Fireside Chat: Aave V4

Who wants to start? Well, thank you for coming to our talk. We're going to discuss the integrations of Balancer and the new architecture of Ave before, which this innovative way to separate assets from risk. So I think the first questions I would like to ask you, Stan, is what is the new role of Go into this new architecture of liquidity hubs and spokes? Yeah, it's kind of really fundamental.

I think the Ave protocol and the infrastructure is quite agnostic to various different stable points and the same kind of like a principle applies into the Ave before architecture and the configurations, but Go specifically has a really special place in the Ave ecosystem. In the first place, Go was incepted from the idea of creating more predictable borrow rates for the users, given the Ave rates are fluctuating between the supply and demand, essentially variable rates. Going forward, just to think about the whole architecture of Ave before, now when you look at the Ave tree, obviously as an architecture, you can use it in different ways, so you can create a market set of different collaterals and parameters. Every time you want to create this type of new markets or a new risk profile, essentially, one of the key problems we see, not just kind of like in Ave, but across the lending space, is the seeding of liquidity issue and the liquidity network effects. So, every time you create a new market, you have to figure out how do you get that liquidity there so you can establish interest rates and the borrowing activity.

For the Ave before, we introduced a new type of architecture where you have a so-called liquidity hub where all the liquidity is always stored, regardless of the assets, and then you have a liquidity spoke. There can be multiple spokes. Spoke is simply a configuration of borrowing and the way you supply liquidity into the So, from a user perspective, you always come into the Ave protocol from a spoke, but then the assets are stored in the liquidity hub. What we want to achieve is that anyone from the Ave ecosystem or the developer community can create their own type of configuration, whether it's some sort of a risk profile, RWAs, or other types of assets or parameters, and then request liquidity from the liquidity hub in form of a credit line. When you do that, you fundamentally remove the kind of like a chicken and egg problem that you have when you create new types of lending use cases.

You can access as a developer to that deep liquidity that Ave has. When we think about Go, we want to use Go in the same way where accessing not just any type of an asset in the liquidity hub, but also being able to access Go as well. I think that's going to be interesting because those rates are configured by the Ave DAO. Yeah, it sounds very interesting. I'm trying to understand how this is going to match with the new architecture of Balancer.

We know we had in 2021, we had this market on Mainnet with BPT tokens, basically the tokens representing when somebody provided liquidity on Balancer. In this moment, well, I remember it was very difficult to liquidate assets. I wonder what's the main difference and why it's different now to have these, yes, composable yield getting fees from swaps and also lending fees from Ave. How do you match this and what's the difference in the previous markets? Well, I would say that one big difference is we already are integrated with Ave.

So, B3 was launched last year, end of last year, and about 75% of all the liquidity that we have on B3 is actually boosted on Ave. So, we're talking about 150 mil that is sitting on a Balancer pool is already on the And with the new architecture for Ave. B4, what it will open up more is you have access to a leading market for tokens that maybe you wouldn't have before. So, you'd have a DAO token paired with a GO token and not only GO be on an Ave. market, but also the DAO token could have a spoke there and be able to be used or even provide supply or be used later as collateral.

So, as we talked before, another thing that it opens up is using again BPT as collateral because their new architecture is much better on analyzing the risk of each type of token. So, when we talk about like Lego and composability, we can have a boosted pool with both tokens getting yield from Ave, but also the BPT that the liquidity provider puts on that pool can be used as collateral for funny, for example. So, I think it's going to be great to have it. Yeah, I mean, it's part of the reason that's why we wanted to make a lot of these architectural changes is that we don't really know what's going to be the future of collateralization of Ave. So, a lot of that has been across DeFi over the years, you know, the native assets.

