Welcome to the alpha please newsletter. We curate alpha for you. That’s it; that’s the newsletter.
Gm everyone, today’s newsletter is the start of a new series. The goal of this series is to shine a light on the ongoing activity in the bear market, but also to gain a wider perspective on where crypto is heading from the fascinating individuals working in the space.
First up is Marc Zeller, Strategy at AAVE.
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What’s your crypto origin story?
Well, it's super simple and pretty common among most OGs. I discovered Bitcoin because of drugs and the darknet. Of course like everybody, I spent a full Bitcoin at $80 in 2013 to buy some weed and that was not the most intelligent financial decision of my life to be honest. My first sense of Bitcoin was like, this is economic nonsense because you cannot create money without inflation. And that was, with my current understanding, just a bad idea.
I had previously seen the altcoin era of 2014 from a distance, before a good friend of mine introduced me to Ethereum in 2015. So when my friend told me of Ethereum, my first reaction was like, fuck off, it's just a new bitcoin, there's a new one every week and it just doesn't work and this shit is worthless.
And he told me, wait, there's something different, there are smart contracts and the world computer and all that stuff. And I was like, okay, tell me more. Being curious at that time changed my life in many aspects.
In 2015 I decided with a few other friends that were technical to create Ethereum France. We got contacted by the Ethereum Foundation to organise a community conference in Europe, which started in 2016 has been happening every year since.
Alongside that, I joined the ecosystem as a full time job in 2016, with Consensys, where I worked on research for stablecoins.
In 2019 I joined ETHLend because they were going to pivot to what we know as AAVE now. I gave support to the creation of AAVE and have worked here ever since.
What do you think we learned from the last cycle as an industry?
We learned much and nothing at all. This cycle was much better than the previous one. The ICO cycle of 17/18 was people basically selling PDFs, whitepapers and dreams - that was basically it.
We got a lot of crap this cycle. But, all of them were actual applications on the blockchain. Actual usage of the blockchain network increased by orders of magnitude this cycle. We had live code, applications, DAOs and an actual ecosystem. We have full DeFi, we have the NFT space, we have many other layers of the industry.
I think this is the first cycle where nobody is saying, even if the price is down, crypto is dead.
I think the ecosystem found enough product market fit to last for a number of years. So, that's very different and I hope we are starting to learn we should not have cults in crypto, especially in DeFi. We had a lot of personalities that attracted a lot of capital and attention and the whole idea of DeFI and crypto in general is decentralisation; and not to give too much importance to a single entity. So my hope for the next cycle will be to have less superstars in the ecosystem and more builders and protocols that speak for themselves.
Why did AAVE survive when so many DeFi platforms didn’t?
It’s a scary responsibility to be the last one standing. We are basically the last DeFi protocol that never been exploited, or hacked, or have any mention in rekt.news.
From 20-22 we spent $1.6 million on audits for AAVE V3. I think that's the largest audit spend for any individual application. We do anything that is humanly possible to keep our users safe. And so far it's as proven to yield good results. But obviously zero risk doesn't exist.
How would you describe AAVE today?
Well, as an insider what is happening today was almost perfectly described to me when I joined EthLend in 2019.
AAVE’s vision is quite complex and it will take years to reach that maturity, but we are basically building that step by step along the way.
You had V1 with the introduction of flash loans, with the stable rates, with the a-tokens, all things that did not exist at the time in DeFi. Then you had V2 with orders of magnitude improvement in gas costs, new features and functionality. Now you have V3 and that is much safer. And then we have in the pipeline the stablecoin (GHO), which is good. You also have the content creator protocol, monetisation protocol, which is Lens or social media. And also you have like the institutional part, which is not that much public yet, well obviously it's not hidden, but it's not accessible to the public yet. And all of this is basically working together into some form of roadmap and there's still a lot of stuff to do.
I tweeted the other day that AAVE had only delivered 5% of what was planned.
One of the good things working with Stani is having this vision. This guy is able to have a plan over years, and he knows that it's going to be hard work, it's going to be step by step work, but we just keep going to execute.
