Fireside: Stablecoins as Infrastructure: Powering New Markets, Yield, and Financial Use Cases

Stani, how's it going? Good. Good. And how are you? Nice Nice cap.

Thank you. Thank you. The official ETH Bushwick Six and Sides hat. You might see it around. Thank you.

Thank you. So, stablecoins, let's get into it. Uh DeFi it has deep liquidity, but not enough places to use it. What's been missing so far? Yeah, I mean um I I I I think DeFi has become uh even more clear um a place to transact.

And and I I think there's obviously like uh different sort flavors of stablecoins. And but when you look at the on-chain liquidity that is um accumulating. And um you can measure that um not only on the you know, volumes that are for example traded, but for example how lending protocols are able to actually liquidate positions. And those that liquidity um exists. But I um I I I I think that there is one category of these uh payment stablecoins that that is completely a separate topic.

And I think it's also uh a big part of uh uh part of DeFi. Um I think one uh exci- exciting uh category is uh stablecoins related to credit. And and that is uh something that we are uh working quite hard at at Aave and trying to understand how stablecoins can be used in uh credit issuance. Uh Aave native ghost stablecoin is sort of uh by nature as a over collateralized stablecoin or uh as a CDP model serves that purpose uh quite well already. Um And it is backed by obviously these um uh over collateralized crypto native uh positions.

Um and what we we want to explore more is to understand how to to use what DeFi has solved really well over the uh past uh two to three years. Which is this uh enormous enormous capability to aggregate uh liquidity uh into financial opportunities. And giving an example is that uh whenever there is a risk-adjusted opportunity in DeFi um the liquidity moves uh in most cases programmatically uh to that opportunity. And that is like a really uh fundamentally big problem to solve. Um And now in DeFi we more or more have a equilibrium where there's surp- surplus of liquidity.

Um and we need uh more um collateral demand uh credit opportunities. And and that's where credit and stablecoins can be play a a very uh big role in the future. Yeah, so when it comes to stablecoins um and it becoming the foundation of how liquidity is used and how markets form in DeFi, why is that the case? Yeah, I mean you mean why there is um Like some stablecoins are like the center of liquidity for different use cases as compared to others. Yeah, I mean yeah.

And this is probably a um a topic for any team that is uh thinking about stablecoins uh issuing them and try to sort of understand like what are the flywheels of of growing a stablecoin. Um and obviously the the first reason why um people want to grow a stablecoin besides um let's say for like a payment uh use cases is that a lot of these stablecoins are um having some sort of underlying yield, right? So, there is a um underlying strategy that is earning T-bills um which is the most sort of a typical uh stablecoin uh structure. Um there is a historical reasons why some stablecoins are larger than other ones. Um USDT is a great example.

So, when we started building Aave and before even Aave uh EthLend, um there wasn't really stablecoins on on Ethereum at all. So, um everything was transacted with uh ETH uh at those uh good old times. I don't know if anyone uh remembers. Um the the old small uh world of DeFi uh almost a decade ago. But then you had obviously uh USDT and Tether.

Uh um sorry, USDT and USDC. And historically they filled a important gap, which is how do you hold stable value? So, I think that's a lot of the more recent growth on newer stablecoins is driven a lot with the incentives. So, incentives are driving um pretty much like all of the growth. And when the incentives uh reduce a lot of that growth or usage actually goes um elsewhere.

So, that is just the nature of um a lot of uh replication of the same uh types of uh strategies. And I think what is going to uh be interesting is to see stablecoins that have a very particular use case. Or they don't even necessarily fill the whole condition of a stablecoin. Um appear as a sort of um um stable value, but have a another purpose. And I think yield-bearing stablecoins are uh that category where actually uh the use case is more of a asset management and investment use case uh where that stable value actually then acts as a as a sort of like a form factor rather than uh stability.

