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Despite a bout of volatility in early January which saw record levels of liquidations on decentralized finance (DeFi) lending platforms, the sector’s transparency means it is “more resilient” than traditional finance, says Stani Kulechov, CEO of lending protocol Aave.
Speaking at the CryptoCompare Digital Asset Summit on 30 March, he referred to the 2008 financial crisis and the issues caused by the opacity in the collateralised debt obligations (CDOs).
Ethereum to US dollar (ETH/USD)
“When you go back in time to 2008, and think about all those so-called toxic assets. It wasn’t easy to quantify how they were issued, and which bank had exposure against another. But in DeFi, anyone in any part of the world can actually quantify (risk levels) every single second. And this is the way to create not just a kind of better finance but also more resilient finance.”
What is the Aave liquidity protocol?
Aave is a DeFi lending protocol which allows users to earn returns on their crypto assets across a number of digital tokens including ethereum (ETH), avalanche (AVAX), and polygon (MATIC). ETH assets, however, dominate lending and borrowing activities on the protocol.As with other DeFi lending protocols, anyone can become a lender on Aave and earn interest. And if end users want to borrow from the protocol all they need to do is to connect their digital wallets.
Loans are overcollateralised, however, in the event of a significant price movement in the underlying cryptocurrency, users can be subject to forced liquidations, and therefore potentially selling their assets at a loss.
On 21 January, according to a report by Coindesk, Ethereum money markets Aave, Compound and MakerDAO processed a single day record of $200m of liquidations, versus a typical day’s $10m.
According to the Coindesk report more than half of that total was accounted for by rival protocol MakerDAO.
Aave survived Black Thursday
Kulechov did not reference the recent bout of volatility during the summit, but he did talk about Aave’s performance during Black Thursday in March 2020 when crypto prices cratered, in line with traditional financial markets, due to the fears over the impact of Covid.
Bitcoin lost 50% of its value on that day and its price went down to the $4,000 mark. However, Kulechov said it was the liquidation mechanism on Aave that ensured the protocol survived such wild swings in the underlying assets staked on it.
“What’s fascinating (about Black Thursday) is that the Aave protocol was resilient in these market conditions…this was because the network of liquidation was open to keep the system solvent. And that’s something I’m very proud of.”
DeFi’s potential for investors
Kulechov emphasised the potential of DeFi to enable investors to achieve their real-life financial goals like buying a car, mortgage or paying for their children tuition.
With some $3.2bn market capitalisation, Aave’s native token, AAVE, is the 48th biggest cryptocurrency by market value, data from CoinMarketCap.com show.
Aave, now trading at $234, has had an impressive performance lately, adding a whopping 95% in a month.
Speaking at the summit, Kulechov explained how users can use Aave protocol to achieve their financial goals without having to sell their crypto assets by borrowing stablecoins to convert them into fiat currencies like the dollar.
What is your sentiment on ETH/USD?
How do investors gain yield?
“In Aave protocol, the yield comes from supplying liquidity in different pools, so-called reserves. Part of that liquidity is consumed by the users. You deposit one cryptographic asset, and then you borrow another out of the system, so basically, these borrowers are repaying interest into the protocol. And the interest is then distributed among the suppliers.
“What’s fascinating is what is the borrowing use case?
Kulechov gave the example of users that are in long-term positions with cryptographic assets and which they necessarily do not want to sell because that would cause a liquidation event, meaning they stop holding a long position.
“What you do is so-called equity release. Let’s say you put $100,000 worth of ETH into Aave and borrow $50,000 worth of stablecoins, and then you finance some particular goal that you have in mind.
Future sources of liquidity
“This goal could be anything to be honest – buying a car, mortgage or even buying your kids tuition.
“And this is happening. One of the community members basically bought a house without selling their cryptographic assets.
“And why is this important? Because today we see cryptographic assets as bitcoin (BTC), ethereum (ETH), we understand governance tokens.”
Kulechov said that over time, pretty much anything could have representation in cryptographic value, that can be this property here, it could be hardware and it could include buildings and houses.
“This is why the Aave protocol is important to unlock that liquidity so it doesn’t sit in the actual value object,” Kulechov said.