What is the other 95%?
Yeah, there's a lot of stuff that people already know but somewhat forgot. Like for example, more than a year ago we tweeted about the debit card and because the attention of DeFi and crypto Twitter is very low people forgot about that. But since then we got the electronic money institution license and we have a full dedicated team on that.
We already announced there will be an AAVE app and wallet, it’s going to be one-stop shop for the social media and DeFi services on top of fintech services. And we're using the stablecoin (GHO) as the main currency.
Many things are already public. We are not working in the dark. We just release stuff step by step. Obviously we put more focus on stuff that we are able to be deliver in the short term. Like for example V3 on mainnet, and GHO, that's going to happen in the next few weeks most likely.
It’s funny, nobody on Twitter is writing a thread saying “oh maybe they released a stablecoin and in the technical paper on the stablecoins the revenue of the stablecoin goes directly back to the protocol. So, maybe part of this revenue will go back to the staker of AAVE”. And it's something I say publicly, but maybe no one cares or wants to focus on it.
The only thing we do at the AAVE company is work on technical stuff. We make sure they are mature, they are safe, they are audited and then we present that to the DAO and we say, okay, we worked for a year on something called a stablecoin. The name is GHO. Do you want GHO? And basically this vote happens directly on the governance contract and the implementation is done by the governance contract. So, that's a new way to work. It never existed in the past in other industries. You have a team contributing to a protocol and then a community of token holders taking the governance decision and making things happen or rejecting them. That's quite cool in my eyes.
Why is GHO needed and why is going to be important?
Two answers to this. In the context of AAVE, when you have one of the largest, if not the largest liquidity protocol, it's a natural path forward to have a decentralised stablecoin because there is very little difference in economic terms between the ability to use ETH to borrow USDC, then using ETH to be able to mint GHO. That's basically the same thing, it's the same market and basically the stablecoin for AAVE is not discovering a new field, it's just an expansion of what we know and have done for the past year. And because the protocol already formed a critical mass of liquidity, it makes sense to enable these services because we already have all the liquidity in place, the actor in place and the brand in place to allow GHO to be a potential success.
The second thing, in the context of AAVE, a stablecoin becomes the centre of gravity for all of these services to work together. And it makes much more sense in terms of efficiency to have a stablecoin be the main currency, or at least one of the currencies of Lens, and also something that you can use to provide liquidity into services from the fintech part and used to go back to fiat with the fintech part as well.
In a more general context, I think the full ecosystem is basically addicted to centralised stablecoins or fiat coins. And I think the only solution is to reduce the importance of assets such as USDC, which are not bad assets, but they are definitely a single point of failure.
USDC is most likely around 80% to 85% of the backing of DAI, and that's probably going to be around the same thing for GHO initially. But, I wish in the future this ratio for DAI will be maybe 50% USDC, 20% GHO, 20% curve stablecoin, and then 10% something else. And if we have more and more decentralised strong stablecoins, we can decrease over time the importance of USDC in the ecosystem.
I'm in favour of GHO, DAI, CRV, FRAX or any kind of decentralised stablecoins because I think strong diversity will allow more diversified collateral from the stablecoins that will make the ecosystem more resilient and also more censorship resistant.
When can we expect Portals to drop? Wen CCIP?
Portals have been pushed back a bit in terms of roadmap. In order to have Portals you need V3 basically everywhere. V3 was supposed to be released earlier on Ethereum, but it’s going to be in the next few weeks, so that delayed portals launch as well.
The current plan is to release V3 on Ethereum mainnet first, then release GHO and then activate Portals.
In terms of the infrastructure for Portals, the current roadmap is to have a V0 and V1. The V0 being just credit lines using trust assumption. So whitelist entities such as bridges, such as market makers, that can basically mint a-tokens out of thin air in the context of credit lines and they are incentivised to replenish their credit line so it's portable. This is “just in time” cross-chain liquidity on any market where AAVE is in exchange of paying an interest rate to the protocol.
We have this V0 implementation because we don't have access to the actual cross-chain interoperability protocol infrastructure. That’s what CCIP means.
