Coin Perspective #12 — Stani Kulechov

DeFi protocols need to get battle-tested — then institutional investors will come.

Stani Kulechov is one of the greatest innovators in the space of Decentralized Finance. He founded ETHlend which was the first lending platform that later evolved into Aave which is currently one of the hottest and most talked about projects in crypto. In this interview, we talk with Stani about how he started to develop in DeFi space, what obstacles DeFi projects need to face, and what is his vision for Aave as well as lending protocols in general. You can follow Stani on Linkedin or Twitter.

Stani, let’s start with your background. Before Aave you have founded ETHLend. Can you tell us a little bit more? How did you get involved in the crypto space for the first time?

The interesting part is that I used to do computer programming when I was younger, and eventually I ended up going to law school in Helsinki, Finland. And during my studies, actually, I got more involved in the blockchain community. I started to investigate and research how the blockchain and actually smart contracts could be used in legal applications.

And one of the interesting things for me was the way that Ethereum worked. Because you had this kind of functionality, where you can program immutable code, that can’t be changed or is difficult to tamper with. You could actually use them very well in financial applications.

And I have always been in love with finance, financial instruments, and how different things work in finance, and I really always had a passion for that. And what happened is that we started to look for a simple use-case where we could actually create a financial transaction that is more complex than sending currency from one end to another. And we wanted to make it in a way that the counterparties did not need to trust each other.

We came up with the very first Ethereum collateral-based loan in this space, which basically means that a user could get a loan, let’s say Bob could borrow from Alice without Alice worrying that Bob will run away with the funds. So there’s no risk of default.

What’s interesting here is, we created this first iteration and that was basically ETHlend back in the days, and later, we started to further develop ETHend into Aave and we launched the Aave protocol in January and currently we have over 50 million locked assets (since the interview was conducted, this amount grew up to $1,7 billion and stabilized at around $1 billion!), and in total, the lending market size is worth 60 million (now $4,5 billion). So it has been a very fascinating journey.

Before we dive deeper into Aave, I’d like to ask some general questions. In crypto, we have this narrative that crypto will help to ‘bank’ the ‘unbanked’, but so far it’s been used mostly by nerds. When do you think DeFi will be able to reach the truly ‘unbanked’ people?

I think DeFi is a good example. Because in DeFi, you just basically create financial applications using smart contract technology. What’s interesting is, why we currently have nerds building for nerds, is that the space that we operate in is very much on the protocol level, so it’s kind of like building houses — before people can live in houses, you need to have builders to build them.

I think we’re living in pretty much a similar space now in DeFi, that we’re building different kinds of protocols and tools that later can be expanded and built on top with different kinds of layers, all the way to the end-user — the consumer.

And one of the interesting stuff for example, if you think of just a retail user, he currently could benefit from DeFi just by depositing stablecoins, and there might be a service in-between that could change those fiat coins to stablecoins, and then that user will earn interest.

Now what’s interesting about the ‘unbanked’ is that when you deposit into Aave for example, you deposit 100 Dai, which is a stablecoin, in return, you get an interest-bearing stablecoin aDai, so those are a part of the aTokens that Aave protocol supports. And that means that when you have that 100 aDai in your address, it starts to accumulate interest directly in your wallets, with a built-in algorithm into the smart contracts of the aTokens.

So basically, from that moment, when you get those aTokens into your address, they start to generate interest there, directly. And this is fascinating, because here you have an interest-bearing savings account, which you could actually direct to anyone you want to. So imagine a situation we have, where you are using the local currency in Venezuela, and you’re suffering from high-interest rates.

What you can do, actually, is you can or exchange your currency to interest-bearing stablecoins, which basically, practically means, that you have an interest-bearing savings account, but also you have an inflation-resistant currency and also an automated built-in treasury inside the currency.

That means if you compare to local currencies, or even one dollar — when you send one dollar to another person, that dollar, while you were sending it and before the person receives it, that dollar will lose its value because of inflation.

And here we have a currency that actually doesn’t lose value against inflation and actually accrues value. It gets you the best yield in DeFi and probably, when the DeFi system will be more efficient and connected and wider, it can generate you the best yield on the planet. And that’s the long-term vision, but it just showcases how quickly we could reach different parts of the ‘unbanked’.