So, you have basically ETH and then, you know, from there, more derivative assets like fake ETH and liquid restaking ETH and rub Bitcoin and other tokens. But down the line, like one of the biggest benefits of decent just finance is the ability to actually achieve really high capital efficiency and that's basically where we want to have an architecture where whatever that idea you might have in DeFi and you need some sort of a component of access for credits and liquidity. I'll be the first to be able to cater your idea. And using the essentially the LP tokens of the collateral is a great example because you have users that want to provide liquidity for market making across many events and at the same time, they want to unlock that liquidity, have better strategies, leverage those positions and you can do that easily by just configuring a new spoke. Why this is really fascinating is that we've done in the past some similar experimentations with LP tokens and obviously like one of the challenges typically is that you have to see the liquidity.

So, either with some sort of a rewards or you have to contract LPs and you don't have really like a native instrument to do that. So, with this type of integration, you can simply create the spoke, request the funding from the main liquidity hub and then that liquidity will be available in the borrowable assets or go for example. And I think that creates more order flow, deeper liquidity and creates better execution. You know, one thing I've always been a fan of these LP tokens used as a collateral because from a DAO perspective as capital allocators, if we have the option to use a native token, a native DAO token as a collateral or a VPT, I would always choose a VPT because usually it's tied to Ether or tied to stable coin and that creates a buffer if the token dumps and still we have a buffer and it's much less riskier. So, it means it's a much better collateral.

So, it's, you know, as capital allocator, we want to avoid liquidation at all costs. So, I'm very happy to see this innovation here. Changing topics, I'm wondering with the next wave of onboarding new assets. So, the one we believe, you know, the next trillion dollar assets and chains are likely going to be real world assets. I'm wondering how these folks would play a role in defining risk parameters and creating credit lines for these new assets.

I think it definitely simplifies the whole actually process of understanding kind of like what types of collaterals you can borrow against. Typically, on Aave, you have like a one very deep liquid market and then a secondary market and with this new architecture, you can create configurations of spokes where you have RWAs and not all the RWAs will be in the same kind of configuration, which makes sense because in traditional finance, you have essentially T-bills, you have also credit funds, you have equities and other types of real estate, for example. So, what it enables is that you can create an interesting combination of, let's say, real estate assets that you can fund against through the liquidity hub and then you might have something that is more liquid on the curve, which can be, let's say, some sort of ETFs, credit ETFs as well. I think the reason why it's really interesting from RWA perspective is that we don't really know what RWAs are going to take off and I haven't had really like a single conversation where I realized that there is some sort of angle that it will take off. First of all, it's a really big bet that the whole kind of industry is looking at the moment, but there is still a chance that none of this will actually kind of like come on chain necessarily.

So, just saying that out loud, but we want to be in a place where we can cater all of these experiences and being able to allocate liquidity, whatever that type of activity is, as long as it's credible in the sense that you can collateralize, there is liquidity of chain, and then it actually fits well with the whole other v4 vision. Maybe this is a question back to you, is that what is your thinking about RWAs and what are they going to grow in the next couple of years? Well, I think it's likely going to be driven by regulation because this is a big thing. So far, I'm very concerned with the liquidity of these assets because using an asset as a collateral that is not liquid can be very risky. Do you mean like non-liquid on chain?

Yes, non-liquid on chain. And then the thing we have as a capital allocator is really difficult to see what's the liquidity of chain. So, for us, something that is off-chain is basically just a black box. So, anything that is on chain is much easier to understand the risks, but then off-chain if we start trusting a lot of assumptions that tend to be riskier. So, I'm not a fan of looping on real world assets.

I think that's a ticking bomb. So, I'm not a fan of that for sure. I know I'm also not a fan of how other protocols have been combining AMMs and money markets. We have some examples out there that they tried it and they had some catastrophic losses. Overall, to me, it's not a matter of if for real world assets, but when.

Eventually, it's a low-hanging fruit to get some extra juice of these assets out there. So, yeah, it's definitely going to happen. What's your take? I share a bit of your vision, but since I'm not allocating capital, I think it's going to be great when it comes. It will have to have liquidity.

