Founders' roundtable: 1inch, Chainlink, Aave on what's next

[00:00:08] Gareth Jenkinson: Welcome back to another episode of Decentralize with Cointelegraph. I’m your host and managing editor, Gareth Jenkinson. This podcast was recorded at Cointelegraph’s exclusive Longitude side event during Token2049 in Singapore. In this conversation, 1inch co-founder Sergej Kunz, Aave founder Stani Kulechov and Chainlink co-founder Sergey Nazarov discuss why DeFi protocols are crucial to the future of Web3 and mainstream adoption of cryptocurrencies.

Genuinely, I’ve been looking forward to this panel all week because three really big names in the space: Sergej, Stani and Sergey. Welcome, gentlemen. I’m just going to fire it straight away. It’s been a big year for DeFi, a big year for all three of the protocols that you guys are involved in. The name of the panel is “Why DeFi Is More Important Than Ever,” and there’s no one better in the space to tell this group of people and our readers out there why DeFi really is the future for what we’re doing. Sergej, maybe you can just take us away first.

[00:01:07] Sergej Kunz: From my point of view, we, in DeFi, decentralized finance in general and Web3, remove the complexity of what we have right now in traditional world and traditional finances. So, we try to implement things completely differently. What, for example, Hayden did, introduce liquidity pools. Actually possible in traditional finance, but it’s highly complicated, and not everyone can access it. So, we have now more accessible financial instruments and also other Web3 instruments like decentralized social networks. What Stani is willing right now. We just try to make things more efficient and simpler.

[00:01:45] Gareth Jenkinson: Stani, you have been diversifying a little bit, right? I mean, started off all with Aave, and now we’ve moved to Avara. You guys are doing many interesting things. Lens. But over to you, why do you see it as the future of finance in general?

[00:01:59] Stani Kulechov: It’s quite interesting because I first started basically building Aave and ETHLend back in the days from more of a kind of a hobby perspective. So, it was a side project that took a lot of time and eventually became something that users actually wanted to use. And that was a very early time, sort of like 2016,17, where half of DeFi users are on the stage, and it was very small of community. And over time, like convictions started to become that, you know, this could be like an infrastructure that could be used by all the people of the world because essentially it just provides a resilient way to interact with finance. And not just resilience, but also in a way that a financial system that doesn’t look into your background, your age, your profile. It gives you the same exact same service, regardless of your background and globally and equal access. And we still live in a world where half of the world’s population doesn’t have an access to a dollar, or even a stable currency, or even a yield to combat against, for example, inflation. So, I think it started kind of like as an ambitious idea. And I do think DeFi has grown significantly. Thanks to everyone who is here on the stage and has been building a lot of this infrastructure. But it’s still relatively small. So, I do think now is an important time to build because DeFi has been able to show its resiliency.

Aave protocol, it’s working on 14 different networks. And regardless of what’s happening in the markets, it’s been able to actually be resilient of the market fluctuations. When I started building in the early days, there was a lot of centralized competitors. There was BlockFi, Salt Lending, Celsius, Genesis lending, and they don’t exist today. And mainly because we built something on a very open infrastructure, transparent, something that is governed by the community, and we’re able to build a resilient piece of infrastructure. And now we are seeing also protocols like Aave and many other ones are actually making revenue. And that revenue is actually also used to incentivize more users, distribute governance power as well. And that actually showcases that you can build something really fundamentally important in DeFi and actually that can be profitable for the community as well. So, and that actually draws more attention. And now we’re seeing more even excitement from traditional finance to come and build. And that’s why RWAs are, for example, an interesting topic these days. So, I mentioned this before: I feel like there is a DeFi renaissance going now based on like fundamentals, based on actually resilient protocols, making revenue, optimizing things. And I think that’s why we are all here.

[00:04:42] Gareth Jenkinson: So, yeah. On the far end, none of this would really be possible without oracles, right? And Chainlink is becoming a very important cog, not only in DeFi but now branching over to TradFi. And you had a fascinating talk yesterday at Token2049, where you spoke a lot about institutional interest and how oracle networks like yours might just be the infrastructure that brings it all together. I think for me, this is a big reason why this panel is titled what it is, and I think you have a very important story to tell in terms of why DeFi is so important.

