Are funds SAFU? Mitigating DeFi risk with Aave founder Stani Kulechov

With nearly $13 billion in total value locked, Aave is certainly one of the dominant players in the DeFi lending space. However, as the protocol grows, so too does its risk factor.

In this episode of The Scoop, founder and CEO of Aave Stani Kulechov discusses the innovation brought on by the recent Aave V3 upgrade, and shares what is being done to mitigate risk.

As Stani explained during the interview,

“For me what has been very fascinating is that within the Aave community, and in general in DeFi, all of these communities are a bunch of nerds coming together with different backgrounds and arguing about parameters, and how well these systems have been resilient to different kinds of market fluctuations and have been working well.”

While parameter adjustments through community governance may be sufficient to adjust a DeFi protocol’s risk curve during times of fluctuating market conditions, there are deeper, systematic risks that can still lead to devastating losses.

For example, a fork of the Aave protocol on the Gnosis blockchain named Agave recently had its smart contracts exploited by a malicious attacker, draining $8 million from the protocol.

At the moment, one of the only ways to mitigate smart contract risk at the protocol level is to submit the smart contracts to a third party for security audits. Not only does this leave potential security vulnerabilities if an attack vector is overlooked, but also given the sheer number of new protocols and their underlying smart contracts, security scaling has become a major bottleneck for the industry.

As Stani explained, “More and more smart contracts are deployed into the internet of smart contracts, and the challenge here is we need to somehow figure out a scalable way of applying security.”

Aave V3 has implemented certain design features such as “isolation mode” which mitigates risk by isolating newly listed tokens from the rest of the protocol’s liquidity.

“We understand that the stakes are getting higher and higher,” Stani said, “so we have to become more risk averse.”

During this episode, Stani and Chaparro also discuss:

• Improved capital efficiency in Aave V3
• Institutional interest in DeFi
• Increasing DeFi’s accessibility

This episode is brought to you by our sponsors Fireblocks, Coinbase Prime & Chainalysis
Fireblocks is an enterprise-grade platform delivering a secure infrastructure for moving, storing, and issuing digital assets. Fireblocks enables exchanges, lending desks, custodians, banks, trading desks, and hedge funds to securely scale digital asset operations through the Fireblocks Network and MPC-based Wallet Infrastructure. Fireblocks serves over 725 financial institutions, has secured the transfer of over $1.5 trillion in digital assets, and has a unique insurance policy that covers assets in storage & transit. For more information, please visit www.fireblocks.com.

About Coinbase Prime
Coinbase Prime is an integrated solution that provides institutional investors with an advanced trading platform, secure custody, and prime services to manage all their crypto assets in one place. Coinbase Prime fully integrates crypto trading and custody on a single platform, and gives clients the best all-in pricing in their network using their proprietary Smart Order Router and algorithmic execution. For more information, visit www.coinbase.com/prime.

About Chainalysis
Chainalysis is the blockchain data platform. We provide data, software, services, and research to government agencies, exchanges, financial institutions, and insurance and cybersecurity companies in over 60 countries. Our data powers investigation, compliance, and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases and grow consumer access to cryptocurrency safely. Backed by Accel, Addition, Benchmark, Coatue, Paradigm, Ribbit, and other leading firms in venture capital, Chainalysis builds trust in blockchains to promote more financial freedom with less risk. For more information, visit www.chainalysis.com.

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