So, for AMMs, it should be a good thing. It talks to our new product that Fabio mentioned an hour or two ago that we're launching a readjustable concentrated liquidity fungible balancer. So, these RWAs coming on chain will need a place to be with liquidity that can be easy for everyone to have access to. And, again, talking about the integration, it will be good to have a place that that liquidity fits, that can be traded and swapped, but at the same time, it's not just sitting there. It can be used as capital for collateral and making the money work, let's say.

Yeah, but you mentioned and you talked about RWA, but for KPK, how do you see this integration and these changes for other V4 on a capital efficiency target as you guys use it? So, I remember when we started having new Layer 2s a few years ago, I have to say I was a little bit frustrated and disappointed because DeFi is all about liquidity and having a centralized global financial system, which at the time was mainnet. So, I was very frustrated when I started seeing all of these replications of DeFi. Now, I think with other V4, it feels like we're starting to tackle this problem, which you should fragmentate risk, not assets, and that's critical. So, hopefully in the future, we're going to have much, much deeper DeFi, much deeper liquidity, basically.

So, for us, it's all about capital efficiency, getting better utilization ratios, having better oracles, making sure in a flash crash, on a Black Thursday, things work. So, yeah, about stability, security, and capital efficiency is the promise of the Legos we have. How can we stack yields while at the same time not creating some systemic risk? So, that's my view. Yeah, I think you always have to balance between how do you segregate risk and you don't create capital fragmentation.

I think it's a really hard problem to tackle because you'll have to always pick a direction. So, you basically don't fragment risk at all, and you kind of have one entry market. You can establish deep liquidity and list a lot of assets there, but at the same time, you can add risk. And obviously, risk can be capped really well, and Aave Protocol has been actually a great example of being able to do that consistently over the years and being able to have 45 billion words of net deposits there and seeing kind of like a trusted end of that scale. But then when it comes to these different asset classes, it is clear that these crypto native assets, they're going to exist, and that category will grow, but there is just like a really significant category of assets in the traditional finance.

And if we think about the whole evolution of where the whole financial system, or if you can call it even a system in the early days, was written in like clay boards as a ledger, moved into paper, and then later to digital, and now slowly it's moving to on chain. Every single kind of like new medium creates new types of properties, and with on chain, that provides the security, mitigation of single point of failures, resiliency, transparency, and those things, what basically makes DeFi quite amazing. And that said, we will see a lot of these assets come in, so when you start seeing different asset classes, and that diversification will just multiply over time, the kind of balance that we are trying to pick is that how do you ensure that you create deep and efficient markets, but still you can create these different types of risk profiles and enable innovation at the same time. So that's kind of like a vision how we came up with the architecture, and then also the pricing of risk is really important. So we always think about in terms of interest rates and how much is the cost of capital, but really we think about how accurately we price the risk.

And in V4, we're introducing a feature called risk premiums, and with the risk premiums, we're able to allocate a base rate for the most basic asset collateral composition, essentially. So if you're supplying ETH, that's like a least riskiest asset, you're paying a base rate, but if you're starting to expand your collateral composition and adding more tail risk, you basically are paying a premium on that. So what it means is that if you're creating the least riskiest position on Aave, you're going to pay less in the future than, for example, now. And then if you're bringing tail end risk, you're going to pay the more accurate price on that. So that's going to be interesting because then when you're borrowing, let's say, stable points from the Aave protocol, you have more kind of like a personalized risk profile, and this prices the risk and reward more accurately within all the users of Aave.

And I think that's going to be interesting for also RWAs and future assets because you have to start measuring the off-chain liquidity of these assets until everything is in balance at some point. Hopefully, yeah. But I think that's a big difference and that's how you tackle it, as you said. Aave got until this big being very conservative on what it would put on the market as a lending product. And we are proud to say that a lot of times we'd knock at Aave and say, guys, can you raise the cap?

We have to put more money there. And we need to like especially in base and noses. And now you open that for everyone to be able to use it. But you're saying, okay, you can use it, but there is a higher risk. So you have to pay for that higher risk.

But at the same time, you are giving access to everyone. That's a really good picture. Yeah, and I think access to liquidity is really undervalued. And I do think that there doesn't need to be just like one main liquidity hub. There could be multiple and they have different purpose.

