani (00:43:37):

Yeah, exactly. And that is fascinating because I believe there’s going to be more of this kind of functionality. So I’m looking very forward. There’s going to be a hackathon by a global called Market Make, which we are proudly participating in. And this credit delegation is something where I’m going to pitch for developers to build. But the other part of the credit extension is that where you’re delegating credit with credit risks. So practically what’s fascinating here is, for example, I deposit into Aave USDC, and then I … Or let’s say Ether, and I let someone else … One particular wall to draw credit line which draws, let’s say USDC, the similar way as the [inaudible 00:44:22].

Stani (00:44:23):

And then they think that those borrowings and they practically do whatever they want to do. They might convert to traditional currencies and let them out in traditional finance, or they might use these assets to market making, centralized exchanges, whatever is the use case involving credit risk. Now, if there is a actual default if that credit risk actually incurs, for some reason, the delegator is the one who is suffering for taking that credit risk, but the protocol will be safe from that credit risk. Because there is the collateral there that the delegator actually placed. So that’s a very interesting way of building this functionality where the protocol doesn’t take the credit risk. And of course you can go in the third [inaudible 00:45:11] the protocol could even delegate credit to some white listed participants. And that will be the next step of like a journey and narrative.

Stani (00:45:22):

But what is interesting here is that the DeFi narrative has been until this point, practically, we need more deposits, we need more capital into DeFi and that is something that will over time period push the yield rates down. And what’s interesting about this credit delegation with the credit risk is that it’s a way for traditional finance to actually source liquidity back into traditional finance. And over time, the liquidity might be even cheaper. It’s actually, it could be cheaper the sense that comparing to issuing bonds or taking private placements. So you might even have a competitive edge when you source your liquidity from DeFi and put it into work in traditional finance and get competitive advantage and grow faster.

Stani (00:46:06):

So there’s so many things that you could actually play around with this. And what I’m hoping is that we see new businesses, new ways to actually … And tools to assess credit risk and put them into usage and create this kind of [inaudible 00:46:20]. And I could even see them being in the Aave user interface where you have five [inaudible 00:46:25] you can select based on different credit risks. Some are closed in systems where you don’t have, and some might have a bit of credit risk, and some might be fully exposed, and it’s up to the user.

Jose (00:46:36):

Yeah. There’s so much to unpack there. And I think one of the use cases there that we saw this year, that you launched the proof of concept of the super interesting as well as the unsecured lending using OpenLaw. We recently had Aaron on the podcast and we’re big fans of OpenLaw. But how’s that coming along, do you see that as something that’s happening further down the line, or … Yeah. What are your plans there?

Stani (00:47:01):

I think it was pretty interesting. So what we do with OpenLaw is we created a legal wrapper on one of the first credit delegations. So diversify the borrowed [inaudible 00:47:11] to practically market make for their decks. And that was pretty interesting because there was a credit delegation wall that was deployed. But then the relationship between the lender and the borrower was brought into a legal agreement and signed electronically by both of the parties. And why OpenLaw is pretty cool is that when you sign the agreement, you can actually deploy the referred smart contract from OpenLaw. So you just plug into Metamask, you sign, and then you deploy it. And you basically made a legal agreement and then you created the actual credit delegation of [inaudible 00:47:48] as well.

Stani (00:47:49):

In version two, it will be even simplified. So now the credit delegation is super simple. So practically they can address who you want to delegate the credit, and you just increase the allowance. You just increase the allowance and then as a borrower, you just borrow behalf of one user who has increased their loans for you. So it’s going to be super simple. So I think you could use this in many use cases, and I think OpenLaw has a lot of potential and it especially like I have a background also in law and I really like what they’re doing. I personally think there should be more businesses that are taking it, putting more initiatives and building this kind of things. And yeah, I guess, like we will see something. But it’s always forward. It’s easier to deploy us market checks then make scalable legal agreements in this ecosystem.

Jose (00:48:48):

Yeah, of course. And I guess the legal agreements would require KYC and then potentially off-chain enforcement in case of default, right? If it were to scale.

