Aave's path to revenue and the future of DeFi

Transcript

GM good morning welcome to the milroad show The Daily Cryptor show where we break down Cryptor faster than you can go someone on a bad date I'm your host Jay Hamilton and today we're joined by stonnie kulakov co-founder of a today we're going to discuss can a and other D5 protocols compete with big Banks like Goldman Sachs will your mom use a someday and defi she will but it will be different than you think now before we jump into this episode I've got a very exciting campaign to tell you all about we are getting close to 10,000 subscribers on YouTube and we want to celebrate so we're doing the road to 10,000 where we are giving away a whole

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a decentralized lending platform connects lenders and borrowers functions similarly to a bank uh but unlike traditional Banks a relies on Smart contracts to handle everything and so obviously people love that that's why a has over a million users 12 billion in tvl it's permissionless it's 247 all these things that we want from the banks that they aren't giving us currently it's a massive improvement over the traditional banking system anything that you would add to to that background on a that's uh such an amazing introduction um what a is and um in in very essence we started to build a because we wanted to democratize finance and and we believe that Finance kind of

is very fragmented and the financial opportunities are even more fragmented and there's not enough accessibility for people to participate in a transparent way into Financial opportunities without actually um giving away their funds into custody so one of the amazing things that a relies upon is the blockchain and smart contracts which means that um you can actually use these applications or like protocols like a where um the rules are set by these smart contracts and they're very hard to change because they're on a blockchain which is essentially a um database system that is distributed

across multiple nodes and the protocol itself can only be um changes can only be made by the a governance which is the a token holders coming together and and voting and for us uh why a is actually incredible is that it's just a better faster stronger Finance in and more resilient Financial uh infrastructure that that that should the whole fin Financial system should be based upon and so that's why we're super passionate what why we're building a we are also super passionate that you guys are building a so deep bow a lot of respect to you and the team H I want to bring up a chart here to start our

conversation because we put out this chart in uh in August that shows um monthly a revenue compared to token incentives and it basically tells a very interesting story which is that if you go back to 2021 token incentives monthly for a were very high upwards of $50 million in some months ranging from probably 20 to $50 million and that makes sense you need token incentives in order to encourage new users to use a new product and token incentives are a great way to do that within the crypto space however this is the cool part of the story fast forward to 2023 and

2024 and revenue is now growing and is outperforming token incentives showing that you don't need to pay people to use a you have true product Market fit people really want to use this technology did you expect this to happen walk us through what this chart and what the story is from your perspective because I'm and also what did it feel like when Revenue first passed token incentives that must have been a big moment that's a amazing moment because essentially we build um the protocol to be sustainable in the sense we kind of understand that the the the a the

onchain business model uh essentially is to to provide utility when the market is doing well meaning that users want to supply different kinds of cryptographic assets from like e to to other tokens to stable coins into the protocol um and being able to earn on that but also unlock um and cataliz their uh positions and and and borrow uh liquidity to find a another Financial opportunity um but at the same time when the market is in a down cycle it creates a utility for users to actually collateralize and or preserve Capital by earning interest but also cataliz the same way their assets

and and actually unlocking liquidity without selling their crypto and I think that's really interesting because um it provides use cases that are based not just searching for new Financial opportunity with the unlocked Capital but actually even using those borrowed funds to pay uh mortgage or down payments uh paying for your uh car or any other purchases or financial like Finance goals and when actually started obviously one of the interesting Parts about the of a protocol is that the ownership of that protocol is distributed amongst um the the actual users um and in the beginning obviously

there was ability to have this uh incentive mechanism where you distribute the the the rewards and the ownership of the protocol to the hands of the users that are using um the the product and that allowed us to use actually these Rewards that were voted by actually in a decentralized governance by third party that created the proposal back in those uh 2122 uh years and down the line um using these incentives to actually not only to distribute ownership of the protocol but also acquire market share as of today we have a significant market share as as the protocol um so depending how you calculate it's from 65 to 75% of market

share of of the all kind of like a lending and borrowing uh on chain and now with this um kind of like a switch of uh becoming a profitable it actually feels really good because it means that we were able to build a fundamental infrastructure um on chain that is public good that is governed by the users that anyone can participate and actually more importantly is more resilient than the centralized um kind of like alternatives that we saw over the years that didn't really have the right risk configuration so having an open system created a better environment to create a better product so now it feels really good actually seeing that

