Why we are creating a money market on Aave
- Deepening of money markets should reduce volatility and improve composability.
- Protocol security a needed prerequisite for institutional adoption.
- Significant numbers of traditional regulated money managers expected to move to Aave.
We are a regulated Swiss firm that offers an insured savings product to traditional financial institutions, with higher rates than in a bank. It works pretty well in the traditional space. So, why a money market on Aave?
There are two main reasons:
- To bring the same insured savings benefits to DeFi.
- Aave’s obsessive focus on security is needed to encourage our institutional users to adopt crypto.
Insured savings on Aave
Aave’s innovative money market technology is the best way for us to bring our real-world offer to DeFi. We are going do this by tokenizing our insured real-world collateral and offering deposit (lending) opportunities to investors, as set out in the diagram below. As additional insured collateral is added, new tokens are minted and offered to investors. As investors wish to withdraw funds, tokens are burned. Proof of reserves and price information is provided by Chainlink.
Benefits
- Aave investors can put their crypto into an insured savings market, not currently available today in DeFi.
- Secure deposits (like bank accounts) are the base layer for the traditional financial system and will likely attract significant liquidity as DeFi grows.¹
- A safe savings account option should lead to increased financial depth in DeFi, resulting in lower system-wide volatility, and greater connections from Aave to other money legos.
A focus on security
As a regulated firm based in Switzerland with an insured product our typical clients are very focused on risk management. We wanted to work with a DeFi protocol that put security first and we found that in Aave. Our objective is to act as a bridge between traditional finance and crypto and we expect that our clients will find Aave an attractive gateway to DeFi. In particular, two main Aave security attributes stood out for us:
- Security audits. In addition to being tried and tested, Aave’s protocol has undertaken some serious security audits (ToB, Open Zepplin).
- System protection. It is impressive how Aave has designed their Security Module to safeguard the protocol. Aave encourages tokenholders to stake AAVE tokens to cover 30% any deficits that might affect depositors, in return for a share of protocol yield. An impressive number of tokenholders (called “Aave Angels”) have done this. This is in addition to the Ecosystem Reserve that they have in place.
In addition, the fact that Stani and his team have been building since 2017 shows a reassuring, long-term commitment to DeFi. This solid presence is further attested to by the huge number of addresses that they have in their vibrant community.
Regulation
As the creation of financial products from real-world assets is a regulated activity, it was important to work with a money market protocol like Aave that facilitates permissioned access.² The cons to a regulated market are that it isn’t permissionless; the pros are that it may offer better investor protection and is necessary to attract institutional money. The Swiss KYC process is simple, common-sense and designed so the company cannot act in an arbitrary manner. Our view is that it is better that we do it than a bank or the government.
Our ambition is that once KYC is done users can be free to participate in any other regulated market on Aave (and perhaps across DeFi). We hope that this will encourage our institutional clients to participate in the space, in a safe, regulated manner.
What might the future bring?
We expect an insured collateral money market to be attractive to investors within DeFi. We also believe that traditional money managers will increasingly use the Aave protocols, driven by a search for yield. These traditional investors will only enter the space via a regulated route, and only if the risk question is properly addressed.
The amount of institutional money that will likely enter DeFi over the next few years is enormous and Aave is well placed to capture a meaningful amount of these funds.
We think that building a money market on Aave will likely lead to at least three additional opportunities in the future:
- Adding a time element to the deposit (lending). At the moment, there is no premium for locking in funds for a longer time period, as there is in traditional finance. By paying higher rates on longer-dated lending, we could create a key missing element of DeFi: a yield curve. In traditional finance, credit risk prices off of the base sovereign yield curve (essentially the risk-free rate). This doesn’t exist in DeFi, as there are no country issuers. As our insured collateral money markets are the closest thing to risk-free, these money markets on Aave have the potential to develop into the benchmark risk-free yield curve in DeFi.
- Tapping into Aave’s innovative Credit Delegation feature. For example, we might borrow on an undercollateralized basis in the future against an insured future cashflow stream protected by regulation.
- Using Aave’s aTokens in our real-world interest-generating functions. For example, we might use the aTokens as part of the payment for our real-world partners.³
More info
Aave
Aave is an open source and non-custodial protocol enabling the creation of money markets. — https://aave.com/
CrescoFin
CrescoFin is a regulated Swiss financial firm with a vision to replace banking with code. — defi.crescofin.ch
[1] The bank deposit market was $60.5 trillion in Q4, 2019, according to the Bank for International Settlements.
[2] CrescoFin holds the necessary regulatory authorization to undertake this activity.
[3] It kind of blows people’s minds in the traditional space when you explain that they could get paid a portion of their goods/services in aTokens and then watch their aToken balance grow every minute. It isn’t quite the same when people get paid in US dollars.