[00:05:14] Sergey Nazarov: Yeah, so, in like the internet analogy, tokens, initial cryptocurrency tokenization is like email, with a relatively niche user base of like universities, and DeFi is like e-commerce. So, DeFi, I think, proved that blockchains are useful to make highly reliable financial products beyond methods of ownership. Before DeFi, blockchains were systems of ownership records. After DeFi, you actually found a use for smart contract that provided economic value separately from tokenization. It really expanded the scope of what our industry is about, and the way it did it was by creating yield, by providing highly reliable and, at the time when it would boom, greater yield than you can find in the traditional financial sector. And so, Aave and Stani and that whole community deserve a lot of credit for that, of generating a highly reliable, secure mechanism to generate yield, which is one of the most basic fundamental building blocks of the traditional financial system. This is what a lot of the financial system does, is generate yield at a certain level of risk. So, it kind of graduated our whole industry beyond cryptocurrencies to useful financial products that generate higher yield in a more reliable, more transparent way. So, that’s like a super powerful thing. Then that yield went down, and the federal funds interest rate went up. So, you kind of had a big, like a moment of reversal. The tables kind of turned. Now, due to the cyclical nature of things, the tables are turning again where the Fed interest rate is going down. Even today, or yesterday, there was a historic rate cut of 50 basis points, and the yields in DeFi are going up. So, the party is back on, basically.

[00:07:06] Gareth Jenkinson: Beers on you guys later.

[00:07:08] Sergey Nazarov: If you can find me later. And we work really hard to make sure you can’t find me.

[00:07:13] Stani Kulechov: I know where he is staying, so...

[00:07:15] Sergey Nazarov: Which he knows not to share, so beers on whoever you can find later, which won’t be me. In any case, the whole RWA thing, I think, will jumpstart things quite a bit because it’ll diversify what backs DeFi. So, it’ll be even less risk in DeFi. And then if DeFi can generate yield on things that it’s usually hard to generate yield on, or things that don’t usually have good sources of yield on them, I think that’s a very fundamental kind of property of what financial systems should do. And the whole permissionless nature of it, and the global nature of it, gives it like this really, really amazing ability to grow very quickly. Because the other thing that’s really powerful is if you make a financial product in Singapore, you made a financial product for Singapore. If you make a financial product in India, you make it for India. If you make it in the US, you make it for the US. But if Aave launches a new market, that’s a global market. That’s available to India and Singapore and the US and everywhere. So, it’s an inherently global system from, like, the day-zero point when you launch a new market. And if that market does something useful, the growth of that market could be massive. With DeFi, that can quite simply happen, is if the economics make sense because it’s so global and so easy to access. I think it’ll reinvent our industry again, or continue reinventing it. And I think protocols like Aave will be at the epicenter of that, and systems and protocols like Chainlink will be powering the security and reliability on a lower level of systems. And then the whole TradFi thing, I don’t want to hog the whole thing, but that’s a whole other thing.

[00:08:51] Gareth Jenkinson: Well, that’s what I was going to go to next, right? TradFi in general is TradFi. What DeFi is doing is very disruptive. So, again, maybe you can take this one first up. Do you think the attitude of many, many big traditional financial entities is hostile towards DeFi, or do you think they’re all looking at it very keenly? Are you having conversations with people? Are there traditional finance people knocking on your door saying, hey, we want a slice of this pie? Give us the scoop.

[00:09:16] Sergej Kunz: Yes, they don’t want to miss the train, or the rocket, what we are building. So, it is like that, that they are looking to discover new technologies because they don’t want to miss the train. Some banks have already adopted. People create new banks, like what we see also in Switzerland. Sygnum Bank offer really nice crypto services. You can cash out through Sygnum Bank. Of course, you need to fulfill all the AML compliance, screening. I have multiple times provide proofs where the money is coming from and where I did that trade and... But it works. It works very well. And regulators also understand more and more and are more educated. I met once in France Minister for Digital Transformation, and I was really surprised. She knew everything. She was really up to date. And this helps a lot to onboard institutionals in this field. So, of course, they have some entry barriers. They need to keep a specific standard of compliance. View from our side, we try to fulfill these needs, hopefully next year. So, coming a good solution for them.

[00:10:24] Gareth Jenkinson: That was a little scoop for Andrew and the other journalists in the crowd. Stani, your thoughts on TradFi? Any conversations that you have with very big institutions? They must be looking keenly, especially at what Aave did, considering you were a big pioneer in the space.

