Stani Kulechov: Aave’s token-centric model enhances value capture, V4 introduces a hub and spoke architecture, and DAOs boost governance resilience | Unchained

Key takeaways

• Aave’s proposal focuses on reinforcing value capture through a token-centric model.
• Aave Labs upgraded its integration to enhance user experience and generate sustainable revenue.
• The Aave protocol’s economic model ensures that borrowing activities contribute to its growth.
• Aave’s growth strategy involves consolidating within the DeFi space to produce high-quality products.
• Aave Labs aims to create a token-centric model to reduce uncertainty for token holders.
• Aave Labs will allocate 100% of revenue from for-profit applications to the Aave DAO.
• The evolution of lending protocols requires active participation for effective risk management.
• Static parameters in protocols can lead to inadequate risk absorption during market volatility.
• The service provider model in DAOs enhances transparency and allows for public debate on proposals.
• Aave V4 will introduce a hub and spoke model enabling broader revenue models.
• Aave V4’s modular architecture enhances flexibility and scalability in lending protocols.
• Aave’s protocol can scale into different risk categories while maintaining liquidity concentration.
• The reinvestment feature allows Aave to manage funds efficiently without additional risk.
• A modular architecture with hubs and spokes can foster innovation in DeFi.
• Tokenization of traditional assets will enhance transparency and efficiency in finance.

Guest intro

Stani Kulechov is Founder and CEO of Avara, the software development company behind Aave Labs, which created the Aave Protocol, a decentralized lending platform that has become one of the largest DeFi applications. He launched ETHLend in 2017 while studying law at the University of Helsinki, one of the first widely used DeFi applications, which later rebranded to Aave and deployed on Ethereum in January 2020. Beyond lending infrastructure, Kulechov has expanded Aave’s ecosystem to include the GHO stablecoin, the Lens Protocol for decentralized social media, and the Family crypto wallet, positioning Aave as a comprehensive DeFi platform.

Aave’s strategic focus on token-centric models

• “The Aave proposal aims to reinforce the value capture for the token-centric model.” – Stani Kulechov
• Aave’s strategy is to send a strong signal that value capture is focused on the token-centric model.
• The proposal is designed to align the interests of the protocol with its token holders.
• Aave Labs aims to remove uncertainty from a dual model and focus on a single value capture point.
• “We simply give 100% of that revenue to the Aave DAO for the benefit of the Aave token holders.” – Stani Kulechov
• Aave’s commitment to a token-centric model is crucial for investor confidence.
• The focus on a token-centric model is intended to enhance community governance.
• Aave’s strategic focus reflects a broader trend in DeFi towards token-centric governance.

Enhancing user experience and revenue generation

• Aave Labs upgraded its integration to improve user experience and create sustainable revenue streams.
• “We upgraded that into a call swap to get a better aggregation and efficiency for the users.” – Stani Kulechov
• The integration focuses on creating non-protocol features to enhance user efficiency.
• Aave’s approach highlights the importance of user experience in driving protocol adoption.
• The upgraded integration is part of a broader strategy to enhance revenue generation.
• Aave’s focus on user experience is aligned with its goal to attract more users to DeFi.
• The integration aims to create a seamless experience for users interacting with Aave’s products.
• Aave’s strategy reflects a shift towards prioritizing user-centric design in DeFi.

Aave’s economic model and growth strategy

• The Aave protocol’s economic model ensures that all borrowing activity contributes directly to the protocol’s growth.
• “The very first time we established the economics for the Aave protocol was AIP one.” – Stani Kulechov
• Aave’s growth strategy involves consolidating within the DeFi space to produce high-quality products.
• “We’ve been picking up to 200,000,000,000 port of deposits roughly as a whole space.” – Stani Kulechov
• Aave’s focus on product quality is key to attracting liquidity in a competitive market.
• The protocol’s economic model integrates smart contract activity into its growth strategy.
• Aave’s consolidation strategy reflects a broader trend in DeFi towards quality over quantity.
• The economic model is designed to ensure that the protocol’s growth is sustainable and aligned with its governance structure.

The role of DAOs in enhancing protocol resilience

• The service provider model in DAOs enhances transparency and allows for public debate on proposals.
• “The service provider model caters that really well so there’s different sort of participants.” – Stani Kulechov
• DAOs contribute to the resiliency of lending protocols by fostering public debate and transparency.
• The model allows for diverse participation and active proposal creation within the DAO.
• Aave’s approach to DAOs reflects a commitment to transparency and community involvement.
• The service provider model is crucial for maintaining the integrity and resilience of the protocol.
• DAOs play a key role in ensuring that governance is inclusive and representative of community interests.
• Aave’s use of DAOs is aligned with its broader strategy to enhance governance and transparency.