That is indeed fascinating. If we look at Bitcoin, it was born out of the Cypherpunks and their vision of programmatic money. But most of the Cypherpunks today don’t seem to be really big fans of Ethereum, even though it seems that DeFi pushes the boundaries of programmatic finance even further. Why do you think that is?

What’s interesting about Bitcoin is that it has a longer narrative. And that narrative has been built over years and basically gets more and more support and actually, people have been with this narrative for a longer period of time, they support the narrative more strongly.

I think that the key difference that we should see is that, when I started Aave on day one, when I started to study Bitcoin and Ethereum — I loved both. I loved Bitcoin because of the security you have in the chain because of the market capitalization and its simplicity. But the thing is, when we come to the more complex transactions, there are some technical limitations in the Bitcoin protocol, and that’s good for the reason that you want to have a very simplistic chain without any kind of additional functioning because then you can build more security in there.

Whereas Ethereum is more about having a general-purpose vehicle, where you can build different kinds of things that the virtual machine in Ethereum supports. And I think, when you add this complexity and these additional resources, it’s very difficult to handle in terms of governance because when you add something more, you always have a bit of risk.

You can create smart contracts, which means that you can get good smart contracts or bad smart contracts. And it’s something that probably, in the BTC community, many understand, what are the benefits of smart contracts and the Ethereum chain.

But there’s also a part that might not understand the benefits, but those who do understand the benefits, also understand the drawbacks — and that’s why they focus on the value propositions of Bitcoin. And I think many in the Ethereum community support the Bitcoin narrative and the Ethereum narrative — they kinda go hand in hand.

Do you yourself identify with the Cypherpunk movement — its values and heritage?

If you think about it, in terms of Cypherpunks, encryption, and for example just basically having this liberation from financial foundations that we have now — I identify with it, but I also see it’s slightly growing a bit.

What we have seen recently, for example, we have seen anonymous projects, so in the similar way that we have anonymous creation of the Bitcoin protocol, we also see now in DeFi anonymous teams, as well. And I think it’s kinda nice to see because it shows that you actually don’t need to have a team there with social capital in a sense that you verify, you don’t trust.

But it’s also good to see that there’s good governance in those teams, whoever the people are there or in the protocol. I think, if someone built something, the users and the holders of a currency should be able to participate in that governance — then it should work. Because you’re practically reducing the social capital from those teams.

What about DeFi and the banks? Do you think that DeFi could be a real threat for banks in the future, or do you think it will complement the legacy financial system?

At the end of the day, it’s a cost-benefit analysis. So, is it basically more efficient to run a system, such as Ethereum, smart contracts, or DeFi infrastructure where you basically might have different kinds of sorts of collateralization values, synthetic assets, and tokenized assets — so are those more cost-efficient compared to traditional finance? That’s the key question.

And the cost-efficiency doesn’t mean necessarily that you need 200% of value to create a stablecoin, or is your stablecoin backed 1:1, or like in traditional finance, that it’s only backed by debt — which is the most efficient way and also the riskiest way to create fiat currencies. I think it’s overall what kind of added value can you get.

So let’s say, if you have a DeFi lending protocol, like Aave, and that protocol can be accessed from various parts of the world, you can get counterparties for lending and borrowing, and draw liquidity from this particular global pool. Will that be a valid proposition compared with what we have today with all of the bureaucracy and liquidity that is in different kinds of pools around the financial trading platforms. Or will something on a very big scale, that is operating in smart contracts, with all the liquidity, could it be more beneficial?

And that’s a valid proposition that DeFi has. Anyone can connect into the system, liquidity is there and it’s basic economics of supply. I think that’s something that we haven’t had this efficiently before.

So for your question, I would say that it will complement a lot, whether it becomes better, or more used than traditional finance, it truly depends on how much it will follow the path and the narrative of the cryptocurrencies in general.