And all of these primitives that we're launching very soon are also kind of like composable. So obviously you can have one liquidity hub that is launched and that concedes funding to another liquidity hub that has spokes. So it's a really kind of a module liquidity management architecture as well. So liquidity hubs are for liquidity management. Spokes are for collateral management.

And these two together and combining them is how you create a product in v4. Yeah, I'm very excited for these credit lines. I wonder who is going to define the accessibility to these credit lines. Yeah, it's an interesting question. So I would say that in the main liquidity hub is and you need to have some sort of a governance for liquidity hubs.

They can be 0x00 can be a governor. It can be the Ovidel. It can be a third party as well down the line. But basically from the main liquidity hub, which will be the core markets, you would request that from the Ovidel essentially. Why this is really exciting is that first time ever you can just build something really interesting, deploy the contracts and request for credit line.

And after review and verification, if that product is flawless, you get access to credit. So you can start building products on Aave and you don't need to focus on marketing and bootstrapping and all the bullshit that developers need to do. You can actually just like build something really cool, make it available, and get access to credit and have a really good product. And I think that's really something that will power the next generation of DeFi builders. Yeah, we're very excited for that.

Perfect. I think we've run out of time. Yeah. Just one last question. Do you have a date?

Well, it's very soon. Okay. I can say we're working every weekend and weekday, so we're getting very close. Thank you. Thank you.

Thank you. We have questions here. We have questions. Okay, so. Thank you so much, Stani, Marcos, Marcelo.

Let's open it up for questions. One question there on the front, please, on the front. Thank you so much. This has been excellent. I kind of wanted to ask maybe a little bit more of like a regulatory question.

With now that the U.S. market looks like we're moving towards a period of time where at least the U.S. administration sort of considers that DeFi might be a core element of the sort of like United States policy going forward, how are you thinking about maybe engaging, frankly, like Wall Street and the sort of like wider market that maybe exists outside of crypto?

And sort of like what ways does that reflect in the protocol itself or not? Yeah, I think that definitely there is a kind of 180 degrees turn on the kind of regulatory side, especially in the U.S., compared to going back just, you know, one year earlier. And I think that's obviously there's a couple of things.

So there's a lot of interest in stable coins. So the Genius Act is in a place where it's going to pass. There's going to be a lot of stable coins from big tech, thin tech, commerce, e-commerce, and other types of use cases. And some of them we'll find into DeFi because DeFi is essentially an environment for best financial opportunities. Why?

Because that's where the best algorithms exist that can be matched instantly with liquidity. So there's those kind of like perfect conditions to find these opportunities. And then I would say there's another piece besides stable coins is the institutional interest in tokenization. And one of the things that I kind of like try to, when I talk to institutions, and there's a lot of actually inbounds at the moment than ever before, is that like once you tokenize, you have to figure out like what the hell you're going to do with the asset on chain. And there is like different reasons why people tokenize and kind of like convince their organization to do so.

But I think that all the roads will lead to DeFi eventually because RWAs are a way to scale the DeFi opportunity. Stable coins are the way to access and consume the DeFi liquidity and also extract the yield opportunity as well. Globally, it's the best technology to distribute it across the world. So I think now the climate is probably better than ever before. And last week I was in D.

C. I was at the White House and I was in Capitol Hill. I was at the SEC. Surprisingly, they let me in there. But it's been like a really interesting, because in the past, and many of you who's been building DeFi for two years now has a little bit like anxiety about the regulation.

And even if you're deep down the bottom, you're building kind of like a freedom technology, empowering technology. At the same time, you have this uncertainty. And the uncertainty is what basically creates the distance between institutions and consumers and accessing DeFi. So I think now specifically it's really good timing to build DeFi. And we probably see a lot of institutional integrations.

So it's been really good at the moment in terms of like the inbound. Do we have other questions? No? No? One last question?

No? Okay. Well, give it a round of applause.