Stani Kulechov
May 8 · 6 min read
Aave open sources the decentralized lending protocol

Aave has built the current ETHLend marketplace to become a fully customised order-matching marketplace where borrowers’ and lenders’ transactions are secured by Smart Contracts on Ethereum network. The lending volume on ETHLend has been growing steadily since the first MVP launch back in may 2017 and our invention of crypto-backed loans now has been validated as an important tool for digital asset holders.

ETHLend technical roadmap is coming to an end in terms of development cycles, since most of the milestones have been fully deployed on the Ethereum main-net. Currently, there would be the following milestones pending for ETHLend:

  1. Revenue scheme for AI Credit Risk bot creators on Q3 2018*
  2. Prediction Market to Assess Credit Risk on Q4 2018*
  3. Lending Other Altcoins and Tokens on Q4 2018* (partially implemented)
  4. Protocol to Enable Insurance Policies (with AI bots) on Q1 2019
  5. Expanding Decentralized Lending and Decentralized Credit Rating beyond Ethereum network Q4 2019*

The white paper has been written back in 2017, and many things have changed since then, especially the crypto-backed lending market itself. The team has performed a review on what is the current market status quo and what is the direction we would need to develop ETHLend further to be the go to marketplace for crypto-backed loans.

To provide the best available product for the end user borrowers and lenders, Aave will continue with the milestones 3, 4 (will be introduced with the Swappers role explained below) and 5. Since credit risk plays virtually zero part within overcollateralized loans, Aave proposes the following DLP extension to the current roadmap instead of continuing with milestones 1 and 2.

Decentralized Lending Pools (DLPs) — The Open Source Protocol For Lending

Today in ETHLend, borrowers are able to create customised loan requests and loan offers.

Hence, a borrower that is seeking liquidity would create a Smart Contract by defining parameters on the sought after capital. These parameters include interest rate, duration of the loan, collateral used, currency sought after and collateral ratio (LTV). It is up to the lenders to fund the loan request in case it is competitive enough.

Similarly, lenders are able to create loan offers, where similar parameters are set from minimum and maximum, whereas a borrower can find a loan offer that fits the his needs and take the liquidity.

In case there is a loan offer or a loan request that is close to what the user is filling, the order would be matched by our system.

The challenges with the above over-the-counter (OTC) model involve both borrowers and lenders.

The borrowers would need to (a) spend time on creating a loan request, (b) the borrower might not know what are competitive rates and (c) the borrower would need to wait the loan to get funded. For the loan offers, lenders would need to park their liquidity without any passive income and wait that their loan offer gets lifted. Hence, lenders are earning interest after they find a suitable borrowed, which provides uncertainty for their earnings.

What is the solution? To solve the issue with matching liquidity, Aave is changing the Smart Contracts to lending pools. Within a lending pool, lenders can park their liquidity, earn passive income and their liquidity is automatically distributed to borrowers. These borrowers can borrow by simply depositing a collateral. In some cases even depositing the collateral might yield income.

Within DLPs, there is no order matching since liquidity is available constantly

Lenders and Borrowers Become Depositors

Since lending liquidity is organised in a common deposit pool, it means that by depositing one collateral (for example LEND or MKR), the depositor is (a) able to earn interest on the deposited collateral and (b) borrow other assets against the collateral(s). The approach would create the opportunity to participate both sides of the market (to borrow and to lend) with a pleasant user experience.

To ensure easy movements of liquidity in and out, fractional reserves are added to these lending pools. Meaning that there would be certain amount of liquidity that the depositor is able to withdraw anytime, which allows a depositor to close their exposure on the DLP. Such would be the case if the depositor finds another higher interest bearing DLP.

To capture wider amount of liquidity, Aave would introduce keepers and swappers within the DLPs. Keepers would ensure to initiate the collateral calls while swappers would swap the collateral currency against the liquidation fee back to the loan currency, reducing the need for the lender to sell the collateral in the after market. Anyone can become a keeper or a swapper and participate within the governance. Both keepers and swappers will be rewarded by the protocol.

In short, DLPs brings several benefits.

Benefits for the lenders:

  • Earn passive income from the moment of depositing
  • Interest calculated by block (blockrate)
  • Withdraw the deposited funds anytime (if there is reserve)
  • No need to actively follow the market and fund loans
  • Automatic collateral calls and collateral swaps to deposited currency

For borrowers:

  • Borrow by depositing assets (liquidity is ready)
  • Return the funds anytime (no pre-set loan period)
  • Borrowing becomes easier

Mobile and Web Experience — Aave Pocket

DLPs would be introduced within Aave Pocket, an application released on web, iOS and Android. ETHLend, its current wallet and Aave Pay would be combined into an unified brand and product — Aave Pocket, which would allow our users to store holdings, deposit funds into DLPs and convert DLP drawn funds straight to your bank account with couple of clicks.

Aave Pocket has the capabilities to allow users to participate in the DLP governance and add custom DLPs to their Pocket. The wallet in Pocket is a non-custodian wallet similar as in ETHLend, and users will be able to interact with it through our web interface. Old Smart Contracts of ETHLend would be supported to their very last transaction.

Open Source Means Governance

To ensure our values are in line with the Ethereum community, the DLP Smart Contracts would be released as a open sourced protocol. This means that anyone can experiment our DLP protocol in their Ethereum project by creating their own lending pools or alternatively integrate the Aave lending pools.

By open sourcing its DLPs, Aave is inviting more stakeholders to enter to the decentralized debt market and experiment on building interesting products on top of the DLPs such as interest rate swaps, refinancing and credit default swaps.

Since the DLP would be released as a protocol, this means that within the protocol level, Aave would introduce DAO-features, whereas stakeholders are able to participate in governing the protocol, lending pools initiated with the DLP protocol. For example, the stakeholders are able to vote on cross pool lending parameters such as the minimum interest rates. Such approach would be in line with the general roadmap of ETHLend:

  1. Opening Suggestions Venue for Public on Q4 2018
  2. Creating and Testing Democracy DAO on Q4 2018
  3. Protocol Voting on Q1 2019
DAO Governance will be added to the DLP protocols and the pools across the protocol

In the next community update, Aave shall introduce how governance of the protocol and lending pools are structured and how the tokenomics would be part of this governance process.

At Aave, we always put a lot of effort in studying the market and implementing the best approaches to be in line with the needs of our users in the best ways.
We can't wait you to dive in our Pool!

Aave Blog

Aave is a Swiss-based technology company founded in 2017 by Stani Kulechov, focused on empowering people through technology and innovation across all industries through the development of decentralized and hybrid blockchain applications

Stani Kulechov

Written by

Founder of Aave

Aave Blog

Aave Blog

Aave is a Swiss-based technology company founded in 2017 by Stani Kulechov, focused on empowering people through technology and innovation across all industries through the development of decentralized and hybrid blockchain applications

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