the protocol is profitable and actually can use part of that Revenue to incentivize um the the the users but also the stakers that are back stopping the risk of the protocol when you first started to use incentives to bring in users were you worried about how much you would have to give out and how long it would take before you got to profitability and product Market fit did you think it would happen this quickly did you think it would take many more years like how how fast has adoption happened in your mind I think the incentives definitely helped um on growing the market share but I think the reason the market share

grew is because AA is such an amazing uh product it the reason why users love AA is that it just fundamentally is really good piece of software and there's constant innovation of improving that software and make it more reliable and reli reliability has a kind of like a premium and that premium doesn't come in actually the price in in in in defy but it comes in market share that people trust actually the protocol and and want to use it so I'd say that even with lesser incentives AA will still be able to capture market share but what what it actually did really well is that it was

a ability to distribute the governance power more towards the users that really love the product and are using it on a day-to-day basis yeah it's incredible that it can achieve both those incentives we never we've never been able to build organizations or businesses like that before so it's it's amazing to see it happening I feel you I feel like we need to fire off the fireworks right now and celebrate because these are the a is one of the breakout apps that we have in the space that is really showing what is possible on chain everybody should be celebrating it it's super exciting I want to sort of zoom out for a second um you are one of the first Founders in the defi space you know you entered in quite

early you've been here for a decade now I'm guessing um building in the space um how how does defi look now compared to when you first launched where do you think we're at in the Journey of D5 you could put us on to sort of the the full map of where we want to be in the future where do you think we're at right now yeah I mean when I started in um 2016 17 D5 really didn't kind of exist so these were like more of like experimentations um that we were um doing on on the blockchain and down the line I think

2020 during covid more people like tuned into defy um and we had the whole defi summer of 2020 um and that was a big moment for dcent finance because it provided really um interesting opportunities for a lot of these defi users but also showed kind of like what you can actually build in a permissionless environment and build accessibility and have this like a border less uh finance and I think um more recently I feel like we have a D5 Renaissance going this is something I talk quite a lot about uh defi Renaissance um and what I think is that there's this kind of like a new uh

rising of of of defi um and it's just not basically new applications or whatnot it's actually looking at these protocols that were built uh early on and becoming more sustainable um have great fundamentals and actually are profitable um and resilient of of any types of uh single point of failures and and that creates like a really amazing inspiration for new innovation in def5 but also adopting this technology so now I think um there's more institutions than ever looking into decentralized finance and looking into a and trying to understand how to use it and how to leverage this technology and and the the liquidity is available um in

these markets and there's more actually developers looking to integrate a and understanding how it actually could be beneficial um and we're in a kind of like an interesting place where we're at the crossroads between Defi chatify and even like fintech and and just like trying to understand how we get this technology to to be used not just in in traditional Finance but also let's say in in fex and and tapping into that existing opportunity and that's like a really um great place to actually be because that also tells us that there is beyond interest of our existing uh user base yeah that really leads in nicely to

my next question which is I'm trying to understand and I've been trying to teach our audience how defi will look in the future because I think it is quite misunderstood right now because it is still it is still small in terms of the amount of people that participate you know crypto is still small globally and then defi is even a smaller piece of crypto do you think everybody talks about how we're GNA have crypto apps with a billion users and when we think about defi specifically I wonder if that will truly be the case will we have defi apps that a billion people use or is it more

likely that fintech or trafi will adopt blockchain and use crypto rails and offer defi within their app so maybe I guess to to make it simple for our audience that's listening is is a going to be used maybe within PayPal someday and you don't even know that you're using a but you're operating within your PayPal app and that's your nice user experience and I can borrow and lend within PayPal or is is my mom GNA someday actually go and use a use metamask and connect to a and do it that way um I think a can actually be uh a bigger brand than for example um

coinbase you know Robin Hood revolutes um cash app and and a lot of these more kind of like known brands for for the mainstream and and reason for that is that the technology itself is is really sound and and the network effects of the liquidity is just compounding so the more of it becomes resilient um the more it becomes trusted and it grows in liquidity um the more these Network effects will favor a and and and other uh def5 protocols and I think the only kind of like a big bottleneck uh essentially is then um how do we make it more easier to interact with a and I think that's more of like a you ask and

rails question and M I think what will happen is that the rails and on ramping and off- ramping into crypto will evolve over time so I think being able to or let's say installing a browser extension as a wallet uh will be in in in the past history at some point and user will essentially use emails phone numbers to plug in into defy and being able to do any type of transactions and having sufficient security to secure their transactions that being said said I still think that a lot of that liquidity is going to be consumed and and supplied also through various uh Integrations like to um in in in financial