And in terms of cryptocurrencies, they’re very good technology. I mean, governments are still researching it and I don’t think it’s the case of ‘is it good to implement’, but rather ‘is it the right time to implement?’ And they call them more like ‘digital currencies’. But I think the key difference here is that the value proposition of the current cryptocurrencies, such as Bitcoin, is that there’s no controlling party. And I think that is the key thing for a currency to succeed.

What about institutional investors — when do you expect they’ll join the DeFi ecosystem and deploy their capital?

Yeah, some of them are already here — very small ones, mainly funds. But what’s the key question here is: when will the bigger institutions come? When will Wall Street join the ecosystems, right? Massive amounts of capital will be deployed. I think it will take some time because the DeFi protocols that we have today, need to be more battle-tested, they need more time to mature, they need more diligence, and at the end of the day, I think in the next couple of years we’ll see more and more interest from institutions.

And once they can hedge more of the risk, for example when they’re able to secure themselves from smart contract risk, or any other risk involved in their operations — whether, in decentralized fashion or a centralized fashion, I think that kind of creates like a Holy Grail to onboard institutions.

Ok, so you mentioned the risks related to DeFi — what do you consider currently to be the biggest challenge of the DeFi ecosystem from that perspective?

I think there are two big challenges — one is the risk of centralization. Because decentralization is a journey. When you build something, you might have to have, in the beginning, some control to fix, for example, some bugs and issues — and then, gradually, give the power over to the community.

And that has to happen in a predefined timeline — for example, when your protocol is sufficiently centralized for your community, and also decentralization is a spectrum — you want to decentralize your protocol as much as you need — and anything above that will be additional cost.

So you need to also understand the target and see how much decentralization you need for your community, for your users, that they can make sufficient transactions without a central figure.

And the second risk is the smart contract risk. The code needs to be well developed, and well audited, and more security measures need to be added to produce a more diligent code. Because developers have just a limited amount of time to develop these protocols, and hackers and exploiters have basically unlimited time to investigate and exploit the code.

And this is a difficult combination. I think the only way to raise the thresholds — if you’re entering into the main Ethereum network, the main-net, is to make sure that the protocol has been sufficiently audited by multiple organizations and also there is some sort of formal mathematical verification on top and enough diligence that it’s safe enough for people to use it.

Last week, at the Ethereal Summit, and you mentioned that you think that the privacy aspect will come to DeFi later on at some point. So in which areas do you think we will see privacy introduced in the future when it comes to DeFi?

I think it doesn’t require much. For example, if you use ZK protocol to ensure that the assets become private, that’s pretty much a way to create a lot of privacy in DeFi. Because you can wrap and unwrap aDai to ZK-aDai and enable more privacy.

But in terms of how quickly we’ll have privacy in main-net, I think it will take six to twelve months — so the next year (2021) will be the time when we’ll see more privacy implementations. I think starting without privacy, how we started the whole DeFi space, was the right thing, because of the fact that the Ethereum chain is public and all the transactions can be seen — it’s auditable by anyone.

That means that anyone can look at the interest rate that there is on the market and look at where the liquidity is formed. Everything is very transparent. If we talk about the centralized part of the cryptocurrency ecosystem, or even the so-called OldFi — the old traditional financial system, we don’t have this level of transparency there. I think this is the key difference here and one of the value propositions that DeFi has. I think privacy on top of it makes a lot of sense, but to bootstrap the network, I think, the kinda publicity and auditability has been a crucial factor.

Let’s talk a little bit more about Aave in particular. Building an open-source decentralized application probably involves multiple different aspects, compared to traditional start-ups. To some extent, this is related also to the question of fundraising. Can you describe, from your experience, the process of raising funds for Aave?

Yeah, and of course, Aave isn’t basically a dapp anymore, it’s basically a protocol, and on its basis, you can build dapps for example and different kinds of front-ends. Or you could use the protocol to complete your own projects. For example, DeFiSaver (https://defisaver.com/) is an example when they’re using flash loans, which can be borrowed in one transaction without collateral. And they are using it to liquidate MakerDao CDPs without the user needing to return the capital back.

