DeFi in 2021 - An Interview with Stani Kulechov

DeFi markets have exploded over the last 12 months, fueled by innovations in borrowing and lending protocols, widely accessible stablecoins, and new forms of capital markets entirely mediated by open source protocols and software on public blockchains.

One of the most innovative and high-growth players in the DeFi space is Aave, who today is the 2nd largest DeFi protocol with nearly $4B of value locked in the protocol.  The entire space has grown from just around $1B in early 2020 to nearly $30B today. 

Listen to this episode to hear from Stani Kulechov on the founding and growth of Aave and the long-term implications of decentralized markets.

Jeremy: Hello, I'm Jeremy Allaire. This is The Money Movement, a show where we explore the issues and ideas in this brave new world of digital currency and blockchains. A lot is going on in crypto and digital currencies and blockchains. Just an unbelievable amount of market activity, just continued surge in growth in dollar digital currencies, like USDC is growing from 4 billion to nearly 6.3 billion today.

DeFi growth has been enormous, not just in the value of DeFi tokens, but in the amount of capital that's coming into them. We're really starting to see a lot of different market participants and sectors really starting to pay attention here. This week I'm super excited to be joined with Stani Kulechov from Aave. We're going to have a great conversation on DeFi in 2021. I'm sure we're going to cover a lot of really cool topics. Great to see you, Stani. You're muted.

Stani: Hi, Jeremy. Do you hear me?

Jeremy: Yes, now I do.

Stani: Okay. There are some connection issues on my side. Hope it gets better. Thanks for having me here on the show.

Jeremy: Yes, totally. I know we were in the midst of a conversation last night on Clubhouse. We'll just keep the conversation going. As I was saying before the show, I think, I always love to start a little bit with people's personal journey. I know your journey starts in, obviously, you have your whole life behind you, but in terms of crypto being really early in decentralized finance, really one of the first creators in DeFi.

I'd love to hear first just what was the aha moment that helped you get inspired to work on DeFi? What was it? The Ethereum white paper? Was it something after that? Where did that start? Then maybe a little bit of ETHLend's history and then obviously we'll get into Aave in a little bit.

Stani: Okay, sorry, Jeremy. I found the issue. Actually, the headphones didn't work. [crosstalk] Definitely. I didn't hear everything, but I guess--

Jeremy: A little bit of your earliest inspiration getting into DeFi. You were really early obviously in the Ethereum community and just we want to hear a little bit of that, what inspired you to start building in this space?

Stani: Awesome. I guess, pretty much I've been always a bit involved in finance. I started to code very early. I think it was 13 years old when I started to code PHP, and at 15, I got excited about Ruby on Rails.

Jeremy: The article you did with Cold Fusion?

Stani: [laughs] Actually, I tried to do something. I was too young. I think it was nine years old.


My brother was more into that. I think I was building more of like financial applications when I was 18 and practically, I run a lot off into topics in terms of regulation, and I went to study law. Because I really wanted to understand how you can build financial applications and how to deal with regulations. At some point, end of my studies, I started to do research on contracts. How to make more efficient agreements.

One of the things I actually stumbled upon was Ethereum and smart contracts. There was an interesting component there that you basically can create a code that doesn't change. In the sense that you can have it as an immutable code or community governance code. That for me was a moment that I realized that actually, you could create all kinds of financial applications without the need of trust. One of the things we started to build as a proof of concept was pretty much lending and borrowing. This was four and a half years ago.

Jeremy: Right. It's super cool. I actually had a background in political science and became a technologist. I've always been interested, it sounds like you, in this intersection of what governance is in the world at large, and then its intersection with open platforms and technology. Back in 2013, when the first wave of companies, a lot of wave of companies were starting, as a technologist, what was interesting was not just like, there's this digital currency, it almost seemed like, "Obviously, of course, we're going to have digital currency to work everywhere," but it's this programmable money idea that was so powerful and that can really radically change the world.

That's why I got into it too. The building blocks just took a while to get in place. I know if you were building ETHLend back four and a half years ago, things were pretty raw. [chuckles] [crosstalk] Obviously, you've taken another attempt at it here with Aave, which is obviously achieving enormous success now. Obviously congratulations, but maybe just a little bit of the origin of Aave.