So right now the two most mature actors in the industry to deliver that are Chainlink with CCIP, who we have been working with since day 1, and Layer Zero. None of them are mature yet to be honest, none of them satisfy our very high requirement of safety and security of decentralisation. For example Layer Zero is heavily centralised at this point in their current form and CCIP is just not available. That’s why we have to stick to V0 for now.
When we have a strong cross-chain messaging solution we will roll out V1. V1 will have dynamic credit lines, like cross-chain collateralisation of those credit lines and also that will allow other use cases than just bridging to move liquidity around. With actual cross-chain messaging infrastructure you will be able to have cross-chain lending and borrowing positions. So if you have some LINK on Ethereum and you want to have access instantaneously to USDC Polygon, you will activate this Portal through a third party dApp and basically your debt will be on Polygon and your collateral on Ethereum and that's the long term vision for Portals.
Do you get regular updates from Chainlink on CCIP?
We have a weekly call with Chainlink about CCIP and other synergies with them. We have a very good relationship with them. They have the same very high security standards as us. They won’t release something unless they are 100% sure it is safe for the public to use. And that’s why you don’t see Chainlink and AAVE in rekt.news.
Will AAVE be deployed on non-EVM chains?
The answer is yes. And it's already been voted. That's going to be StarkNet with Cairo. That's already something that has been budgeted, and has a budget from the DAO and a working team deployed to that, which is BGD Labs for the last six months. That's expected to happen in 2023 when StarkNet goes public.
AAVE is definitely not EVM maximalist. But, there is some analysis required. Non-EVM means that all your expertise in Solidity goes to zero instantly because that's not the same code. So if you are a world leader developer on Solidity you may be shit at Rust. That's a fact because some skills don’t magically transform when you change the language. You need to find or convert your current talent into something that is compatible with the new environment. Acquiring new talents costs three main currencies which is time, focus and money.
The second thing is that when you rewrite all your code base into a new language, the auditing firms that you are used to working with are basically useless, because the best firm in the world who can verify Solidity smart contracts have no track record with Rust, or other smart contract language. So you need to find new auditing firms which you have no experience with and no relationship.
And the third thing, does this new chain justify the cost? When you do six months or nine months and spend $1 million to go into Solana and it doesn't work, you basically wasted the DAO’s money. So that's something that people should be aware of.
Maybe Solana is an edge case, but for example, there are a lot of people in the Elrond community that say “when AAVE on Elrond?”. And I say, “well, never (lol), unless you 100x your number of users and TVL.”
The thing that pushed us into StarkNet is that it's a game changer. It’s an actual L2, compatible with Ethereum and eventually settling on Ethereum. But, because it's non-EVM, there's a big difference in terms of, for example, computation.
When you do something on the blockchain, everything that you do on the technical side of things costs money. So if you store some data, it costs money. If you change a variable, it costs money. Anything that you do costs money. And one of these costs is computation.
On Ethereum, doing maths on the blockchain at the smart contract level costs a lot of money. On StarkNet it is almost free. Right now DeFi is simple and stupid, not because we can’t do maths, it’s because complex maths costs a lot of money. The risk parameters, the interest rate curves, they are like super simple and stupid right now.
And what is exciting about StarkNet is that we will be able to basically create a V4 of AAVE there. It's not something that is mature yet, but it will have much more eloquent mathematics, optimisation and efficiency. A whole different league. That's why it's interesting in terms of experimentation for us.
Where does Lens fit in in the overall AAVE vision?
It's a new way for content monetisation and because you are a content creator you know how shit web2 is when you create content to monetise it. Lens will supercharge the abilities and the revenue of content creators. And I think that's clearly compatible with what we do at AAVE because there's a lot of bridges between the liquidity protocol and the content creation.
For most users, the only visible link will be GHO and I think most of them don't even know DeFi, but they will use GHO. For example, they will use their credit card in order to buy GHO and basically support their favourite creators. But on the content creator side, it's going to be a game changer. Most, if not all, of what is given by their community will go directly to them. They will have access to direct on ramp and off ramp out of crypto. They will be able to do cool stuff with their audience, which is basically not possible with web2.