And for fundraising, what’s interesting is what we have seen recently, the very general way of raising funds is the token generation events, and we have seen recently a lot of VC interest in this space. And of course, then you can build DAOs on top of the protocols and raise funds that way.

I think that the current narrative has been that basically once you have an interesting idea, you attract venture capital and then, from that point, you build your protocol, and then you sell that value or generate that value with a token-distribution, if it’s a protocol for example, to the end-users. That’s the way you can basically go from VC to the community. Or you can basically do a token generation event based on the usage of your application, or people who want to invest in it. Of course, there are lots of regulations involved, but it really depends on what you’re building.

Some of the solutions that we have on DeFi don’t need a token. If you’re building a fund and access points into the DeFi protocols, I think you might be very well off with venture funding or a DAO that covers your project, depending on how you want to build. But the interesting part is that building protocols is very cost-intensive. Just the security budget at Aave is half a million a year now. And it just shows how much funds are going in only the diligence of what you have built.

On the note of monetization of such open-source protocols — what are the potential revenue streams for open-source protocols on Ethereum and what are the actual revenue streams that Aave is using?

Yeah, good question. So you can monetize by collecting fees and if you have token-based governance, you have more abilities to actually monetize than the fee collection.

The interesting part is that there has been a narrative before, two years ago in DeFi, that because DeFi makes everything accessible and you should not charge fees, because that’s rent-seeking, but I think we have been very shy in the space to basically try to monetize and show that actually, you could have very well monetized projects here.

And I think the risk has been always that if you monetize something, as the smart contracts are public and usually open-source, even though some projects have copyrighted code, they can get forked. So you have a risk of getting a forked, a zero-fee system competing with your own code.

And that’s why we’ve been very shy in terms of adding fees, but I think now there’s a new narrative here, especially with different kinds of fees — for example, Aave charges fees and many protocols do and are going in this direction too.

And it’s important to show that basically in DeFi, you can generate fees and actually make a sustainable protocol. Interestingly, in our case, we collect fees upon Loan origination, and also we generate fees on each and every flash loan that is made on the protocol. Most of the fees we use to burn our token, and the rest of the fees we’re using to reward integrators, as a referral, and so forth.

So in our model that we have, we’re decreasing the supply of the current token, but this is just a temporary fee model, fee structure, that we’re having — the thing that we’re going to introduce pretty soon will be quite different and quite interesting.

This will be part of the Aave ecosystem growth paper, which is basically Aavenomics, which determines the governance of our protocol, how the protocol will govern, how we govern the future with our community, and also the monetary policies that we’re going to implement into the protocol and extract fees and where those fees are going to go. (New model is here: https://docs.aave.com/aavenomics/)

So that’s the key difference here. If your project has this kind of tokenomics, basically, you’re applying monetary policies, which can be changed with the governance.

You have recently moved away from the token-burn model. Can you elaborate on that? What were the decisions and reasons behind this?

When we look at the token-burning model, it’s more like a psychological function, than value and actual economical value. There has recently been a situation with Maker, where they basically had, during the Black Thursday, Ethereum price and all the asset prices were declining in value. There was a lot of rage because the network of Ethereum was congested, liquidators were not able to liquidate the loan positions in the market prices.

And what happened was that some of the liquidators did it with the price of zero of the collateral value, which meant it left 4 million USD of debt in the Maker protocol. And to cover this deficit, Maker had to mint more of their token, MKR, to cover the debt left on the secondary market. Option style.

When you look at how much of their token has Maker burned, if instead of burning it, they would have captured that value and kept it for situations like this, it could have been more beneficial because they would not have had mint that amount of MKR tokens.

I think the deflation system where you’re gradually decreasing the supply, isn’t as effective as actually increasing the supply — giving value to get more value. So what we see is that it’s a kind of like a shift from decreasing a currency supply to a system where you’re actually creating a currency, but you’re creating it to get more people involved and actually build different kinds of things and secure the protocol more. And in our case, one of the main things will be that we create more value by allowing the token holders to increasingly secure the protocol and that means that more liquidity will come into the protocol and a more secure protocol we have. And I think that’s way more powerful than the burning.

This transition has implications, also on the token supply. Can you elaborate on that, what is the plan in regards to increasing your token supply for staking?