Stani (00:48:57):

Exactly. So it’s easy, for example, if you have a party like diversify and then you have a lender, they already know each other they, they communicate in emails and whatnot. So they know each other. So that’s gave us, hey, let’s see, there might be some additional requirements if the amounts are big and whatnot. And maybe there’s some additional KYC requirements that needs to be fulfilled. But end of the day it’s important that you identify your agreement counterparty. So if you need off-chain recourse, that also works. So I guess that’s one of the things that’s like I’m focusing quite a lot on things that are very core in DeFi. But this space of between off-chain and on-chain ecosystem. This is something where we need more innovation and the thing is that there’s a lot of things to do, but I just wish, there is more people working on it.

Jose (00:50:02):

Yeah. I guess it’s much tougher once you touch the real world. Because it’s no longer just a theorem’s consensus, it’s like legal system’s consensus, and legal systems interacting with each other and often people from all over the world. So I guess that makes it tougher. But we are seeing some cool stuff, I guess, with Centrifuge and Realty onboarding real assets, which will then expand the amount of credit line available and then stuff like what you did with OpenLaw will also expand, the amount of use cases that you could actually delegate your credit to.

Stani (00:50:31):

And I think, [crosstalk 00:50:33].

Jose (00:50:33):

Yeah, sorry, go ahead.

Stani (00:50:34):

Yeah, I think what will be the kind of like moment for this kind of innovation is when you create something very innovative where you’re using DeFi, and you’re able to get because of this innovation and DeFi source liquidity, you get the competitive advantage in traditional finance and good yielding opportunities. That will be the kind of a moment that will spark more of this kind of projects.

Jose (00:51:03):

Yeah, for sure. And even if it’s not like a pure pricing advantage, just the ability to get alone, executes it very quickly like a flash loan, I think can be a superior UX and allow for very profitable opportunities that you can take advantage of with the traditional lending process.

Stani (00:51:22):

Yeah. I mean, flash loans is definitely unique. And we read a lot about flash loans when there’s some protocols get battle-tested. But if you think about, last year, there was like over two billion worth of flash loans solely from Aave Protocol. So it just shows that most of the flash loans are actually used to make things more efficient in DeFi. So definitely, like, you’d say interesting concept.

Jose (00:51:50):

Awesome. I want to also touch base on some competitive and a strategy question is to see how you think about this stuff. Because obviously, the blockchain space is super collaborative. It’s non zero sum. I think we all know this is going to grow like significantly before competition even becomes an issue. But obviously, there are some other players in the lending space, probably the biggest one is Compound. Although, they’re doing the same thing as you’ve taken very different strategic decisions, both in terms of asset listing decisions and adding new features. And recently, Compound had the pretty interesting decision of launching their own chain. I’m curious, I assume you read the white paper and stuff. What are your thoughts? Is it something that you considered before for Aave or yeah. What do you think of they’re doing there?

Stani (00:52:39):

Yeah. Well, first touching base from the competitive advantage. And I remember that, was it end of last year, beginning of this year, especially beginning of this year when Aave basic came to the market and it was discussions. Mainly actually was VC driven like discussions about competitive modes, how you create modes and what is the mode in DeFi. Is it liquidity, is it something like mainly driven by VCs because obviously they want to protect their investments. It’s weird space where VCs are practically doing the work of comparing different competitors for obvious reasons their investment is always better than Aave’s. And they do have a little of time unless there’s like a yield farm somewhere that they’re busy, just joking of course.

Stani (00:53:38):

But what’s interesting here is that this [inaudible 00:53:40] was in place. And I’ve never understood about the competitive mode thing, because I don’t think there’s any modes anywhere. So there’s only one thing that matters, this goes back to my actually the angel investment thesis is that, what’s important is the actual rate of innovation. How you can keep up with innovation and come up with new things. And if you cannot innovate what happens is that you will have at some point your Kodak moment. And then you have to somehow get out from there. So I don’t think that there’s any kind of way you can actually secure your position and keep that position. But that’s something that just doesn’t work. I think what works is that you need to find constantly ideas, how you improve the current status quo, make it better, make finance more efficient, make it more interoperable by removing inefficiencies.