Stani: I guess, at some point, we started with ETHLend and we were the first markets for lending and borrowing blockchain. It was pretty much bilateral order matching in the sense that we had users that wanted to lend out assets, and other ones who wanted to practically borrow those assets against collateral. That was a time when we didn't have actually that much of market capitalization in various assets that were used as collateral.

We'd decided not to go through a pooled globalization model. This was the time where actually stable points weren't existing in deploy. Practically, the borrowings were Ethereum or USD Ethereum which was very tricky. You can imagine the use case was, let's just narrow with the DeFi users back then, but also what you could do with your borrowings. I think it was 2018 when the market conditions were a bit different in the sense that there was a bear market that started quite heavily.

2018, we kept continuing building in different iterations, but we realized that ETHLend was a bit of a name in the sense that it's Ethereum lending we created the name. We understood that we're creating a little more serious infrastructure and we wanted to rebrand to something that's more general, but has a very big community-wide. We've always been in the sense that we wanted to build-- We build thick, but we also want to build a lot of cultures because at the end of the day, the thick in the finance is going to be connected with everything that will exist in the ETHLend ecosystem.

Then, I think it was last year, 2020 January, we practically launched the Aave Protocol. Since then, pretty much from zero, we have grown into a protocol that holds five billion worth of value, which is incredibly unbelievable for me and the whole team.

Jeremy: It's truly incredible. I think for folks that have been in DeFi, and some of the audience on Money Movement definitely are active market participants and have a pretty solid understanding. I think one of the cool things that's happening right now, as we speak is, this is getting on the radar of so many more people. There's a lot of people who are just really trying to understand what is this? What are the implications of this?

Actually, I just did a media interview this morning and it was all about this. It was from a really mainstream payments and banking place. It was kind of like, how do you translate this for people in TradFi or traditional finance or the layperson? Maybe just from your perspective, really breaking it down into basic building blocks, what is DeFi for borrowing and lending? How does that compare to, I want to lend to a bank and get paid something, or I want to borrow from a bank? Just fundamentals, like DeFi one-on-one for people.

Stani: I guess probably one of the most interesting part is ready to DeFi properties is the fact that the users has the opportunity to choose not to give custody. For me, DeFi is also Bitcoin, it's Ethereum. It's whatever has been built on Ethereum which has decentralized governance.

There, you can actually choose that actually I can keep my custody of my funds and I can choose what I will participate in in a permissionless fashion, or then I can actually choose a custodian if I actually want to do that. DeFi allows this permissionless access pretty much to choose whatever you want to participate in in this ecosystem. By ecosystem, we are talking about whatever is built on Ethereum that you can interact with. Compared to, for example, traditional finance, usually you are a customer with a bank, you're pretty much using their services and to change your service providers from one bank to another, that's a big hurdle.

Also, being able to keep your accounts in one place, your funds in one account, and participating in something other service provider offerings, it's not very-- how to say. There isn't much of communication and interoperability in place. What DeFi actually does, it just takes and makes all of this infrastructure to communicate with each other.

Not just that you can practically select whatever you want to use but there's thousands of developers practically working every day in open-source fashion to contribute and create new products and services that actually remove inefficiencies. I think those are the main things. Of course, there are other things related to what makes DeFi awesome but I guess from a traditional finance perspective, that's the interesting part.

Jeremy: Yes, totally. I think a lot of times, they're looking for analogies to how is this going to be different or better? A lot of times, there's this concept of the internet can make things 10X better or 100X better or whatever it is. I think when one starts to use DeFi intuitively, I think people grasp all of those things that you've described just like how radically empowering that is and efficient.

A lot of times, people don't even realize that we have decentralized communications, we have decentralized information sharing, we have decentralized messaging, we have decentralized video. There're semantics because in a purest sense, decentralized would be everyone's running on a peer-to-peer network but we have essentially permissionless protocols that are at a minimum fully distributed that people can connect to and that's like the internet.

It's like, well, just think about what the Internet's done for how we can share information and data and communicate and connect. It's these open networks, permissionless protocols mostly developed under open-source efforts and open intellectual property. I call that the inherent DNA of the internet. It's a lot of the internet was born that way. It's just taking all those same things that we take for granted and saying, well, that's what's going to happen with money.

