Upstart Aave Shows DeFi Dreams Are Real

Upstart Aave Shows DeFi Dreams Are Real

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Protests. Forest fires. Pandemic. A presidential election. In these chaotic times, it can be difficult to follow the distant frontiers of “fintech”. Yet even in the midst of this manic news cycle, the groundwork is being laid for an alternate financial reality. So much innovation is going on.

The burgeoning world of decentralized finance, or “DeFi,” as its practitioners call the cryptocurrency landscape (with more than a dollop of rebellious bluster), is growing at lightning speed. Since the start of July, deposits of cryptocurrency enthusiasts in DeFi projects have grown to more than $ 10 billion, from $ 2 billion, according to DeFi Pulse, which tracks the industry’s preferred “total locked volume” metric. It has been a boom.

In previous Ledger Expeditions, we’ve introduced you to some of the major DeFi projects benefiting from this silent boom. Uniswap, a decentralized cryptocurrency exchange, is currently the market leader with $ 2.22 billion in deposits. Maker, coin mechanism of a so-called popular stable currency, a cryptocurrency designed to maintain a fixed price, claims $ 1.82 billion in funds, making it second. In third place with $ 1.16 billion is Aave, a project that calls itself the “money market protocol”.

I spoke with Stani Kulechov, CEO and Co-Founder of Aave, to better understand the latest cryptocurrency craze and Aave’s place in it. When the Finnish entrepreneur talks about DeFi, and Aave’s mission in particular, he doesn’t dwell on the risk and the obvious associations with the game. Instead, he fixes his gaze on a higher goal. .

“In some countries, access to savings is very limited. You can save money in your national currency, but you lose more in terms of inflation, and that is a very problematic thing, “Kulechov says. Aave offers an alternative, he says, “a kind of unlicensed savings account, where no one can pass between your principal and the interest you earn.”

Three-quarters of the people who use Aave’s software use it strictly to earn interest on deposits; thus, the moniker of the money market. (In the process, lenders also earn “governance tokens,” similar to corporate shares, which give holders the right to have a say in the direction of the project.) The remaining quarter of users take loans from them. ‘Aave, often to meet collateral obligations owed elsewhere — a common occurrence in the cryptocurrency industry, where sudden price swings are the norm.

All the code and technical complexity behind Aave – and similar DeFi projects, like a rival Compound“Could be, in the long run, a game changer for financial inclusion,” Kulechov said. It’s a hifalutin talk for an industry currently dominated by financial sharks and Bitcoin whales who often describe themselves as “degenerates.” But some investors, like Kulechov, are betting that the future of finance lies like this.

Adam Goldberg, a former investor at Lightspeed Ventures who has since founded his own cryptocurrency-focused investment firm, Standard Crypto, is one such believer. He is leading a series of investments in Aave worth $ 25 million by purchasing a series of governance tokens from the project. Goldberg explains that DeFi’s high growth rate heralds riches to come. “It’s finance that innovates at the speed of software,” he says.

Recent macroeconomic trends strengthen the arguments of the crypto-bulls. Aave, which offers potentially higher return savings than traditional banks (alongside higher risk, of course), “is particularly relevant to many people right now due to the zero interest rate environment. we’re in, ”Goldberg says.

At this point in the game – and for a lot of people it is indeed a game – playing on DeFi fever dreams is a sure-fire way to lose money. But for a new class of pros, it’s a miracle in motion. When the smoke from the many disasters around the world clears, the progress made on this overhauled financial infrastructure will become readily visible.

Robert hackett

@rhhackett

robert.hackett@fortune.com



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