Stani (00:54:40):

And I think that’s the way to compete. And I think when it comes to what [inaudible 00:54:47], we have different kinds of approach because I guess we also look at different perspectives. So we try to be as collaborative as possible and be kind of like not take too conservative stances when it comes to something like seeing new communities evolve and they have good community, and if they have a lot of value that community, their governance assets to be used as a collateral. So we try to be very … Follow how different communities involve. We’re very conservative when it comes to listing assets in terms of risk parameters, but we want to create those opportunities still.

Stani (00:55:32):

So innovation is one thing that drives and also different kinds of listing strategies. But also we try to always remove inefficiency. I guess, there’s not like any kind of direct thing. What we’re doing completely differently, everyone aims at the same thing, which is just making finance efficient, transparent, interoperable. I really love the part the Aave community can participate in something that is happening in Curve community and Curve community can participate in the Aave community. For example, now Curve, they basically worked very hard to actually get CRV listed in Aave, so how the Aave Governance works is that there’s this function called proposition power delegation. So you need 0.5% of proposition power to put a proposal on chain. Once it’s on chain, you have the voting period where you need at least 2% threshold of the total supply which practically means that when it’s reached and the outcome is positive, the proposal, which is smart contract based proposal will automatically gets rolled into the Aave Protocol and the asset gets listed.

Stani (00:56:46):

So practically they campaign to get a position power which they get sufficiently enough to put the proposal and the proposal passed. And that’s a good example where different communities are working together. And next what I heard that they’re doing is that they’re creating a new Aave market where we’re practically in Aave. They’re putting a proposal on where there’s going to be a Curve market where you can use Curve LP shares as a collateral. And that’s going to be very exciting thing. And one of our community members working on the [inaudible 00:57:19] version two, LP shares as a collateral. The cool stuff starts to happen when people start thinking about modes, competition and just thinking about innovation and innovate together.

Stani (00:57:34):

And this reminds me, some industries have these big things that they’re building. It might be construction industry or something where you … Or it might be infrastructure where you actually, you can’t do those projects by yourself, but you need other support. And you put forces together to achieve something better. This is something will happen more frequently this year. And we even saw it last year with [inaudible 00:58:00] and the partnership that they had with many protocols.

Stani (00:58:03):

So I think this is where things will become more exciting. In terms of layer two, I definitely think that the re-scalability you have to have different kinds of security levels. You can’t secure each and every transaction with layer one. And I definitely think that the future will be multi-layer and there’s going to be different ecosystems, there’s going to be different kinds of DeFi in Polkadot. And Aave just wants to be part of these different cultures. And they can call solutions that we will have, we definitely have done lot of research, quite a lot. But we have a strategy, but we haven’t announced it yet. But we’ll probably announce it very soon.

Jose (00:58:49):

Very interesting. And on the cross chain stuff, do you think there’s merit there and interoperating with CBDCs and stuff like that? Or do you just see everything’s happening on Ethereum right now, we want to focus on that for right now.

Stani (00:59:04):

We need to be careful with the central bank digital currencies, because it might be even kind of like a wolf in a sheep’s skulls. If you think about it. I guess, the thing about DeFi and for example, DeFi based stablecoins is that you have all this transparency and you don’t have this centralization interoperability. But we don’t know exactly how the different central bank digital currencies will look like. So people are very excited about it. I’m excited about it as well. We definitely like we want to work with this kind of technology, if it’s actually in line with the principles of decentralization and it’s built in an open way.

Stani (00:59:47):

So I will say that I’m very excited, but also I kind of hope that it goes to the right direction. Because the last thing we want to see is what they saw in 2017, 2018, when banks got excited about blockchain. And then they started to build this permission to very restrictive blockchain networks that didn’t lead to anywhere. Because you don’t have the interoperability, you don’t remove any inefficiency in that sense. But I definitely think they will play a big role in the future, but their success is based on how open permissionless and transparent they will be.

Jose (01:00:28):

Yeah, yeah. Banks like to do that, right? They did the same thing with the intranet. This intranet thing’s awesome let’s just do this intranet thing and remove the open permission on this part. That’ll work well. But yeah, I mean, CBDCs are definitely an issue and with the stablecoins, we’ve been thinking about this a lot, obviously in the context of Aave’s treasury and decentralizing, or rather diversifying the risk there, especially with the insurance product. But right now there isn’t really, we have kind of robust decentralized options for exchange, for lending, but there isn’t really that many great options for decentralized stablecoins. There’s obviously like USDT isn’t decentralized, and it’s also unclear how much they actually how reserved backed it is. USDC is centralized, that is great, but with multi collateral, arguably, it’s also become a little bit more sensible. Have you looked at any of the new algorithmic stablecoin designs, and do you have any thoughts there?