And those stablecoins will grow uh significant. And we've seen in Aave also with the um uh Ethena uh Pendle uh example where yield-bearing stablecoins can actually get even uh further growth by being used as a collateral in Aave uh and expanding that uh use case. Yeah, you mentioned incentives, which I think are important to bootstrap a stablecoin. But you don't want to rely on them for too long. Otherwise, you're spending money you may not have.

And then it's kind of like you're getting high on your own supply. So, I feel like the next stage of stablecoins is to move beyond incentives and for the stablecoins to be in as in good as in their yield. Um I'm curious what your thoughts are about that and the future of incentives in DeFi. I I think actually I'm very um bullish about incentives because I do think that uh on-chain is a really particular good infrastructure to uh reward certain type of activity. Um so, you supply let's say um you supply a stablecoin into uh Aave, you get some sort of uh um yield for that uh and and reward.

Um But in the future these incentives can actually be more uh behavior-based. Um and uh you can go quite deep with on-chain data to to craft these uh different incentive campaigns. And the on-chain is really good for distributing uh incentives. And I don't think there is any other system uh in the world that does it as efficiently and transparency transparently as as uh DeFi does. So, from that perspective I'm I'm I'm quite um uh optimistic.

Whether it's actually is a growth mechanism that is um maybe something that stablecoins won't be able to rely on uh long-term. Uh and there needs to be some sort of uh uh differen- differentiation on on different use cases. Yeah, and Aave V4 is coming out soon. I'm curious um what what changes it'll make in order of like making new markets for stablecoins and how it will affect markets for stablecoins with Aave V4. Yeah, there is uh obviously what I was talking about earlier um the the credit use case and and and using uh stablecoins on the credit issuance is is a really big opportunity for us.

And Aave V4 um it's a next generation of uh of the protocol of of what we we built in the past. But one interesting uh uh difference uh is that um it's a very modular uh architecture. So, what can happen is that typically in DeFi we lend against ERC-20s uh fungible assets. Um there's going to be lending against uh ERC-71s. Um and I'm not talking about uh NFTs in in terms of like um art and so forth, but actually uh different obligations um that can be tokenized.

Um and RWAs as well. And and also more native uh interesting uh non-fungible uh collateral. Uh but a third uh category that I'm really excited about is actually lending against uh data. Um and this then means is that now that we built in DeFi this really uh enormous and efficient uh capital allocation layer um where liquidity flows into uh risk-adjusted opportunities, the next uh chapter and and um opportunity is to actually solve uh the demand side. And a lot of the uh financial uh opportunities to pursue is actually outside of on-chain.

Um but it's value that can be brought on-chain. And RWAs is is big part of that. I think um uh tokenization is bringing a lot of value uh and a lot of financial products. Um and I think that's um what Aave Horizon is doing where uh stablecoins are lending against uh these uh more traditional assets that exist on chain gives a a very unique uh risk opportunity uh and risk profile for uh stablecoin lenders. But the the uh category of lending against data could be actually lending against uh payment receivables, uh lending against uh consumer loans, uh business loans, and and also institutional credit.

Um in those cases we might not even see any uh sort of tokenization because it doesn't necessarily make sense as a uh accounting uh and and settlement unit. The data part's really interesting to me because that hasn't been done before. I'm curious to go into that more. Uh the data part you said account receivables, maybe streaming. Can we go into more of that part of Aave V4?

Yeah, I I think that uh the the data pieces are particularly interesting because Aave's um Aave V4's architecture is based on a hub-and-spoke model where uh liquidity is stored in a in a hub and then credit lines are issued to these different uh spokes. And spokes um are where you have uh collateralization, you have the borrowing uh logic. A great example to think about is is is that uh in some ways the hub is kind of a central bank in a in a spoke is a commercial bank with their own uh loan book um and risk framework. And and then from that sort of like a central bank you're going to get uh credit lines to these uh different use cases. And what we noticed uh a lot and one of the ideas why we built this architecture is that there's a lot of uh builders in the space uh building DeFi.