institutions but also in fintex as well and I think that's going to be the trend um in the next couple of years so we're going to see more Integrations into defi es specifically because um the actual um the the defi brands that are existing and have been able to actually build something really reliable um is going to come at a premium of actually um forming that trust relationship that we need between uh defy fex and institutions but overall I think end of the day people want to interact with the main main brand uh which is a um and I think that's will be the the biggest brand that will

go I I love your confidence and your conviction it's amazing to hear uh a was one of the first protocols to Branch out to other chains initially built on eth and branched out was was that a good idea and will that continue to be the plan I think OB as a protocol um it's really great infrastructure that that actually could be used anywhere where they're users and the protocol is compatible for example evm networks and currently the protocol is deployed over on 13 networks um evm based and avaps is working also on non evm implementation

in move um and and that's upos uh deployment so what we see is that uh we're going to see a future where there's different types of U uh blockchain Technologies and they have their own peculiar users and if they need a financial layer AA is is that layer for those users and and if there's significant amount of usage assets and opportunities I think in general all it should be there and I mean it's got to be tough to be building a business where you constantly have to adapt to another chain and another infrastructure and another Network how do you think this all plays out like what is your view on

blockchain Zoom push us down the road 10 years 20 years years will we have a multi-chain world will we have one dominant chain that is has 80% of the market share how do you think it plays out I think there's going to be definitely um multiple networks and a lot of that infrastructure will be based on uh ethereum and EVMS but also we have significant market shares of these non evm uh networks because they might have their own specific use cases that will let say specifical um specifics in the technology that enables interesting use cases or are optimized those use cases like for example payments um that need a

lot of scale but not the same security necessarily when you're moving small amounts of uh funds for aice perspective I think and going back to that even a little bit previous question about the the the adoption to mainstream I think um one common misconception about a is that you need a collateral uh uh to to actually borrow from Ave but actually everything in real world is somehow collateralized so it's either you know it's either your house it's your you know car or your your um stock portfolio it might be actually just your reputation and your ability to repay um essentially your future income uh from that perspective and I think what's

going to be really U uh significant down the line is that we're able to issue credit um any part of the world the same way we're doing today and rate that credit and um have a um proper process for that but then the credit is um tokenized uh into a a token that actually then can later be used as a collateral in a to borrow against uh that token for example uh go and then use that go to convert back to the um let's say USD and and finance some of these um opportun ities and grow credit and and finance opportunities that maybe were difficult to finance um in the past

so there is that type of U uh growth there and and that world can also be uh multichain as well you first launched a and built this borrowing and lending protocol uh and then you went and built lens a social media protocol or a social graph protocol are it to walk us through how those two things fit together or do they not fit together and they're two totally different businesses with totally separate road maps yeah in some Essence they they definitely are different um projects and and obviously overlaps contributes contributes into the um a ecosystem by building the av4 and other

initiatives with with the go stable coin and then within avara which is the kind of like a larger uh umbrella we basically have lens laabs and lens laabs is building this kind of like a resilient social network as a protocol where anyone can actually build social applications that are relying on onchain social Primitives like social identity uh social craft your connections you make um and then um different types of um features that you expect from social networking and and and enabling ability to own Social Capital um completely the same way we

own Financial capital and are able to access into Financial uh opportunities but on lens um road map we do have items where we want to integrate the a protocol um and that's something that we're going to talk a little bit more about in the future and in overall I think um end of the day in in web Tre um besides Financial Capital we have to build non-financial use cases as well um and non-financial protocols that can be later empowered by these Financial protocols too yeah I'm excited to uh watch out for the ways that the road map might cross and that lens might take advantage of a

uh it feels sometimes as if uh you must have 48 hours in the typical day and you just you had to you had to go after another use case you were like yeah D5 is not enough let's go after social media too which is another fantastic use case for blockchain for all the reasons that you mentioned um I want to talk a little bit about um token BuyBacks and I don't want to focus on a and whether or not a will do token Buybacks in the future um that is uh not for today's discussion but I want to talk about just as a concept because there is this narrative or pressure in the crypto space that basically says hey I'm a