I think one of the things and I talk a lot about the future of markets, the future of capital markets effectively. Aave is a capital market. It's a form of capital market around borrow-and-lend. One of the other things that internet seems to do really, really well is establish long-term markets effectively enabling every level of participant in the world to participate in a market, whether that is as a creator, a seller, a musician.

All these incredible platform marketplaces, sharing economy is another dimension of that as well. Basically, these long-tail markets. I like to think of crypto and DeFi as enabling long-tail capital markets. I'm curious what you think about the future? I mean, we have that with taxes. They're long-tail capital markets.

Anyone can create a market, but when you think about things like the core behavior of borrowing and lending, there's obviously potentially so many different ways that that could be sliced and diced and surfaced to people who need to borrow or who need to lend. Do you envision Aave in the broader space continuing to really diversify out the richness of how that can work so that it can service not just people who are pledging crypto to borrow on margin to trade, but a more regular everyday kinds of borrow and lending?

Stani: One of the really coolest thing that is happening with the Aave protocol is that exactly because it's running on this internet of finance. Pretty much like if you have a internet connection, you're pretty much connected into the system in the same kind of mindset. Anyone can actually get the same yield of what the protocol provides. It democratizes many things.

For example, I'm here in London now where I get the same access to the same yield as someone else will get from, let's say, Brazil, Hong Kong, Singapore, and so forth. That's the main element that you actually have this global market and pretty much, when you deposit to Aave, let's say, USDC, you get back so-called a token, so AUSDC. That AUSDC algorithmically grows in your balance and that makes it a USD nominated global savings account in D point in one way. I think it's very much something that empowers in many places because you don't have in all regions access to USD nominated public income and that has automated treasury management.

Jeremy: It's incredible. The concept is that you've told someone you have a savings account and you can take that savings account and just give it to someone and you can sell it to them, but you could actually give it to them if you want to give it to them as well. It continues to be this yield generating savings account. You can pass it around just like you pass around an MP3 file and whatever and people are like, what? That doesn't sound possible.

Stani: What's cool about this, Jeremy, is that when we look at traditional US dollar as a payment instrument. US dollar, every time you pay with it, practically whoever receives it, if the value of the USD practically decreases because of the inflation. Here, you have practical payments currency increasing in balance wherever you are sending it and it's practically backed by USDC.

It's very interesting. Aave, we don't put efforts to make it as a payment currency, but we're happy to see that this algorithmic balance increases could work in even USDC level or anywhere because it's a nice way to credit value to the holders.

Jeremy: That is brilliant. It'll be fascinating to see whether these yield generating dollar tokens become more common for people transacting with them just like, I don't want that deflation error or that inflationary thing that's going down in value. I only want to accept AUSDC or CUSDC or whatever. It's pretty amazing.

I think one of the big things I'm interested in hearing your thoughts on is today, people are pledging collateral to borrow. They're pledging hard collateral because it's liquid collateral and it's liquid collateral in the crypto markets, whether it's Eth, Wrapped Bitcoin, USDC, Dai, and so on.

These are in some ways the hardest assets that there are because they are these digital bear instruments and that's why people are comfortable with this in many ways. It's not some fuzzy thing where there's this legal agreement and you don't really know what's going to happen but clearly, a lot of this becomes really interesting when the real world becomes tokenized.

When these protocols can surface value for people against the real world. I wonder how we get there. I mean, we were talking last night about tokenized equities and Sam is like, he's doing it. There are going to be a lot of other people that do it too. I think they're going to be people in the US. That'll be a view into that. I know of just from our own work tokenized fund products that are quite significant in scale that will go on-chain and the people who could never access ETFs, or certain types of funds will be able to access those with just a crypto wallet anywhere in the world, it's really powerful.

What about other things? I think part of the idea of tokenization is that the value of so many other things in the world can be represented on-chain. People cannot just exchange it, but they can actually borrow against it, or lend to those that want it. How do you think that evolves?

Stani: I guess, what we see now quite a lot is practically tokenization. Something that is fungible, for example, US dollars are very good thing that has happened recently, in terms of tokenization. That's one of the most used collaterals even in Aave. There's little value related to things that are less fungible. Actually non-fungible properties, there's value in credit economy, there's everywhere value. I think we definitely will see this value transform at some point and have a cryptographic representation.

