The DeFi space is exploding at the moment growing from $1Bn to over $3Bn in three months from May to July. A major contributor to this has been the meteoric rise of Aave. Could Aave be set to be the darling of DeFi? Could this potentially be the trillion dollar bridge linking DeFi to the traditional financial system?
Most of DeFi’s surge to date stems from “yield farming”, which refers to incentives offered by DeFi projects to people who deposit their crypto assets on a particular platform. These incentives are often in the form of tokens and has led to something eerily similar to the 2017 ICO craze. That has attracted a lot of attention to DeFi from speculators, but it has done little to demonstrate how DeFi can compete with the traditional, centralised financial system. In other words, arguably a red herring for those seeking true technological and financial breakthroughs.
What makes Aave’s surge different is that it’s growth has been driven by an actual breakthrough it calls “Credit Delegation”, not through yield farming.
Aave’s founder, Stani Kulechov, thinks Credit delegation has the potential to move DeFi from a high stakes game between crypto speculators, to real world applicability and real world value. The market seems to agree. Here is a visual Stani shared which shows some of the technical detail behind the credit delegation methodology:
Currently all lending on DeFi is fully collateralised, which is not very useful if you actually want to make/take a loan in the sense that we are used to in the traditional financial system. Up until now that has been due to the anonymity of DeFi and crypto where making a loan to an anonymous person is a sure-fire way to be scammed.
With Aave’s Credit Delegation, two people enter into a legally binding credit agreement (assume the lender has performed a credit check on the borrower) which is repayable in crypto via Aave’s platform.
The longer term vision is that eventually the credit worthiness of the borrowers will be more easily determinable (e.g. decentralised credit scoring or the use of credit scoring oracles) or trusted (e.g. a history of repayment) that the lenders eventually wont need to know the borrowers’ businesses that intimately anymore. That is why Aave thinks that it has the potential to become a fully decentralised debt system – the DeFi version of the traditional lending system an important, missing piece on the DeFi lego set.
The market sentiment seems bullish, with the Aave token rising over 500% in recent days. Aave also recently closed a substantial round of VC funding which, coming in the middle of the COVID-19 pandemic, seems to be a vote of confidence in the quality of the Aave team, systems, prospects and vision.
With Aave’s Credit Delegation, two people enter into a legally binding credit agreement
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