Stani (01:01:27):

Yeah. I like the idea of the algorithmic stablecoins, because kind of makes sense because in one sense you can issue shares that can be redeemed later, for example. So you have ecosystem where you have practically users that are more patient than others. So you can create a balance and with incentives, you can adjust the pick. So I think there’s a lot of innovation there, and I think it will work because if it works in practice, when it comes to how treasury bonds are issued, so it should be a pretty workable solution. One thing it’s interesting that many of these, they have this kind of a token distribution mechanism and people are focusing on that. I would love to see more, completely new ways of building stablecoins. And there are things you still can do, and actually very scalable things. And I just think developers, they just should iterate new things. I think there’s plenty of ways of creating a stablecoin that doesn’t exist at the moment.

Stani (01:02:40):

And I think we should see them in the test net, main net at some point. Because we still have di, which is pretty nice. But some di is backed by USDC. I mean, this kind of a very mixture of everything, which is pretty nice if that’s what their community wants that’s interesting. And I personally, I use di as well. So I’m part of the maker community as well. So I think it’s interesting, but I would just like to see more innovation it’s all about that. And there’s still little space, I think it boils down to the discussion we had earlier about having this, winner takes all attitudes competitive modes and whatnot. And I think people just need to remove that from the minds and just focus on innovating. That’s the only thing that matters.

Jose (01:03:40):

For sure. And you mentioned cream before, I wanted to touch on this. Obviously, another sort of a pseudo competitor in the lending space, innovates very quickly in terms of listing assets. And recently they did this merger with WiFi and are part of this new Yearn conglomerate. I’m curious, have you thought about, what do you think of that, and did you ever think of a merger with any other protocols with Aave of acquiring a protocol? Or what do you think of this protocol, M&A stuff that’s starting to happen?

Stani (01:04:11):

Well, I personally think that’s not M&A at all. I mean, when I worked in a law firm practically M&A is where you buy shares or you buy a business. But here you have more of a partnership I will say, right? So two protocols work together, build technology, but they still operate, there’s two governances, they might take over some of the governance, but then there’s still the token left from the previous. So it looks more of like a partnership. And partnership, like, with Aave, we work with everyone. For example, recently when we worked with Curve, we didn’t have any kind of official partnership.

Stani (01:04:56):

It’s just like we gave them everything that they could to help and create the proposals they wanted. And also we were working with them at the background on getting eight token full in Curve. So now you can actually when you deposit into Aave, you get the stablecoin eight tokens. You can deposit them into Curve and you get additional interest and also you get CRV. So that’s a pretty cool thing.

Stani (01:05:21):

So we were working with them on that, and there’s a bunch of other stuff we’re working with Set Protocol, Balancer. I think we’ve worked with honestly, everyone. But what’s interesting here is that I don’t have any strong opinion, like how … Because I see these just protocols working together, teams working together. And this is what I was earlier talking about. When more than one protocol they start to work on something, it becomes very interesting. So that’s the cool part, I think, with all of the so-called merge partnerships and everything like that is happening.

Jose (01:06:00):

Yeah. I definitely agree with you on the M&A side. I’m curious, do you think that will happen in the future? For instance, token swaps, or even protocols acquiring other protocols in their communities in a more structured way?

Stani (01:06:16):

Yeah. I mean, it’s a good question. I think it will happen. Whatever can happen will happen in DeFi. And it can happen even sooner than later. I could imagine where there’s two tokens, communities will pay, let’s vote on this. You don’t even need a governance mode. You could just have a smart contract that accepts two or more tokens and send your token there and it mints you a new token. And somehow creates a community. And that community starts to build products and it’s practically born again. And also you can change the ownership addresses of existing protocols. So they’re actually easy to do, the question is, is it worth it? I don’t know. I personally think, when I look at, let’s say Aave and the token economics, I try to build as much value as possible for that particular governance, because it takes a lot of work to spin up something new.

