Aave, an early DeFi protocol, is expanding across a number of new blockchains as it looks to draw in more mainstream users and retool itself for a much larger market opportunity in crypto lending than its creators anticipated.
Backed by a Swiss company of the same name founded in 2017, Aave is an open-source protocol for borrowing and lending crypto. The challenge it faces is not uncommon in crypto: It was built to handle millions of dollars in value, but it now has $18 billion in total value locked or deposited. The new version of Aave’s liquidity protocol, V3, tries to address some of its shortcomings by lowering risk, improving scalability and making Aave a truly cross-chain protocol, Aave founder and CEO Stani Kulechov said.
”When we built the V2 protocol, we were thinking that maybe we'll have $200 million worth of value locked,” he said. “It has billions now. Now we're launching the V3 protocol. We're kind of expecting that some day this protocol could actually have hundreds of billions of value or even a trillion. So we have this kind of scalability in mind.”
Many DeFi protocols initially attracted crypto-native investors as speculators looking for high yields or trading gains in tokens, and have been hit by a big decline in token prices. But Kulechov believes DeFi is just getting started, with a move to broader, more mainstream use in the future.
“We think of these protocols as a new back-end for finance that will be used by everyone who is interacting with finance directly or indirectly — similar to the way we today interact with HTTP or IP protocols,” he said.
Aave has grown quickly, a result of its open system where anyone can contribute to code and build something better, he said. But that means that risk has also increased tremendously for these autonomous systems.
Risk mitigation features in the new version include supply caps, which limit how much of a certain asset can be supplied to Aave; borrowing caps, which limit how much of a certain asset can be borrowed out of Aave; and isolation of assets, which means you can only borrow the same asset as the one you supplied as collateral.
While Aave was on Ethereum, Avalanche and Polygon, with more than $1 billion deposited on each, now with V3 Aave will be live on seven different blockchains, including Fantom, Arbitrum, Optimism and Harmony. This is important as activity on the Ethereum chain moves to Layer 2 protocols or other Layer 1 chains to address speed and cost, and developers and users need to be able to work across multiple chains. Aave’s governance also enables people to vote across different chains.
Aave has built “very successful” DeFi technology for Ethereum, Avalanche and Polygon, said Bill Dishman, investment analyst at CoinFund. “Aave remains one of the most trusted places for borrowing and lending capital throughout DeFi.”
Aave recently launched Aave Arc, a service for large institutions to trade in DeFi only with specific approved parties. This is designed to reduce risk and assuage concerns for large investors. The effort is still new but over $30 million has been put into the service with participants such as SEBA Bank and Fireblocks handling custody, Kulechov said.
Kulechov sees other growth areas for Aave such as fixed-income products and collateralizing NFTs.
Aave, which has a decentralized governance system, collects about $50 million in revenue per year to its treasury through its various activities, which makes it self-sustainable, Kulechov said.