[00:10:37] Stani Kulechov: It is an interesting spot, as Sergej pointed out, especially because from traditional financial perspective, I think there’s a lot of people that are having these discussions and looking into DeFi. And I bet that there’s a lot of people that are personally, they’re working in traditional finance, but they’re actually using DeFi themselves. So, it is a technology that is really better, as we discussed. Like it’s just better, faster, stronger finance. And actually to make it happen, there’s still kind of like a gap, obviously. You know, how we can bridge these traditional assets onchain and make them available for everyone. And I think there’s still a lot of learnings to do. And we’re discussing with a lot of people, and actually, we’ve recently been working with the Aave ecosystem on a GHO Stability Module, which is essentially keeping the stability of Aave native stablecoin, GHO, and then is investing some of these surplus USDC funds into BlackRock’s BUIDL fund that is onchain on Ethereum. So, that’s just one example of these initiatives. And down the line with GHO, you can expand into multiple different kinds of facilitators. A facilitator simply means a strategy to mint the GHO stablecoin. And that can be backed by RWAs or basically by the collateral that is in the Aave protocol when borrowers are coming and depositing collateral to earn and borrowing GHO. And also, we’re looking into actually creating markets that are RWA-based. And that’s really interesting because every single provider has their own kind of like peculiarities, how they want to ensure that who are the eligible participants.

What is interesting feedback we usually get is that DeFi has a lot of great fundamentals because you can actually quantify the whole risk end to end, in not just like protocols like Aave but, for example, if you are routing trades and liquidating positions and you’re using something like Chainlink, you can quantify different routes, slippages. You can quantify how much liquidity there is onchain, and everything is auditable. But also smart contracts provide you an environment which is resilient in the sense that you can agree to execution rules. And then you have these open communities like DAOs, where you can participate in and actually adjust different kinds of risk parameters and talk to other people and express your opinion. And I think that’s a really interesting part of it. What I’ve seen actually, even like more recent trend, is that there are tools like, for example, Chainlink’s Proof of Reserve, which is even like used to proof of these underlying assets, whether they are wrapped assets or, let’s say, more traditional financial instruments. And I think that’s quite interesting because, in DeFi, we have so high standards of assessing risk. And that’s purely from the principle of don’t trust and verify, as we all know. The users in DeFi and community members, they really want to understand what is behind of an asset, how it’s issued, what is the colorization. And this kind of like thinking expands into traditional financial assets.

And I don’t know if you all seen the recent discussion about Coinbase’s CBDC, where they announced, for example, that they’re a publicly listed company. You know, they do financial reports, so they don’t need necessarily things like proof of reserves. And that’s just not enough for people who are in DeFi and are used to actually far more greater auditability. Because you can’t have a financial revolution based on quarterly reports. You need on a block-to-block, one-second-to-another-second transparency and auditability because anything can change very quickly. And we’re living in a world where things move really fast, news spread around really quickly, and you should be able to actually have an understanding what is the most latest state of finance and the risk itself. So, that’s how legacy and data, the existing financial infrastructure is. But seeing more institutions being interested in this, seeing more assets coming onchain, we have 2 billion worth of Treasurys, and as Sergey mentioned, there was a recent drop of 50 basis points on the rates. We’re going to still have more Treasurys coming onchain and newer assets with newer type of risk profiles. And risk profile is interesting because in Aave, obviously it’s a, there’s one big liquid market where users are depositing, but we see more also interest in custom markets as well. For particular of the RWA use cases, too.

[00:14:55] Gareth Jenkinson: Sergey, I wonder if you just have a different perspective here because you do deal a lot with more mainstream financial institutions. And as an oracle network, you have a lot to offer them that solves what Stani is talking about, right? Like this legacy system that might not be as fast and might not be as auditable. You literally have the system that is the answer to all of that and could lock trillions of dollars.