Jose (01:07:28):

For sure.

Stani (01:07:30):

Because there’s months and years of work behind. So it’s always will become more difficult. And I just like simplicity.

Jose (01:07:43):

Yeah, 100%. I think what would be interesting, we’ve been kind of like, that’s what got us excited about Aragon court was the potential for these partnerships to also become a bit more granular. Or you could have, for instance, token swaps or vested token swaps based on achieving certain milestones, whether it’s building out certain integrations or products or generating a certain amount of volume. Yeah. That’s kind of something we were excited about. But I think it’s still quite early for that.

Stani (01:08:08):

Yeah. And one thing is underrated at the moment is that you always … When they have this token distribution events and whatnot, you basically have to bring your liquidity. But there’s more than capital in DeFi space. There’s so much brain work and know-how, there’s many things that people can do and build and participate and they should be rewarded. So I think that’s the next thing that should happen. So that you just don’t bring liquidity, but you bring skillset and you bring people, that’s something that needs to be highlighted more.

Jose (01:08:47):

For sure. And I think governance is becoming more and more important, and people are realizing that governance is going to accrue a lot of value and be really important to who wins because Bitcoin doesn’t need governance, it’s kind of digital gold, it’s by design. But I think everything in DeFi’s sort of early stage technology, and it’s going to need to iterate and move quickly and make good decisions. And governance is kind of how that’s done. We saw Compound when they launched their governance contracts established a standard with Sushi and Uniswap and bunch of others using them. And I think the launch of Aave V2 Governance is probably going to do a similar thing. You’ve had introduced quite a few innovations from separating voting power and proposal power, the Guardian contracts, and a lot of that. Why did you decide to develop your own governance standard? And in general, do you think new projects should develop their own governance standard or use an existing one like yours or Compound’s?

Stani (01:09:44):

I think it’s always good to use something that’s already exist. That is battle-tested, unless you need to innovate something. So in our case, practically what we wanted to do is we wanted to separate the [inaudible 01:09:56] delegation and proposition power delegation. Because in our division, we saw that there’s going to be protocol politicians that you want to delegate toward or some other parties. But also they might not be technical. So in terms of proposition power, you might want to delegate to someone who actually might have technical capabilities to put a proposal on change. It could be actually like [inaudible 01:10:24], or Dharma, or for example, Delphi. So it might be, you have developers and you are specialized to put on proposals such as for example, the trenching of the safety module risks, and putting that actually into motion in a smart contract mode.

Stani (01:10:46):

And then there’s other people who are … Users delegate proposition power to you, and then they might keep the voting power to vote actually on the … So they’re looking at the code, if it’s good enough, they might vote, or then they delegate to someone else who actually makes that decision making. So that was the innovation, but the second important thing is that we went to token swap previously during this year. So we had an Immutable token, Dylan token, and now we have a token that can be upgraded, but it’s very difficult. So what we introduced in the Aave Governance version two is that we have this different kinds of voting strategies and voting strategy is practically what token you can use to vote on certain things. So the current strategy is that there is, you can vote with the Aave token, the state Aave, and also like there is this timelock concept.

Stani (01:11:41):

So we have this short timelock for example, protocol improvements and support. And then we have this long timelock, which is, you need very high threshold of proposition power. And also the delays are very long after the vote has finished to protect from governance attack. And we applied the long-time lock on the token upgradability itself. And this is very important lesson we learned beginning of the year. And because of the token swap and everything is that we know that there’s always going to be innovation and doing a migration, if you want to innovate on the token level, which probably we’ll have to do at some point, I mean, rarely it’s the case that you don’t need to update software.

Stani (01:12:26):

Otherwise, we will be using Windows 95 or something like that. Software is always something you improve and innovate with. And then we avoid the situation where we have to go another token migration and with all the logistics and so forth. So with this, we can actually continue innovating, but it takes a lot of power to make any kind of a change a lot. And this is the cool part. You can create this different kinds of strategies, whatever you want to achieve. And that’s why I think it’s very powerful governance model at the moment in DeFi.