Yeah, the mechanics, or rather the parameters of it will be increased — that hasn’t yet been set in stone (at the time of recording). But it’s interesting, as an incentive model, we will have an inflation-based system and also a fee-collection system that we share with the token holders.

And the model will be that the token holder could stake the tokens to ensure the protocol. The idea is that the more secure the protocol is, the more the protocol grows in-depth, it creates pressure in terms of incentives into the Aave value, so that, basically, users want to obtain Aave to stake it to get the incentive to secure the growing network. And it has this kind of a positive feedback loop that we’re targeting.

And of course, there is some monetary policy, which means in practice that even if you implement it, it doesn’t always work 100% in the same way. As we, for example, look at monetary policies of different governments — what happens is that even if you adjust interest rates up or down, it doesn’t guarantee the effects that you’re trying to pursue. But the idea is that your protocol is incentivized in a way that you have this feedback loop.

Aave is one of a few lending platforms that are out there in DeFi. How are you different from the other platforms and what is your strategy to be competitive in the future?

That’s a good question. DeFi space is currently very small, and what we’re currently trying to do is that we focus on one thing. Because we do understand that we don’t need to build everything. And we want to focus on the very foundations and basically do one thing very very well, which is lending. And then enabling this lending liquidity to be consumed all over the ecosystem.

And thus, we’re very focused on developers by having very good referral systems and making sure that they will have a say in the future in the governance of the protocol, and that’s the very crucial thing. And of course, in terms of functioning, how we differ is that Aave actually has not just the base lending and borrowing, where you borrow against collateral, but we also have flash loans implemented, directly built-in to the protocol.

That means, with the current market size, the value of roughly 50 million USD locked in the protocol, and with the rest that has been borrowed out — you can actually use that 50 million value in the ecosystem. We have flash loans. And this is a part of the narrative that we have been looking at, until this date, the narrative in DeFi has always been about how much value you’re locking in.

If you look at DeFi Pulse, which is basically the leaderboard of different protocols, the metric there is who locks most of the value. But it’s not only about locking the value, but how do you use that locked value. And flash loans are a part of that. All that value is there, sitting, it can be reused, which means more efficient capital allocation.

And similarly, the aTokens, when you deposit one Dai, you get one aDai back, that’s also a way to reuse the value in some order in place of the ecosystem. So those are pretty interesting things, the money market that we have is basically just the first money market — and our goal is to create multiple money markets with different kinds of parameters.

And the governance of Aave, which are basically the token holders who decide which money market will be added into the governance of the Aave protocol. And the idea here is that because the Aave token is used as a kind of insurance in the system, there are different kinds of parameters of how you could be added into the token-based governance.

And also, once we create the second market that we’re creating now and trying to launch pretty soon, is the Uniswap money market — which means that you can use Uniswap liquidity. So when you provide liquidity in Uniswap, you get in return a token, which is basically your position in that protocol. And you can use that token in Aave and basically borrow stablecoins and then you get those stablecoins and reuse them in the ecosystem.

And I think, the key difference will be in the future, Aave will have multiple money markets which are governed with our Aavenomics and that’s the key difference between what’s now there in DeFi.

That sounds very interesting. You mentioned flash loans a couple of times, and they have been getting increasingly more traction and spotlight for obvious reasons. And probably the first and biggest use-case for them appears to be arbitrage — can you say what are the other use-cases for flash loans?

Definitely. Recently I was brainstorming with Mariano Conti from MakerDAO, because in Maker’s system, you can create a vault, like a CDP. And when you create the vault, you can either collateralize ETH, USDC, or now WBTC.

But back in the day, there were only two currencies used for collateralization. And when you collateralize something, you have a long position in that asset and basically, if you want to change the long position, let’s say BAT token and you want to go back to ETH, you need to close that CDP, that vault. That means you need to return Dai and then you can open a new CDP.

And that’s very inefficient for the end-user because you might already have spent that Dai or it’s in some other protocol, maybe generating more yield. And what’s interesting is, I asked on Twitter: “Is there anyone who wants to build a way to swap your collateral, so you’re using flash loans to actually swap the collateral without returning Dai?’, and then there’s this one person who came and said that OK, I want to do this.