[00:15:17] Sergey Nazarov: Yeah, so there’s a few things going on, like three big things. And then I think there’ll be a fourth step in the whole process. So, the first thing that’s going on is that the TradFi community has successfully made onchain financial products that people use today, whether directly or whether through protocols that use them as collateral or backing, as an obvious case with BUIDL. So, the first thing that’s happening is, whether you realize it or not, in many cases, you’re using TradFi financial products because they’re embedded or becoming more and more embedded somehow in the DeFi community because of the various guarantees that they provide. The funny thing is that instead of us making products for them, they made products for us, and they made products for us, the Web3 community, because the size of the Web3 community and the market of purchasing power is big enough. Since it’s big enough, it makes sense for BlackRock to make a tokenized fund about the money markets. And lo and behold, in a matter of months, they’re at half a billion, with very healthy margin on that fund, which makes it very successful for them. It’s considered one of the most successful funds they have in terms of what they make from it and the speed of the rate of growth, right? So, that’s the first thing that’s happening.

The second thing that’s happening is that the TradFi community understands that DeFi can take more risks and, in many cases, generate more yield. Like one view of the whole financial system is seeking yield with adjusted risk. The most yield you can get with the least risk that you can get. So, if DeFi is able to generate better yield or really reliable yield and the TradFi community is seeking yield, then what’s going to happen? It’s like really, really simple. Then, DeFi will be making a product for the TradFi community. That’s the world we’re starting to transition into now. And what we work on at the Chainlink community, what I work on, is creating the rails and the systems for facilitating that transfer of value between those two worlds. And then the third kind of big thing that’s happening, to Stani’s point, is that the nature of how blockchains work and how transparent they are, and how they force systems to be transparent in how they’re built at a foundational level, eliminates counterparty risk.

So, the financial system evaluates risk on a number of dimensions. One of the key dimensions is, what is my risk that this counterparty will fail, which basically boils down to, what’s going on with the counterparty? What do I know about them? Well, guess what? You know a lot more about Aave and what’s going on inside Aave than you know about your TradFi counterparty that’s a 120-year-old institution like Credit Suisse that had to become insolvent and get absorbed by UBS. You know a lot more about Aave at any moment in time than you ever knew about what the hell is going on inside Credit Suisse. [Cheering.] Well, yeah. Thank you. And then you have like people like this that like are like that’s a good reason for me to use it. Yeah, that makes sense. There’s enough people like this person that’s like excited about this. But even beyond this early adopter group that feeds value into Aave, the fundamentals of why the way this works is better from a counterparty point of view are there.

So, the thing that really needs to happen is, yes, you know, TradFi will make financial products for DeFi, the DeFi community, to create stability and diversification. Yes, the DeFi community will probably have TradFi as its biggest set of customers, with the most value coming into the DeFi ecosystem from that part of the world because of the greater yields and slightly higher risk that DeFi is willing to take that those people want access to. And then, as all that’s happening, everyone’s going to look at how everything works, and they’re going to be like, wow, my counterparty risk dealing with Aave is a hell of a lot better than my counterparty risk dealing with the next Credit Suisse. Why did I resist this so much? And the answer will be because I didn’t know what the hell was going on. I didn’t understand how it worked. But now that I understand how it works, my counterparty risk with Aave is fine. As long as the regulators understand what’s going on and they agree that it’s fine, then you can have hundreds of trillions of dollars flowing into kind of the blockchain format, and a percentage of those hundreds of trillions in the form of RWAs going into systems like Aave. So, that’s how I think this is evolving, and I’m pretty sure about that at this point.

[00:19:44] Gareth Jenkinson: We definitely need to do a long-form podcast with three of you. We’re going to do that. Just under two minutes left. Very, very quickly. Cross-chain matters. All of you have been involved in some cross-chain efforts in recent months. Why is it so important, and why have you all been trying to solve this, unlock liquidity across all these chains?

[00:20:02] Sergej Kunz: Liquidity is very fragmented. Take a look on the analytics. So, we see 80 billions of West dollars total value locked. Available liquidity across chain, 55% right now on Ethereum. On other chains, highly distributed. I guess we are far enough so the narrative changed. I’m traveling already one of years around the globe and try to explain, okay, we need to change the approach, how we work with the liquidity. We should use intent-based architecture, for example, where the user don’t care about how this is going to be executed, but what they want.

[00:20:36] Gareth Jenkinson: Happens in the background, right?

[00:20:38] Sergej Kunz: Yes. We, from our side, we announced yesterday, for example, our new cross-chain swaps. So, I hope you integrate us soon so we can cover the needs of what we have right now in the market to switch shortly to another chain, to another layer, to be able to sell fast, buy fast and also go to a chain what is more stable, maybe, than the others, like Ethereum to be safe. Yeah, cross-chain matters.