Jose (01:13:02):

Yeah, it’s really cool. Reminds me of Jeff Bezos’s type one and type two decisions. I don’t know if you’re aware of that framework he has. But it says the type one decisions are these big decisions, like upgrading the token protocol and things that you can’t go back on and that need a lot of consideration. But he says that most decisions are actually type two decisions, which can be made very quickly because actually deliberating is less effective than just doing it and seeing what happens. And so having that at the protocol level at the protocol governance level, I think will be super useful to encourage that quicker innovation.

Stani (01:13:35):

Yeah. And Bezos makes a lot of decisions. So you understand the conflict that some decisions you want to make quickly. And it’s actually pretty interesting to see how someone could actually improve this model and take it further and create interesting strategies. Because you can actually use the basis of this governance V2, but then you could actually create different kinds of four things strategies, and just let others to also deploy and use them. And it could be something interesting. One thing we’re actually deploying, one module strategy is that we are going to launch a new market within our community. And probably there will be some way that there is also voting power for the other community as well, in a different kind of weight to get more inclusiveness into the Aave Governance in that particular new market. Which is a proposal that they want to put in.

Stani (01:14:36):

So that’s a good example where you can create this kind of different strategies and it’s very flexible governance. And I think the innovation was the key, but also the key thing was that we just wanted to think what we need at the moment. And what we needed actually is flexibility. There’s always this discussion about whether you need governance or not, one of the things should be mutable or not. There’s so many things related to this. When you actually, your product is good enough that you can actually put the immutability. And also the governance is very key. I mean, it brings the community closer together. That’s why something like SushiSwap was born, and that is why Uniswap has a token now. Because it really takes … The governance brings the community closer together.

Jose (01:15:23):

For sure. And how do you see the future of that community governance? You mentioned protocol politicians, which is something we really think is part of the future as well. And do you see these as kind of paid protocol politicians that are participating in governance or they’re incentivized by having their own skin in the game. And you think there’s going to be a separation between the protocol politicians and the developers themselves, like a technocrat class and a politician class, or yeah. How do you see this developing and how would you like it to develop?

Stani (01:15:53):

This is a very, very fascinating question. So for example, from my perspective I’ve never been so much into politics. I’m being [inaudible 01:16:04] decision making, but I personally just love to build things and let others to guide where to go and have a wider audience on deciding things. But I just want to build more. So I think there’s probably people who share similar opinions that they just want to build. And then there’s other people who want to govern and you might have this kind of a thing actually. And this fits well into our governance because the proposition power is all about creating smart contract code and putting it on chain safely and securely and so forth.

Stani (01:16:43):

And that’s practically a developer’s job. And then there’s the decision maker’s job to actually vote, whether it should pass or not. And there’s already things we have been taking into consideration from this perspective. But I think there’s some distinction between whether … I mean, if you’re a developer, you could definitely be a decision maker and I think it’s still hard to say what direction will become I just know that there’s more … There’s less developers than decision makers because everyone is a decision maker. So in that sense that’s the atmosphere. But I think not everyone cares to make decisions. But I don’t know honestly, where it will take. I think there will be paid people to run agendas, definitely that will happen. It happens in real life. There’s lobbying, there’s different things that people want to get involved in. I think it will come to the on-chain ecosystem as well.

Jose (01:17:57):

Yeah, no, absolutely. And you already have a pretty large amount of protocol politicians. I mean, there’s very smart discussion that happens on Aave’s governance forums. I mean, we had some great feedback to the first proposal, both from your team, but also from the community. And people sent us long private messages on the side as well. It’s amazing how many people in the community care and also are intelligent and well-educated on the issues. How do you think you develop that? Is there something you did? Do you see that there’s something that you do that fosters that kind of community versus other projects? Or like yeah. How do you develop that, are there any tips that you’ve learned?

Stani (01:18:36):

I think it matured over time governance is white new thing for the Aave community. Because I think the governance has been active for six months or under. And what’s interesting here is that the Aave community itself has been around for three years or so. And I think it just takes time for the community to mature and people who follow the project for year after year, they have opinion. And also when you see that there’s people with strong opinions, very interesting substance, others are coming in as well and contributing. And I think that’s probably the reason why the Aave community is very vibrant. I personally want to contribute as well, I try to stay out off, as much as I can because I mean, I don’t want to influence anyone.