For example, what Circle has done pretty well is that you guys have taken one particular thing, and tokenizing it very well. When we're looking let's say, tokenization of real value, real estate, and whatnot, we try to solve the issue too widely. I guess, the solution will be that we try to tokenize something very locally, whether it's timber, whether it's commodities or real estate. Try not to achieve it in a global scale yet and try to move step by step in that sense.

I think that value is coming. I guess one of the coolest thing I've been now following quite a lot is practically the labor market on-chain. Things, for example, Gitcoin, that you actually don't need stable coins to or let's say the hard currencies to get to stable coins and on-board. You could work and get stable coins, for example. This new onboarding mechanism, I think it's very valuable. I guess in terms of tokenization, that's something that's probably will progress quite a lot now during this year.

One of the things what's important about DeFi is that we get the liquidity back into traditional finance. Currently, we have liquidity like a crunch that we need more liquidity into DeFi, but at some point, we need to get that liquidity back into where basically people are doing also business. That's where we have this great delegation mechanism, where you can whitelist some of the borrowers. For example, might be institutions or whatnot, might be from traditional finance. The depositors could delegate their credit lines.

When they deposit to Aave, they earn, but they might not exercise the credit line, so they delegate to them, and they are practically financing their businesses and businesses in traditional finance and consumers. End of the day we might end up in a situation that where someone buys a house or a car, that liquidity comes from DeFi.

Jeremy: Yes, that's exactly where I'm excited about. Is delegating out those market functions into DeFi protocols themselves creating those meta structures to make that possible. It's interesting. I mean, I think USDC, there is this assurance layer, there's a governance layer, people understand Circle is bound by law and where there's regulators making sure we don't run off with reserves or that we maintain the full reserves. That certainly provides trust but yes, something like a house or a car.

I like to think about if they'll become more seamless ways to like tokenize everyday objects, in a community tokenize the snowblower for there's a lot of snow. Someone has a snowblower, and it could be a community object.

Stani: Public good basically.

Jeremy: Yes public good, and you can transact on it. I'm not sure if you've looked at Azura.

Stani: Yes.

Jeremy: I mean it's a really powerful concept, and it fuses real-world objects with tokenization as non-fungible tokens that ownership can pass between people. Then they're redeemable. What Azura is doing is they're creating the assurance market so that market participants know, with eBay in the early days. How do I know I'm going to get my beanie babies? How do I know you're not a fraudster? The assurance layer is really, really key moving assurance models, risk and reputation models on-chain as well can be very, very significant to this thing.

Stani: I agree. Azura is pretty fascinating because I mean I see it's something like you have today like Etsy. Creators can actually do different physical objects and pretty much tokenizing value. You can tokenize before the object even practically exist in theory.

Jeremy: Yes, they're doing that on Azura. There's people who are saying, here's the design for something I want to make. It's a little bit of-- what was the crowdfunding site that people would make things for. It still exists, I forget what it's called.

Stani: Kickstarter right?

Jeremy: Kickstarter, right. There's a little bit of that, which is I'm going to make this limited edition really cool designer jeans. I'm going to figure out how to make them. I'm going to make 20 of them, and you can buy-- they're NFTs and you can basically pay for them, and you'll get them. It's creating a scarcity, desirable object, that is tradable on-chain as well.

Stani: You know what's the cool part? This allows actually more people to create things, and less things. You don't need to create, let's say, hundreds of thousands of features that are looking the same, you can create just less and people want that. It creates more brands and more creators as well. It's really, really empowering.

Jeremy: Yes, and this is a little bit of what I was getting to earlier, which is the Internet is really great at long-term markets. If we can actually move the marketplace and the role of the marketplace on-chain and we can bring forms of identity and reputation and get that assurance layer that used to require big intermediaries like eBay or Amazon or Alibaba. You can have that be on-chain. You have labor markets tokenized so that you have this tokenization of work, and all that can happen through these efficient protocols.

It's this new substrate for organizing labor output, economic coordination, and actually making things for people that are useful at creating value.