[00:21:04] Gareth Jenkinson: Okay. Stani? Sergey?

[00:21:06] Stani Kulechov: We usually look into networks in a way of acquiring market share and users and just providing a good financial layer that is safe and secure. And that’s the kind of way we think about it. So, we understand that scaling is with layer 2s at the moment in Ethereum strategy. And that’s why it is quite fragmented, as Sergey pointed out. Hopefully like there is more kind of like a thinking around changing this approach of like how we ensure that there is less of that liquidity fragmentation. Hopefully, ZK as a technology can play a role there as well. But yeah, I think it’s been always a big part of what we do. And I think especially with the v4, and our Aave 2030 plan is also to figure out how to move more efficiently the liquidity across these multiple different deployments that we have across these different networks.

[00:21:52] Gareth Jenkinson: Sergey, CCIP also looks to solve this in one way or another, right?

[00:21:56] Sergey Nazarov: Yeah, so CCIP seeks to be like the TCP/IP of blockchains. So, the way that TCP/IP unifies various internet technologies into a single internet, CCIP seeks to unify different blockchain technologies into a single internet. But yeah, the situation with cross-chain interoperability, whether you’re talking about public chains or private bank chains, is basically that, as Sergej and Stani put it, liquidity is fragmented. That’s a really serious problem because it means that if you choose a chain and you go live on that chain, you have access to the user base of that chain. You’re in that little kind of world. You’re on that island. And that really isn’t how growth and success happens in the internet, right? Like if I make a web application, I launch it on the internet. And the internet has all kinds of different other applications that use various databases and all kinds of other stuff. But if I use a certain type of database and they use a different type of database, we’re still all on the internet because there’s something called TCP/IP linking up all our applications into a single internet. That’s kind of the global power of the internet.

Right now, there’s still all this tribalism and choice around, like, I’m in this blockchain, and I’m in that blockchain. It doesn’t really make sense. What should be happening is I go to a blockchain because it has certain technical properties, like I go to a cloud. There’s a cloud provider, they have a service, they have some fees, they have a cost for doing a computation. They have something they can do for me technically, and I launch my thing there. And then if I want to connect to all the other apps, I connect to them over TCP/IP. I’m not limited in my ability to interact with other applications because I chose a certain cloud. That’s like a ridiculous thought in the web world. It’s just like wouldn’t even make sense. So, that’s what we need to get the whole blockchain industry to. We need to get it to the point where connectivity is seamless, efficient, cheap, high volume, scalable so that you can launch your smart contract on one chain and that smart contract can interact with the private keys of thousands of other chains. And that can be just as simple as, hey, I launched my web application in this database, and there’s a thousand other places and browsers and applications my application interacts with, and that’s not a complicated thing. I’m not choosing what I’m building my application on based on how that limits or expands my user base. That shouldn’t be a thing.

So, this is kind of the problem that I think is keeping the industry back to a certain degree, and it keeps it back because it’s a hard problem from a security point of view because you’re fundamentally moving value and valuable data that if it’s manipulated, people can steal money. And this is the type of problem that the Chainlink community likes to solve. This is the problem that we solved for market data with decentralized oracle networks, which enable DeFi and all these things. And now, using that same security model that’s been live on production for over five years and has enabled over $15 trillion in transaction value, that same security model is now being applied to this cross-chain connectivity problem. It’s going very well, and we really just want to end up at a world where it’s a seamless, cheap, efficient wing where it’s just like, hey, you don’t have to worry about what chain you launch on, because you’ll just have access to every user on every chain, just like you have access to every user on the internet, regardless of what technology you use to build your web application.

This is the world that kind of makes a lot of sense and is actually the parallel and the historical example that exists in the web world. So, once we get there, it’s great. There’s going to be a lot more money flowing around. Things like Aave will have access to the whole universe of blockchains, not just a few chains. It’ll be not just public chains, it’ll also be the bank chains in this single interconnected web of what we call the Internet of Contracts. Yeah, that’s what we’re working towards.

[00:25:44] Gareth Jenkinson: There we go. Stani, Sergej and Sergey, thank you very much. Let’s give them a round of applause.