And And I think most um thing most exciting things aren't still yet built. I think there's a lot of room to innovate. Um obviously a lot of low-hanging fruits are uh existing. And the Aave V4 hub-and-spoke model is a great way of actually uh plugging new innovation uh into Aave uh and being able then to scale uh these new use cases and products uh with the liquidity deep liquidity that Aave has. And that is actually the the uh number one um problem statement that I uh keep uh hearing from a lot of the DeFi builders that um it's the there's a lot of interesting projects being built um and there's a lot of great builders here today.

Um but it's really hard to actually bootstrap your product. So being able to innovate and plug that innovation into Aave um is a massive um um

[clears throat]

massive for innovation uh in DeFi. And I think one next wave uh is going to be credit. So, you know, how do you actually access Aave's uh capital and can allocate that um across credit opportunities uh in real life uh for consumers, businesses, institutions um and do it more uh in a sort of less trusted, more verifiable, more transparent, and automated way than the traditional finance uh is doing. Now, going back to stablecoins, how should we think of them today? Should we think of them as assets?

Should we think of them as infrastructure? Maybe somewhere between the two? Um Yeah, it really depends because the stablecoin uh form factor uh captures a lot. Um and I think that's it's a big mistake because uh we're going to see things that we call stable um that necessarily won't be stable. Um and we already see some of these uh symptoms as well.

And I think that's that is something that especially when DeFi is starting to scale uh towards mainstream, we see more fintechs uh integrating um DeFi. We We for example had a uh really big integration with Wabi, which is a e-commerce platform with 21 million users now able to access uh Aave thanks to Veda Plasma uh and these partners uh that provide that uh integration. Um a lot of these users will be trusting on using stablecoins. Um And um in my opinion we need to start categorizing a lot of the uh the innovation that we have. And I think it's already happening a little bit.

We have yield-bearing stablecoins and there's some consensus uh around that uh what it actually means, the risk, and they look more like funds. Um but there's a lot of work that has to be done there. So, I think that um for people in Argentina stablecoins uh is an asset because they can um escape uh inflation that is eating all their uh basically at the hard-earned uh money. Um you know, in some other part of the world uh for example users that are using Wabi stablecoins might mean a better transaction settlement um and and also access uh uh to financial opportunities like like like DeFi. So, I think there is a uh now a a a a kind of like a over categorization on the world uh word stablecoin and that has to be broken down.

Yeah, I think the Wabi integration is really cool because Wabi is not even a crypto platform, it's an e-commerce platform. And they're plugging into crypto rails. And if you notice in their promotion of it, they didn't even mention crypto at all. They're like, "Earn 6% on your yield." And then it's you guys, it's Tether, it's Plasma.

Can you go into the Wabi integration more? Yeah, it's really um exciting because um the whole path towards how do you get into DeFi is solved. First of all, um Wabi is a uh small startup started very small uh with a big idea solving their own problem of how to actually sell uh online uh digital goods for example. Um you know, and there's different components. There's obviously like uh payments, there's PayPal, there is Zelle.

Um you know, and and there's a lot of uh uh sales happening on for example Discords and you have to automate things. So, they created end-to-end solution to manage um the uh the sales processing including the transactions and the payments and so forth. So, um uh the onboarding happens through uh MoonPay. You have wallets through uh Privy and and Tether's uh wallet SDK. Uh USDT uh zero for for also for the uh stablecoin.

You have Plasma for low-cost transactioning on the on the network. Um you have Aave for the financial opportunities and then you have Veda for the uh financial uh infrastructure. And then there's a lot of teams that have been actually involved uh including in the Aave ecosystem uh to make this integration uh happen. So, uh it just showcases kind of like a how you can build a full earn uh and transaction stack uh as a fintech. Um and that probably is going to be the example uh for the whole fintech space how to get closer to uh stablecoins and and also DeFi um in in in a way that it actually helps uh the users.