Stani: Cool part about that is what I will see, probably, we already see that there's developers working in multiple protocols and collaborating quite a lot. With open-source, and with this ownership economy, you actually can choose who you work with and what you work upon. I think that's something that if it starts to scale, it might be quite interesting.

Jeremy: Yes, that's one of the things I wanted to talk to you about too, was your community, you have a governance token. Again, just for the people who are new to this, Aave protocol, it's not a company. It's actually just this machine that exists on the internet that's immutable. It's just this machine that provides this function as a public good to the world. It has some intrinsic economics. It also coordinates work and coordinates decisions through the governance token. How's that working today in practice, just in terms of coordinating work, coordinating decisions, improving things like that?

Stani: It's quite interesting, because it's something that we haven't been used to, because Aave has been known that we have a very high rate of innovation and we can practically develop and shift very secure code with a lot of innovation. Now with the governance and everything, it's completely different because if you want to build something or someone proposes in the community, it has to go to this layer of governance where everyone can actually look at the idea, brainstorm, get involved.

I think at first it felt a bit burdensome, but as people started to get more involved, actually I understood in that particular moment that, probably, the decentralized governance is one of the best mechanisms of the on-chain ecosystem and what smart contracts are providing. Practically anyone, actually, could go and make a proposal to the DAO, that, "Hey, I want to build something cool," or, "I have a cool idea and, probably, it will cost this amount of funds. Can I get a grant?"

Some of the ideas are absolutely amazing. We deal with a lot of engineering, like economical technical implementations, but the amount of people there are in the community with different ideas, it's amazing, actually. I think we're now in the state where we actually are trying to organize a bit more, the work, so that the governance is more inclusive, that anyone can come and just start to ask grants, whatever they want to build.

It's a process that takes a lot of time because in Aave, building the community took us roughly over 40 years or so. All of the success in community-wise and branding, it's actually something that's compounded over years. The same thing will be with the governance. I think the Aave governance will look good in 5 to 10 years from now, and then it will be very interesting to see how it will function.

One interesting thing I want to add to here is that we recently launched the Version Three of the governance, which allows not only delegating voting power, but delegating the actual proposition power. We see proposition power in a way that whenever you want to make a proposal, on-chain, you have to put it on-chain and if there is a positive outcome of the vote, that code will be executed on-chain.

Practically, proposition power is a way of Aave token holders to actually choose the codemakers, the lawmakers, or whatever is the terminology, and then delegated voting power is how you could actually choose the protocol politicians unless you want to keep those powers to yourself. This creates, actually, interesting an element because the codemakers are competing of creating good proposals. When we look at, let's say, how governments work, you have a government that makes the proposals, and you either vote yes or no, but now you have a element of competing proposals that are going on-chain.

That's a very fascinating part and because these strategies-- You can have strategies in the governance. It means that we can create a new market, where not just Aave token has voting power, but, let's say, if there's assets such as Uniswap liquidity shares as a collateral, the same from SUSHI and Balancer, you can basically give voting power to Uni, you can give voting power to Bal SUSHI tokens, and make more inclusive governance. I think that's the next step in DeFi, that everything becomes a bit more a mesh, everyone works together in multiple things and also govern, commonly, all of the main protocols.

Jeremy: It is, I think, the greatest laboratory in the world for the future of economic coordination and work coordination. It's just so, so exciting from that perspective. Just building on that, and tying back to some of the other things we talked about, I'm really excited about experimentation in these new types of, I call them, corporate forms.

Basically, we had joint-stock corporations and now we have DAOs-- is a really genuine new form of corporate organization. Effectively, for the first time, we have a substrate that's global, that allows for the creation of organizations that can, or anyone in the world can participate economically, anyone can participate in various forms of stake-holding, and where you have the ability to structure really innovative forms of decision-making.

When you think about what a corporation is, it's a token that has certain privileges, it's a treasury that that token basically governs what happens with that treasury and then it's this nexus of contracts, maybe, between-- There are entities and individuals that are interacting with that entity. There's this enormous edifice of legal, political, economic, infrastructure to support that and, now, we're radically simplifying it in many ways.