token holder uh I I deserve some some value flowing my way flow more value my way and it seems to me to be a bit um immature H and also shortsighted because if we were to look at the if we look at web 2 and companies like apple and Amazon they didn't do dividends in the beginning Apple didn't do dividends for 20 years and I think you can comp you know token BuyBacks dividends very similar and the reason is they want to invest in growth and you should if you're building a business you should invest in growth but at the same time crypto companies have a Unis swap have all these this pressure of token holders saying hey like give me give me something back what are your thoughts on

this I do think that um the reason that users are token holders is that they see some sort of uh utility in the underlying protocol and obviously there's bunch of other reasons that uh people are holding tokens but they see some sort of a utility for themselves or for the general public and I think whatever that utility is uh it needs to find kind of like a protocol Market fit or prod product Market fit and once that's done obviously the the main important thing is to secure market share um and that means that that particular protocol can can be actually uh widely distributed to to um

in in terms of the market share and and has significant usage so before that actually uh happens um I think there's there's no reason of actually uh doing any kind of like uh short-term strategies uh for the actually uh for let's say token holders but once that's that's achieved and there's profitability and there's good fundamentals um then it's actually interesting to think about what kind of U utility could be created for the token holders and besides for example participating in the um governance that could actually help the protocol itself whether it's some sort of a securing a

risk or risk transfer out of the protocol or some other type of utility and then kind of like incentivizing uh that type of behavior so it really is a timing question and most of the protocols in the space are um uh 99% like too early and and not that stage uh yet and I think uh um to get there you have to have significant usage significant market share and the the technology has to be good and right for kind of like a wider adoption when you think about uh adoption um we mentioned before we started recording that you know we

weren't going to talk about token prices today and I don't want to talk about about token prices but I want to point out that so many people who listen to the show and so many people around the world who are interested in crypto really just look at markets they don't look at adoption metrics they don't look at any other metrics they don't realize that through the bare wallets and activity on chain was actually increasing while prices were struggling what what do you look at what matters to you when you think about what we are building here and long term achieving this this objective of decentralized Finance I think reliability is the thing

that is top of my mind so I think defi is based on reliability the more reliable um a a protocol can be the the more chances there are to get adoption um because there's still like a lot of intermediaries that are going to be the connectors between a a decentralized infrastructure and the end users um and they will always choose whatever is the most reliable option so from that perspective I I think that's the most important thing to to achieve um that means that there is sufficient security actually from the technical perspective um this reliability on risk management

um the Dow is significantly decentralized and there's significant amount of uh service Prov providers and contributors to actually contributing into that uh decentralized uh Community um and in overall it makes the whole endtoend kind of a um um end to end product appealing for for integrators and and and users so reliability is I think the Cornerstone of of of of any type of uh Financial infrastructure and is a at the point of reliab ility where you're satisfied or is there more improvements that need to be made well I'm never satisfied

so I I it's actually quite funny because within our team um it's a discussion where I chat quite a lot with uh Emelia our VP of engineering and um you know every time we've we've um we've shipped a new version of of a um we always kind of like realized that maybe you know this is going to be like we build if that's going to be like the long lasting version and it's it's a perfect infrastructure perfect software and we couldn't come up with anything else that we should add and like let's you know this is going to be like the that version that will like you know be have the have that longevity you know and I think like few months passes and we

already have like new ideas or improvements and and whatnot and a lot of like the community members participate in this process as well so contribute by bringing new ideas and uh it's a very kind of a um distributed and de essentialized process from that perspective and I think now with the um also the community members are also contributing to improving the code base and From aap's perspective we we are uh focusing on building the version four which we think is going to be like the the kind of like final version but um that version is going to change the architecture in a way where it's very modular meaning that different kind of components and pieces can be improved uh

individually over time it's more flexible um it caters variety of of use cases from like even all the way to rwas and um I think that that's going to be a version we're going to be really proud of um once we get it out and um and I think like Innovation is big part of uh um a as well so we think that the the main way actually of of improving the adoption of this technology is to keep the Innovation uh um curve as high as possible any timeline on version four version four um we're expecting to have a a prototype in the upcoming months um

and a and a launch is going to be in Q2 in in 25 fantastic well we'll look forward to that and hopefully get you back on the show around that time to announce that launch thank you so much for joining us today stonie thanks for your time shout out to your entire team uh for leading the defi space as you have been for so many years everybody who's listening in I want to know do you use a let us know in the comments if you use a or if you use any other def5 protocols let us know what you use we're always curious to find out what you guys are using to make sure we're producing the best content for you stannie thanks again for joining us today thank you so much for having me here have a wicked awesome day everybody as always if you

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much for listening in my friends have a wicked awesome day