Yeah, truly the future of finance. Yeah, it's sort of um having uh fintech in the front and Aave in the back. Uh you mentioned yield-bearing stablecoins before. Um could you define what a yield-bearing stablecoin is to you and how they should be categorized in the future? Ooh, yeah, that's um uh there's probably like a like a better categorization somewhere, but my uh thinking is simple is that uh there is a dollar-denominated or some other currency-denominated um asset uh that has uh a yield component uh into it.

And then there is a some sort of strategy uh attached uh to that yield. Um we've seen also strategies that are CeFi strategies, basis point trading uh for example when there was a lot of uh

[laughter]

upwards movements on the markets, um it can be arbitrage strategies as well uh in the traditional finance. Um can be also some um uh more native uh native strategies. And And the typical arbitrage is that you might have a yield-bearing stablecoin that produces uh a yield that is um and then you use that as a collateral in Aave and then you borrow um stablecoins at a cheaper rate and then you leverage that position to maximize your uh return. That is a a a probably example how to define the yield-bearing stablecoins. Yeah, and when it And also like a really simple strategy that that anyone can execute.

Yeah, and when it comes to stablecoins, um how do you see connecting on-chain liquidity to real-world assets? Yeah, I think that uh a lot of real-world assets won't necessarily have on-chain liquidity. Um first and foremost because it's really hard to to build. Um it's costly. Um and the second thing is that if you have a traditional financial uh product that has already a market somewhere, um there is less appetite to actually make it more liquid uh on chain.

So, I think that's uh sort of like uh the incentives are not necessarily there. Um and on-chain liquidity kind of feels like in public markets when you have a um a company that list lists their shares in let's say Nasdaq but then they have a same shares in some smaller European stock market and and no offense to you know to Europe and or anything like that but just showing kind of like if there is already really liquid market then there is less appetite but I do think that's where it's really helpful is you know where you actually want to take investments on chain and channel them to tradfi or you take investments in tradfi and channel into on chain and you need that liquidity element there and of of course I'm more a fan of moving value in on chain than out of on chain and I think that Biddle had a kind of a USDC redemption fund on chain which was sort of facilitating a lot of that liquidity because when you go off chain you have these problems that RWA's have which is T plus two liquidity and that introduces obviously like the world that we all are trying to escape escape from Yeah and one final question we've seen the past you know five six years D5 TVL it double topped around 250 million first in 2021 then in 2020 for 2025 what do you think it will take for D5 to get past that to go parabolic to you know 500 billion a trillion Yeah I mean first we have to be really proud what we built D5 has existed in less than a year year less than a decade

[laughter]

It feels like a year it feels like a year So we have to be very proud what we built so far and all the attempts on on all the different products and and I think that's D5 has proven to be very resilient right so we had these major protocols running really well you know year after and cycle after cycle without seeing any major challenges so and also they're built on the most volatile assets we can imagine so D5 has really proved its resiliency and these native assets and use cases will keep growing I think tradfi will start integrating more the D5 infrastructure there's going to be more Bitcoin and and Ethereum collateral and and native assets I think yield bearing stable coins are a category that will grow and then just the credit aspects being able to lend against traditional credit is really important and I personally think that a lot of the growth will come from RWA's but not necessarily just RWA's that already have markets in traditional finance and are traded a day-to-day basis but but actually you know infrastructure that can be that can be anything from from the future that we are going towards which I call like the the sort of abundance assets that can be solar batteries energy in general that can be GPUs as well and things that really matter as an infrastructure in the future and these assets don't necessarily have the same trading markets as as assets that are already listed but what for example Aave's perspective what Aave does really well and why it's viable is that you can't actually go to a bank and give them your Ethereum or Bitcoin and get a loan for example not as of today I mean I tried

[laughter]

but that means that a lot of the these native assets has been unbankable for for years so the key is to find a lot of these opportunities where the technology risk is high enough that maybe banks and financial institutions aren't ready yet to to bank against these assets but D5 actually will and that's how D5 can get more growth near term and that's what I'm expecting where the things are going to head towards in upcoming years Stani thank you so much Thank you