I think one of the things I'm most excited about is to see what kinds of new corporate forms are created. I think one of the biggest questions for our industry is how will governments treat these things when, in a very free-market way, I've created this thing. There's potentially thousands of people involved in it and it's creating things, it's creating value, and anyone's interacting in it. What is that? Can you tax that thing? Are the individuals subject to their local tax laws? What the heck is it?

Given your background, you were studying law and contracts before this, do you think this is going to require fundamental rethinking of corporate law, basically? Is it going to become internet law is a different kind of law? What do you see happening there? I think about this a lot in looking at projects like Claris, Openlaw, things that are trying to figure out how to intermediate some of that. At the end of the day, we live in these places that have armies and have taxes, and we have to worry about that. [chuckles]

Stani: Yes, exactly. There's a physical war. I guess I've been thinking this quite a lot. I spend all my time thinking of everything related to on-chain stuff. I think there's two paths. One path, we just try to figure out, how contractually, what's happening here, which we could see that when people come together and they choose to use software to manage their relations, it's something that might be contractual, like contractual law or contractual agreement of joint effort.

That's what many of the corporate forms are, but they also have these statutory provisions that, in some cases, give them practically limited liability, which is one of the key components. If it's only based on a contractual relationship, you can limit this liability against your counterparties in a group, but then there is the third-party creditor liability that you might not have the same effect as the statutory law that gives limited liability.

I think that will be one way to just draw simple conclusions, but I don't think that will make that much sense compared to actually trying to rethink what we have now. I'm thinking that, actually, what we have here goes beyond what we are trying [crosstalk] to agree, just like cultural [crosstalk]--

Jeremy: Totally. It's talking about leveraging the multiple governance tokens to create this nexus of these units of work organization that are connected to each other in these, really, ways. Like, "What's that?" [chuckles] They can't do that very easily.

Stani: Yes, you can't. You can't. Imagine this. In Aave DAO, we have quite a lot of, basically, participants globally. It allows you to organize and decide on things transparently, and the result will execute. Why we can't have this kind of governance everywhere, as a basis, as a human right?

Jeremy: Totally, totally. Totally, yes. Well, I'm hopeful. You're running your grand experiment, and it's just awesome. This is in the spirit of open-source. It's just like integrating and improve new proposals, new designs, and it just moves it at such a powerful and fast pace.

I'm really excited about projects that are working on making creation of these types of organizations much, much easier for people. I can imagine the Google apps of DAOs and I want to get going with this. I know Aragon was in that spirit as well, but it feels like we're still up early there. Most people aren't like, "How do I start one of these?" But there's a lot more people who want to start these.

Stani: A lot. What's interesting that Aragon, they were very early. DAOs was one of the first use cases in which you can build on Ethereum and the governance and the development, there's been a lot of interesting stuff. There is the model of DAO. Aragon has definitely done some interesting work, Compound has pretty nice governance. We innovated on governance as well a bit and there will be more models.

I think this is something that requires quite a lot of more innovation because one model doesn't fit for everyone. I think as we might be able to experiment more various type of governances, that makes it very interesting because then I see the on-chain ecosystem where it's a big sandbox, you can do a lot of things. There's also things that you can play around when you have a lot of value in big protocols, but when you're actually creating something that you are trying to test, and see how it works, DAOs is exactly where you should do.

DAOs, it doesn't have to govern finance only, it can govern the NFT ecosystem, gaming, and so forth. Gaming is actually a place where we should use it as more of a sandbox and things like how the social interactions go there and what you could actually use in finance even.

Jeremy: Absolutely. Very cool. Well, awesome. This is just a great discussion. I'm super, super pleased we can do this today. Love the work that you're doing, and excited to just keep collaborating and building.

Stani: It was very fun. Thanks for having me here, Jeremy.

Jeremy: You're welcome. All right, see you next time.

Stani: Thank you. Cheers.

Jeremy: Cheers. Bye-bye. Really enjoyable discussion there with Stani and just continuing to explore this new substrate that is forming this new global economic system in front of us at an incredible pace. Very exciting. We look forward to our next episode. Until then, stay well, stay safe, and stay informed.


[00:42:41] [END OF AUDIO]

Jeremy Allaire
Co-Founder, CEO & Chairman at Circle
Stani Kulechov
Founder, Aave

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