Innovations in Aave V4 and its impact on DeFi

• The upcoming Aave V4 will introduce a hub and spoke model that will enable a broader set of revenue models.
• “The Aave V4 version has a pretty specific architecture that involves a hub and spoke model.” – Stani Kulechov
• Aave V4’s modular architecture enhances flexibility and scalability in lending protocols.
• “For us what is very important about V4 is that we noticed that actually the use cases of DeFi are expanding.” – Stani Kulechov
• The modular design allows for future expansion and collaboration among multiple contributors.
• Aave V4 is considered the state of the art of lending protocols due to its flexibility.
• The new architecture is designed to accommodate the expanding use cases of DeFi.
• Aave V4’s innovations reflect a broader trend towards modularity and scalability in DeFi protocols.

Addressing liquidity and risk management challenges

• The evolution of lending protocols requires active participation for effective risk management.
• “What we noticed over the past is that there’s sort of an active participation needed for risk management.” – Stani Kulechov
• Static parameters in protocols can lead to inadequate risk absorption during dynamic market conditions.
• “If the parameters are fully static there might be cases when the risk is the protocol is absorbing.” – Stani Kulechov
• Aave’s approach to risk management emphasizes the need for dynamic and adaptable parameters.
• The protocol’s design allows for scaling into different risk categories while maintaining liquidity concentration.
• The reinvestment feature allows Aave to manage funds efficiently without adding additional risk.
• Aave’s focus on risk management is crucial for maintaining the protocol’s integrity and stability.

The potential of tokenization in transforming finance

• Tokenization of traditional assets will enhance transparency and efficiency in finance.
• “I do believe that’s for example the traditional assets are gonna get tokenized.” – Stani Kulechov
• Tokenizing solar power and other abundance assets can address the collateral demand problem in DeFi.
• “Being able to fund a lot of solar which is capital expensive but operational cost low.” – Stani Kulechov
• The adoption of solar and other abundance technologies will lead to cheaper operational costs over time.
• Tokenization is seen as a key driver of innovation and efficiency in the financial sector.
• The transition to abundance-based assets is expected to reshape economic structures over the next three decades.
• Aave’s focus on tokenization reflects a broader trend towards integrating traditional finance with DeFi.

Governance and community involvement in DAOs

• The transparency of the DAO proposals is a significant feature that sets it apart.
• “I think it sort of reflects the level of transparency that we’re dealing with.” – Stani Kulechov
• The proposal allows for public discussion and contributions, reflecting the community’s preferences.
• “Part of the proposal is that we don’t always know exactly what everyone wants.” – Stani Kulechov
• Criticism and feedback are essential for the health of the DAO and its proposals.
• “Having any sort of criticism is actually really healthy.” – Stani Kulechov
• Aave’s approach to governance emphasizes the importance of community involvement and transparency.
• The DAO’s structure allows for diverse input and ensures that proposals align with community needs.

Strategic shifts in Aave’s revenue model

• Aave Labs is shifting its revenue model to enhance clarity and value capture for the Aave token.
• “Creating this clarity where all the revenue goes into one certain address is the best approach.” – Stani Kulechov
• Aave Labs is foregoing significant revenue to create a more sustainable model.
• “Labs is foregoing a lot of revenue to the labs.” – Stani Kulechov
• The protocol’s unique model collects fees from both protocol activity and external application layers.
• “It’s a very unique model where the protocol is collecting on the protocol activity fees.” – Stani Kulechov
• Aave’s strategic shift reflects a commitment to long-term sustainability over immediate revenue.
• The new revenue model aims to align with the token-centric focus of the protocol.

Challenges and opportunities in DeFi governance

• The Aave DAO’s lack of a legal entity creates uncertainty for contributors and challenges in enforcing trademarks.
• “One of the challenges that the Aave DAO has is that it doesn’t have a legal entity.” – Stani Kulechov
• The proposal requiring disclosures of wallet ownership was rushed and not well thought out.
• “The proposal was really rushed and done really quickly.” – Stani Kulechov
• Token governance should ensure that contributors have skin in the game while maintaining fair voting rights.
• “I truly believe in the token government and having skin in the game.” – Stani Kulechov
• The proposal’s components are interconnected, making it essential to vote on them as a whole.
• Aave’s approach to governance reflects the complexity and challenges of managing decentralized organizations.