The Generalist - Aave: The Crypto Conglomerate

Hi friends,

One theme I’ve been interested in this year is how DeFi is moving up and out.

Though the first wave was dominated by retail investors, new products have emerged that open up its benefits to large institutional clients and real-world asset classes. While still in its early innings, we’re seeing billions of professional funding flow into DeFi pools. Old school businesses like freight forwarding are also receiving working capital from crypto-native platforms.

Aave has positioned itself to capture both of these trends – and several others. Over the past year or so, DeFi’s largest lender has launched special services for funds and traditional enterprises. It has also made a play in social media and stablecoins.

The result is a fascinating organization that tells us something consequential about DeFi’s future, crypto entrepreneurship, and decentralized social networks. To hear the story of an unlikely market leader, how Aave has weathered the downturn, and the best raves in crypto, jump in.

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Aave: The Crypto Conglomerate

Actionable insights

If you only have a few minutes to spare, here's what investors, operators, and founders should know about Aave.

• DeFi’s leading lender. Aave is the de-facto leader in decentralized lending. Its fully-diluted market cap is north of $1 billion, even after the crypto downturn. Aave has $5.6 billion in total value locked (TVL) and is on track to produce $16.8 million in annualized revenue.
• Powered by community. One of Aave’s most noteworthy traits is its robust community. Founder Stani Kulechov has prioritized this since the beginning, investing considerable time in fostering grassroots support. This base has helped Aave distinguish itself from its rivals.
• A relentless innovator. Aave is not a project that sits still. Since its founding in 2017, it has continually added new assets, ecosystems, and product lines. The result is a comprehensive financial platform with unparalleled range and flexibility.
• Balancing expansion with focus. The organization’s biggest challenge in the coming years may be figuring out how to maintain focus. This year, Aave has announced two significant new initiatives in the social media and stablecoin spaces. While promising, they will be resource-intensive and invite new risks.

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“Banking is necessary; banks are not,” Bill Gates once said. Stani Kulechov, founder of Aave, would likely agree. His financial protocol is perhaps crypto’s clearest expression of that sentiment. Since its founding in 2017, Aave has grown to support more than $5.6 billion in total value locked (TVL), a similar metric to assets under management. During last year’s bull run, TVL approached $20 billion, even without incorporating some of the parent organization’s newer projects. Aave has achieved such figures by architecting something akin to a bankless banking system, a financial empire built on protocols and animated by an enthusiastic community.

Aave’s ambitions have scaled with its assets. Over the past year, Kulechov’s team has outlined initiatives suggesting an expansive future beyond lending, including an overcollateralized stablecoin and decentralized social graph. These projects, and others that arise in the years to come, will live under the “Aave Companies” umbrella, alongside the liquidity protocol for which it is best known. Only time will tell whether such ventures prove a distraction or allow Aave to become something grander: a miniature Alphabet, a homespun crypto conglomerate.

In today’s piece, we’ll discuss:

• Aave’s evolution. From the outside, Stani Kulechov looks like an unlikely entrepreneur. The former law student transformed a small peer-to-peer lender into one of DeFi’s blue chip projects.
• Critical lessons. Aave’s success offers lessons about web3 entrepreneurship, the institutionalization of DeFi, and the power of an active community.
• What the future holds. Aave is entering its second act. After addressing on-chain lending, Kulechov has set his sights on two of crypto’s biggest problems: establishing a reliable stablecoin and solving decentralized identity.

Evolution: Aave’s ascent

For much of its life, Aave operated in relative obscurity. Its success owes much to Kulechov’s grit, the project’s innovative products, and an active supporter base.

Origins

In 2017, a Finnish law student decided to run an experiment. A few months earlier, while studying dispute resolution and contract law, Stani Kulechov had learned about Ethereum. When he discovered its potential to create self-executing and enforcing contracts, he was stunned by the implications. “It practically blew my mind,” Kulechov later recalled.

Intrigued by Ethereum’s possibilities, Kulechov decided to spin up a small side project focused on lending. The idea was that borrowers could put up cryptocurrency as collateral and then get matched with a lender. The peer-to-peer (P2P) process was built on Ethereum, leveraging its smart contracts. Kulechov called it ETHLend.

It was not Kulechov’s first entrepreneurial effort. As a teenager, he displayed an admirably wonkish streak, building fintech apps in his spare time. The most notable was a revenue financing product for game makers. Instead of waiting 30 to 45 days to receive payouts from the App Store, developers could get paid instantly, allowing them to cover costs and grow their businesses. Though a promising concept, Kulechov allowed the project to fizzle out.

He expected ETHLend to follow a similar trajectory. “I never wanted it to be a startup, or anything like that,” he said, “I was still studying in university.”

Initially, it looked like Kulechov would get his wish. After sharing the idea on Reddit, Kulechov noted the “idea itself was completely killed.” Few saw the need for a service like the one he had proposed, nor the desire for it. Before too long, however, the tide began to change. Though ETHLend struggled to attract users to its service, it started to draw a community of enthusiasts. That was mainly due to Kulechov’s willingness to engage with crypto newcomers. “For some reason, I don’t know why but it became a bigger project,” he said. By the end of 2017, ETHLend underwent an Initial Coin Offering (ICO), receiving approximately $16.2 million in funding. With the benefit of hindsight, it was one of the few projects that emerged during the ICO frenzy that has shown real staying power.

In a meme

​​​​For the pictorially inclined, here's the whole piece — all 4,700 words of it — in a single meme.

Puzzler

​​​All guesses are welcome and clues are given to anyone that would like one. Just respond to this email for a hint.

Greg K is heating up. After deciphering the puzzler two weeks ago, he claimed the throne last week again. He was joined by Chana B, Steven R, Joshua K, Jaey C, and Neil H, who all deciphered this:

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The answer? A volcano. Tricky!
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Until next time,

Mario

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