Stani (01:19:26):

And I think there’s so many good opinions. I usually try to wait quite long before giving an opinion. And also thing is that there’s so much time constraints. I’m such a slave when it comes to shipping and building and our team is exactly a bit the same. So we love to build things and get new things, new ideas into main net. So it’s always difficult to contribute, but that’s good in the sense that then I don’t have to … There’s less risk of me influencing the community because I have social capital, which is, in one sense, it’s a good thing, but in other sense it’s also going to put stress on me. But would rather see more stronger people in the Aave community that people listen more to them than me. And that’s my objective.

Jose (01:20:24):

That’s really interesting. And I guess my final question there’s a lot going on at Aave from our recent insurance proposal, the e-money license, delegated credit, unsecured lending, all these different fires that you have in the call or calls that you have in the fire rather. And I’m curious, what are the things that you’re most excited for in 2021, what are your biggest strategic focuses and where you want to put most of your energy?

Stani (01:20:50):

I think what’s very fascinating for me now is build more assets into the Aave Protocol and also getting liquidity out of the Aave Protocol into the traditional finance. This kind of loop is something I’m looking as well. But also I’m very curious to see whether they could be something very innovative that they could build on top of the Aave Protocol as a Genesis team and present it to the Aave community. So that is something I’m looking quite forward. Because I think there’s still so many things that haven’t been built. And I don’t know why people are always building the same things and there’s just so many cool things. Even if you look at traditional finance, there’s so many products that you could just take and make them efficient, transparent and put them into the on-chain ecosystem.

Stani (01:21:45):

So I guess that is something, what I’m looking forward, like what we could build next on top of the current protocol. And the other theme itself is being … We try to increase the team size as much as we can to have, but still keep it as lean as possible to increase the rate of innovation. And the thing about Aave is that the things we build, you cannot build by yourself. It’s not a one-man developer thing, because the effort we put into engineering, the economical part and everything, it really takes a lot of time you could do it, but it takes a bit longer. And it’s always difficult to build things with smaller team, because then you have less eye pairs into the smart contracts and so forth. So that’s one of the cool things about Aave like, the product development is so amazing and the process and everything. If Aave would be a shipyard, it will be very cool place to hang out. And that’s why we probably put so much effort because it’s a very good environment for builders.

Jose (01:23:08):

Yeah. No, for sure. I mean, the speed at which you’ve built this year is astounding. I’m really looking forward to seeing what you get up to in 2021. Especially with the onboarding of real-world assets and creating those two bridges to the real world.

Jose (01:23:24):

So, yeah, I really appreciate your time and all the answers. This was really interesting. And let’s definitely do it again.

Stani (01:23:31):

Awesome. Thanks for inviting me. And yeah. Thank you.

Jose (01:23:35):


Tom (01:23:36):

Hey everyone. Thanks for listening to the podcast. If you enjoyed it, please support the show by hitting subscribe on iTunes, writing a review, or sharing this episode on Twitter and LinkedIn. And stay tuned for our next episode out soon.

Show Notes:

(3:35) – Stani’s background and what brought him to crypto

(9:45) – Angel investing: What does Stani look for in projects & founders?

(13:57) – Learnings from being a Protocol CEO

(19:31) – Biggest mistakes and learnings from 2020

(23:47) – Aave’s e-money license and what it will enable

(28:39) – Aave’s Protocol and Application Layers

(31:43) – Aave’s Application Layer as a DeFi Aggregator

(33:16) – Application value capture

(38:14) – The potential of the Safety Module as an Insurance Product.

(40:47) – Delegated Credit and unlocking yield aggregation

(52:24) – Competitive moats in DeFi

(58:42) – Thoughts on Compound Chain

(01:01:13) – Thoughts on Algorithmic Stablecoins

(01:03:34) – Thoughts on CREAM, the Yearn conglomerate and “Protocol M&A”?

(01:08:39) – Aave’s new Governance Standard

(01:15:14) – How does Stani see the future of Protocol Politicians?

(01:20:14) – Stani´s Expectations / Strategic Focuses for 2021.