And what you now basically can do is you can swap your collateral in the MakerDAO system. For example, you borrow a flash loan of Dai, and you close that CDP. And you sell BAT in Kyber or Uniswap for ETH, and then you open ETH-based collateral to mint Dai and return Dai back to Aave. The magic is that everything happens in one transaction here.

You could actually even create multiple functionalities as you can even add here a currency swap and interest rate swap. So instead of changing just the collateral, you could change the position from, let’s say, from MakerDAO to Compound, and also if there’s a cheaper loan on (USDC) than (Dai), you can also swap the currency into USDC. And you could even automate this thing so it is done for you once a week. And everything will be using flash loans and these transactions.

That sounds very useful. Let’s talk a bit about the legal aspect — what is your perception of the regulatory landscape in DeFi? It’s still very small; do you expect more troubles in the future, as the ecosystem grows, from the legal perspective?

I think what is important now is that as DeFi starts, it needs a bit more regulatory discussion. Not necessarily more regulation, but a discussion on how this kind of different applications can be regulated and also how we can preserve the value that DeFi brings, without devaluing it with regulation.

And I think that something that’s very difficult to touch upon yet, because the industry is so small. But I think once it starts to grow more and more, this will become a more evident discussion from the regulator’s perspective.

You mentioned MakerDAO and the Black Thursday and what followed after that was the class-action lawsuit against MakerDAO. How do you think this is going to play out?

I haven’t seen the concrete details, but I think what’s happened is that the vaults that got liquidated in MakerDAOthe — first there was an idea to not repay the losses of the (vaults), but eventually they agreed to pay them.

So there was kind of like a mishmash there. And I think that the issue was more down to listening to the community. It’s very important that you listen to the community and try to find amicable solutions and do a nice thing.

Because that’s the way you can self-regulate yourself. But once you start deviating from this direction and to look at your own interest, you’re pretty much destroying the benefit of the community. And I think in this situation, there was a user that wasn’t careful about this, and this kind of thing happened.

Ok, so the whole lawsuit is built upon the claim that the risks were not stated clearly for the end-users — do you think that’s a kind of a justifiable position in this case of MakerDAO?

It’s interesting because you can actually interact with the smart contracts straight, without front-ends, and clearly, this user interacted with MakerDAO’s client and basically, this is an interesting question of what he was subscribing to. Pretty much what I think he was subscribing to, into the usage of the protocol from the front-end, so those terms and conditions that are subject to that front-end, I think they dictate what he’s basically subscribing to.

And I think, in terms of smart contracts and DeFi usage, I think they will follow, pretty much, this kind of browsewrap or clickwrap style agreements as a legal wrapper. So either you click to accept the terms or you accept them by browsing. There are quite extensive legal foundations on that in case law.

But I think the new thing here is that you’re now able to interact with smart contracts without front-ends and this raises a question what terms will be applicable then.

DeFi is something that many smart contract platforms are trying to tap into. How do you see the expansion of DeFi to other platforms in the future?

I see a couple of things. First, it’s Layer 2 — for building another layer to make some functionalities more efficient. For example, building a layer for more efficient trading, that is not subject to Ethereum network congestion. Now, there’s also coming ETH 2.0, which is more scalable than the current system with sharding and these different kinds of hubs. So that’s pretty interesting and Layer 2 solutions are required. Whether Ethereum 2.0 becomes the most efficient thing — it’s hard to tell yet. But definitely, some Layer 2 solutions will be adopted.

And the second thing, having DeFi in other chains that have technical capabilities to support smart contracts is great. Of course, it’s all about liquidity. So I think that DeFi will follow where liquidity is. It’s currently in Ethereum, but I don’t see an issue with being in multiple blockchains, for example, Polkadot and Cosmos, as well.

You mentioned Layer 2. There are some concerns that Layer 2 implementations could possibly break the composability of DeFi apps — do you think this is a real threat?

