Stani Kulechov on Why Aave V4 Is The Most Resilient DeFi In The World

**Robbie** (0:00)
Alrighty guys, we are back live at DeFi Day here in Khan, at ECC, it's day one with Stani. Obviously a big day, Stani, how do you feel, man? How does it feel to get this out there in the wild? And the team's been really on it, man.

**Stani Kulechov** (0:14)
It's been amazing. Aave V4, we've been working for like two and a half years or so, and getting it out, new generation of a protocol, and also Aave Pro, that is also the interface for that. It feels incredible.

**Robbie** (0:31)
So it's a milestone for sure, but it's just the beginning in its own way.

**Stani Kulechov** (0:34)
Oh, yeah. Oh, yeah.
It sets a new dimensions for the Aave protocol to have new types of use cases and collaterals. We're super excited. And it also opens up the whole architecture of Aave, enabling anyone to come and actually build new use cases as well. So that's really cool. We're going to see a lot of development, not just from the Aave team, but community developers and third-party developers that want to tap into the Aave liquidity.

**Robbie** (1:03)
Yeah. And so this was the first kind of restructuring of the way the protocol works in several years. Yes. How do you think about that from a risk perspective? I think one of the things that Aave is known for is its resiliency and its ability to manage risk very effectively. We've seen even just recently vault exploits and different kind of like DeFi mishaps. How do you think about the risk kind of parameters when it comes to this new iteration? I know you guys spent almost a whole year kind of risk testing this thing. How do you think about that?

**Stani Kulechov** (1:37)
Yeah, I think what Aave is really known for is the resiliency. Obviously, it's the protocol that has been seeing multiple market cycles.
We saw FTX, we saw a lot of market down cycles, and Aave has been able to be extremely resilient. And it showcases that the protocol works really well, and the parameters that are always pre-vetted and applied to the protocol has been done correctly. And Aave V4 simply introduces new tooling for risk managers and the Aave community to manage the risk. So a couple of features, for example, risk premiums allows now to actually price the risk per collateral asset, where it's useful and applicable. So every borrower doesn't necessarily have the same rate when they're borrowing a particular stablecoin. The second is dynamic risk configuration, meaning that now configurations can be applied to new positions without affecting old positions. So this is really fundamentally new tooling that didn't exist before in Aave. And the architecture itself isolates risk into the spokes, and liquidity is tapped into from a hub that gives credit lines to spokes. So it's a way of actually ensuring that we don't fractionize liquidity, but we have a good amount of segregation of risk profiles in Aave. Yeah.

**Robbie** (3:06)
And so when you have this kind of hub of liquidity and these spokes of different risk profiles for different collateral assets, how is the kind of delegation of liquidity, how does that choice get made? Is it just based on user demand for that type of asset? Or how do you allocate the capital in this pool to each spoke?

**Stani Kulechov** (3:29)
Yeah, so first of all, there is three hubs. So there is a prime, that is the sort of lowest in the risk curve, and then there is a core, that is more of a risk adjusted, and then plus, which is risk return. And each of those hubs have connected spokes, depending on their use cases. And it depends a lot on that hub's risk profile. So core is where you have the risk adjusteds, markets connected to that hub. And the idea is that there is the deepest liquidity. And then plus is where you have more sort of tail end opportunities. And then prime is kind of like the lower end of the risk curve. So it all goes by risk assessment. But now what's different with Aave V4 compared to existing Aave markets is that you don't have only one entry point. You have multiple selection while still keeping the capital relatively concentrated in a particular risk profile and allowing to tap. So the way the decision actually works is that it's still a governance decision. How much capital is allocated from a hub, your particular spoke use case. And that's done by Aave risk assessment as well.

**Robbie** (4:50)
So it's kind of like the tranche model in finance with like a junior tranche as one hub, a senior tranche much less risk as a separate hub, and then you've got a third as well.