The central theses
- Aave CEO Stani Kulechov believes yield farming is on the way out, but DeFi is just getting started.
- More democratic incentives are needed to fully decentralize the ecosystem.
- Kulechov outlined his own method to prove that a project is truly decentralized.
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Stani Kulechov, the CEO of Aave, highlighted some of the issues with the copy-and-paste nature of today’s DeFi space, adding that overall fundamentals are still strong.
Aave CEO defines decentralization
The DeFi economy can be imbalanced, often favoring wealthy whales over average users. This is especially true when high Ethereum fees exclude retail investors.
Aave founder and CEO Stani Kulechov spoke to Crypto Briefing about the problems and possible solutions of DeFi.
While distribution models favor larger accounts, “this can be solved by simply creating more democratic incentives rather than copying and pasting the same model over and over,” Kulechov said.
“DeFi” becomes a lot less interesting when it replaces one centralized, opaque system with another centralized, opaque system.
There is potential here to build an actually better financial system.
No cheaper way to farm and trade shitcoins.
— Camila Russo (@CamiRusso) February 25, 2021
Decentralization is, of course, the answer. As Kulechov pointed out, decentralization in DeFi can be a kind of misnomer, and he offered his own methodology for evaluating projects in this space.
“Personally, I believe a protocol is decentralized when the founding team’s proposal can be successfully voted against,” Kulechov said, “and the team, including its early investors, does not own more than 50% of the tokens.”
The “madness” of yield farming is on its way out
Speaking to Crypto Briefing, Kulechov said that DeFi has always been about incentives, adding that “yield farming is indeed an interesting way to reward user behavior such as providing liquidity.” The sad part is that many yield farming protocols offer absolutely unsustainable yields.”
He went on to say that the yield farming practices we see today are “pretty much money printing.”
“I believe that eventually the madness will end and we will see more sustainable incentives.”
Kulechov commented on the “fatigue” that the yield farming industry has suffered in recent months, adding that “fatigue is related to innovation”.
“Most of the incentives for liquidity extraction are copied from other notable projects and do not provide communities with creative ways to distribute token governance and get communities more involved in the project.”
While liquidity mining may continue for a while, Kulechov says, projects need to engage their entire communities in decentralized token distributions.
Kulechov added that the innovation continues in his own project Aave, which recently released v2 of its governance model that allows the community to delegate voting rights. Aave is exploring Layer 2 solutions, he added, saying, “We’ll see some progress there soon.”
Aave is currently ranked 3rd by market cap on DeFi Pulse
The DeFi founder’s comments on the nature of space highlight ongoing issues that have been the subject of criticism since the industry’s inception.
DeFi projects market themselves as decentralized while project teams maintain disproportionate control over token supply. A recent St. Louis Fed report listed this as a serious and common risk in DeFi.
It’s all too easy to copy and launch an existing project in a somewhat unregulated atmosphere without adding value in the process. However, as both Kulechov and the St. Louis Fed report pointed out, the space is filled with potential, and projects that are truly innovative and offer value could be hugely disruptive.
When asked what other projects he is pursuing in this space, Kulechov mentioned Pods Finance, a project that is working to lower the cost of options that use Aaves aTokens as collateral. He also expressed interest in Aavegotchi, a DeFi and NFT hybrid project that launched on March 2nd.
Disclosure: The author held Bitcoin at the time of writing.
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