Yeah. Yes, that is true. So basically, Layer 2 always adds additional transaction verification and so forth. You might break a composability a bit, but there might be a way to go around it technically. I’m not sure yet how exactly, but based on what I’ve read there are different alternatives, but to overcome this. And of course, you can always part liquidity into Layer 2 and enable some composability. So I think it breaks it a bit, but it doesn’t kill it.

Maybe one more question related to the so-called Ethereum killers. Many of them are launching this year. Do you see platforms like Dfinity or Avalanche be a real competition for Ethereum?

It’s all about the two factors — the technology and then the liquidity. In terms of technology — it’s always about security versus scalability. So when you take out security, you get more scalability and vice versa. In each and every protocol that there is, you always subscribe to different scalability and security tradeoffs. For example, we can compare (EOS) with the Delegated-Proof-of-Stake, it’s less secure compared to BTC, where it requires quite a lot of power to change the protocol. I think they will have their own applications and their own liquidity and use-cases. Whether they’ll be overtaking Ethereum, really depends on what the people build on top of them.

What we also have recently seen in DeFi space is that BTC is coming increasingly more into DeFi, but there are also efforts to bring DeFi on top of Bitcoin. But this doesn’t seem to get bootstrapped that well so far. Why do you think it’s that? Do you think we will see more of DeFi on top of BTC in the future?

If you look at BTC, there’s not much that you can do transaction-wise. There are certain things that you can do, like delayed payments and execution: Alice sends to Bob and once that happens, Bob automatically sends to John. But when you are looking into very complex transactions that we have in DeFi, the technology doesn’t support that.

So one of the things that happen in BTC is layering. Additional layers with smart-contract-like functions — that is something that could be working. And of course, if it’s Layer 2, you have a less secure protocol, and then it’s not anymore the Bitcoin protocol. Because, in my opinion, the value capture of BTC is really the security. Of course, it’s by design decentralized, but in practice, it is a bit centralized, because of the mining farms. But still, it provides the highest security at the moment in the cryptocurrency space.

And I think that we may see more DeFi related to payments, different kinds of ways to make faster payments, but I think most of the stuff will happen in Layer 2.

One thing we haven’t mentioned yet is the so-called CeFi, the centralized finance apps like BlockFi or Celsius, which are the competition for lending platforms like Aave. Do you think that Aave and other protocols will be able to compete with these services in terms of ease and user-interface?

I think if you go today and try to deposit into Aave, you will probably find that it’s way easier than any CeFi app. And we used to be in the situation in DeFi that everything was hard to use, but now it’s way easier. The user experience is just becoming very good and even better. And the fact that in CeFi, before you get a deposit and onboard the user, there are certain processes involved — and that slows down the whole experience a bit.

The value proposition of DeFi is that you can do things very quickly, everything is interoperable, and everything’s auditable and transparent. So people don’t need to trust us, because they can just verify our data from the blockchain and also our code behavior from the blockchain as well.

Where do you see the DeFi ecosystem five years from now?

I think it will grow quite nicely. I think the growth will be steady, but I think we’ll see different kinds of liquidity. Like more diverse. I think we’ll get more institutional liquidity into DeFi and also we’ll see more secured DeFi. I think this and the next year it’s all about building more secure protocols and also having a product that insures whatever you are doing in the space. Basically, once we reach that in the next year or two, then we have a pretty scalable financial system in DeFi.

Would you guess the value of assets locked in the DeFi apps? So now we’re at one billion (currently 11 billion), can you make a random guess what it could be in five years from now?

Five years is a long time. But I can imagine it can be even five hundred billion by five years.

This will probably be the last question — where do you see the role of BTC in our society ten years from now?

I think Bitcoin, depending on the governance, has two roles. One, that it will be used as an autonomous currency in the terms of that it doesn’t have government control.

The second thing is, that it becomes a store of value. And that will mean that different governments and institutions will bank on BTC in a way that they use it to store the value as, for example, is the case with gold.

And I think the volatility will get reduced to the level of commodities — but if it overcomes the challenges related to the network fees, and becomes more like a payment instrument, what will happen is that we’ll have even less volatility and the currency, which will be pretty nice.

Thank you!

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