I have a YouTube channel with a large audience and YouTube takes 60% of all the ad revenue, possibly more. Twitch is the same. When someone subscribes to my Twitch channel they pay like €4 I think and I make less than €1. The rest goes to Amazon and that's super shitty.
With just a fraction of the community I have on Lens compared to Twitter, I have made like $350. That’s a lot of money. That was during a month when I was posting AI generated art. I have never made a cent from Twitter (70k followers). I'm very excited to see how it develops.
What are you bullish on over the next few years?
I think the upcoming narrative in DeFi will be LSDs, liquid staking derivatives. I hope LSD as the acronym sticks, that’s quite fun. LSDs are the best kind of collateral.
When you have stETH, you have that sweet 5% yield in ETH and you can use that to basically borrow DAI and spend, or borrow more ETH in order to convert that into more stETH. And depending on your leverage and collateral, you can increase your yield and make sure that you have a leverage directional bet on ETH. So it's up to you. I think it's a great form of collateral, because if ETH is stable, in one year your collateral will be 5% larger and so on and so forth.
The experimentation of that started with stETH on AAVE. That was a large success with $3 billion for deposits and around $1 billion of borrowing. I think we basically spread that into Polygon with stMatic and MATIC X. There's a governance decision to make MATIC borrowing more efficient and once that passes there's going to be an Instadapp feature so you can do like leverage on Matic.
I think more and more LSD diversity will be better for Ethereum as well. Because right now Lido is like 30% of all staking on Ethereum and it's better if Rocket Pool, and StakeWise, and the other alternatives grow in order to have a more decentralised ecosystem. And a good way to do that is to onboard more LSDs into DeFi. I only own 1 ETH. The rest is staked directly with my own validators or with stETH. It doesn’t make sense to have naked ETH outside of paying for gas. If you have ETH it is better to stake it, or use staked ETH as collateral.
And the second thing in DeFi that should grow more is using LP tokens as collateral, something that we actually pioneered at AAVE in 2022. The market was not mature enough yet at that point, so it was not a huge success. But I think the market is mature now. And to me it makes sense to have, for example, curve LP tokens or 3CRV as collateral to borrow other stablecoins and do a leverage bet on that.
For example providing liquidity on Convex, or even curve stETH, because at the end of the day the underlying asset is ETH and that could be a great form of collateral because you get the incentive.
I think it's the time right now to increase the efficiency of DeFi because most of the basic primitives have already found product market fit and now it's time to increase profitability and efficiency.
What could also be interesting is the layer 2 of DeFi, so layer 2 as an application. We already know the principles of money legos, but that’s just stacking yield and yield farming stuff. It’s not that efficient. Protocol layer 2s are better. For example, there is a layer 2 of AAVE called Morpho. Morpho allows you to have a P2P layer on top of AAVE. If you have stablecoins you provide that into Morpho and you will get the AAVE yield or a matched yield with a P2P borrower on the Morpho level. So, as an LP you get either the AAVE yield or better than the AAVE yield and never less. So, your situation is always the best, as a borrower you get a lower cost than the AAVE cost.
I think we will have more yield derivatives . There is a ton of things that already exist here. I think the first one was 88MPH which allowed people to get their yield in advance, so you lock your collateral and that collateral is deposited into AAVE and you get your yield liquid in advance. You have a number of protocols like this Element Finance, AP Wine etc. And they haven’t got traction yet, but I think these are powerful projects for the future if they get more efficient. And maybe a good way to market it will be to focus on the buy side of things, focusing on who is ready to buy that yield. For example, if you want to buy LINK and are ready to DCA for 6 months you can basically buy at a discount.
Obviously, cross-chain positions will be powerful in the future. There are so many things. There is so much to build.
Any words of wisdom for crypto investors right now?
Well, DCA is good.
And that’s your alpha.
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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Do your own research.
This is interview was fantastic to see the future of Aave and DeFi.