The Institutional Wave: What is AAVE ARC?
AAVE ARC is the corporate-grade, KYC’d, AAVE product bringing DeFi technology to a swarm of yield-deprived suits
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The institutional wave is storming the multi-chain starting with DeFi blue chips.
AAVE is the quintessential money market protocol which pioneered the OG DeFi summer in 2020.
They’ve been by our side since we literally started this entire venture and we couldn’t thank them enough!
Now, TradFi is making its impact on DeFi. AAVE ARC is the corporate-grade, KYC’d, AAVE product bringing DeFi technology to a swarm of yield-deprived suits.
Learn more about the latest addition to the AAVE suite:
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The Institutional Wave: AAVE ARC
Guest post by DeFi Slate contributor, WassieCapital
Overview of institutional interest in DeFi
Decentralized Finance or DeFi has gained significant traction not only because of the developments in the space but also because of the broader economic situation of the world. With near-zero or negative-yielding bonds, low-interest rates, and the fear of looming inflation, this has led to a huge amount of inbound interest from hedge funds, family offices, corporate treasuries, and also regulated financial institutions looking towards the DeFi sector where even in a highly deleveraged environment can generate yields upwards of 5%.
One of the core components of DeFi is lending. In contrast to traditional lending, DeFi, with the aid of blockchain and smart contracts, offers a censorship-free environment and complete transparency in asset transactions without the need for third-party involvement. The creation of these non-custodial, decentralized peer-to-peer lending platforms allows anyone to get a return on their assets by either borrowing funds while putting up their assets as collateral or lending their assets to borrowers for higher interests than those offered in traditional finance. This act of pooling assets and putting them to work is more commonly referred to as Yield Farming.
However, despite the attractive yield opportunities that exist in DeFi, traditional players and US-regulated entities are still hesitant to participate because of the regulatory risks that may arise. In light of this, developments have begun in pushing the development of Institutional DeFi, or blockchain-based financial products tailor-made towards fulfilling the stringent requirements of institutions, while still retaining an aspect of DeFi.
Intro to Aave & Aave ARC
Aave is an open-source and non-custodial liquidity lending and borrowing platform with over $12B in total value locked (TVL) into the protocol. Aave is currently deployed on Ethereum & Polygon (MATIC) with plans to launch on other blockchains such as AVAX and HARMONY soon.
In July Aave announced Aave Arc, a service to make Aave accessible to institutional investors via permissioned liquidity pools separate from the existing set of Aave pools. This allows participants to access decentralized markets while still being regulatory compliant via extensive KYC / AML procedures.
The mechanism for Aave Arc will be a simple deployment of Aave v2 with a layer of whitelisting and KYC. In the short term, regulated intermediaries will play the role of a whitelister, allowing them to offer services on top of the existing Aave infrastructure and serve as gateways to users who wish to interact with Aave. Users who complete full KYC (know-your-customer), KYB (know-your-business), and whitelisting processes can participate in various roles such as suppliers, borrowers, liquidators, or all of the above.
Aave Arc will include a far simplified risk portfolio in terms of the assets that will initially be offered. Currently, this includes Bitcoin, Ethereum, and AAVE with USDC being the only stable coin to be offered. Aside from that, Aave Arc will only support variable rate loans for now as opposed to stable or fixed-rate loans and the same liquidation and solvency mechanisms will still apply as well.
One of the major criticisms against Aave Arc is its non-decentralized nature especially when it comes to the onboarding of new users through centralized, regulated intermediaries such as FireBlocks which defeats the main purpose of decentralized financial products. Despite that, Aave Arc at its very core is still decentralized as only user onboarding, KYC, and AML compliance are handled by whitelisters whereas community governance handles protocol and pool level decisions. If any, institutions will be active participants in governance and take another layer of risk-off DeFi by helping prevent the risk of economic attacks on the protocol.
Another criticism is towards Aave’s approach in keeping the user interface and experience as similar to Aave v2 to enable market participants such as institutions to get a first-hand experience the way most of us have experienced DeFi, by directly interacting with Aave’s smart contracts. Though this goes against the ethos of simplicity, it also means that Aave Arc has a unique market segment as opposed to its competitors offering products geared towards non-crypto native institutions.
Governance Proposals: Bringing Aave to Harmony & AVAX
In a world where DeFi is becoming more and more popular, the need for decentralized protocols across these blockchains is increasing as well. Both Avalanche and Harmony announced plans and started governance proposals to bring DeFi protocols such as Aave over to their respective blockchains by providing liquidity mining incentives for Aave users in their native tokens ($20M AVAX, and $2M ONE). The launch of Aave on both Avalanche and Harmony will attract new potential users, while also giving access to cheaper and faster transactions. Ultimately, this sets up an interesting and novel situation where the Aave ecosystem stands to benefit the most from both on a protocol and a token holder level.
The inception of Aave Arc makes it more likely that more permissioned versions of DeFi products will be created allowing more users to use DeFi and we may see more types of collateral be accepted as traditional assets enter DeFi through tokenization. Though the concerns of regulatory uncertainty remain, Aave, as it stands, is in a great position to establish itself as a market leader in a space that is only beginning to grow.
More info on Aave ARC here: https://www.theblockcrypto.com/linked/112475/aave-to-launch-institutional-defi-platform-aave-arc-within-weeks
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Babylon Finance is an ecosystem of community-built DeFi strategies. Non-custodial, completely trustless and transparent asset management with traceable performance history.
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⚠️ DISCLAIMER: Investing into cryptocurrency and DeFi platforms comes with inherent risk including technical risk, human error, platform failure and more. At certain points throughout this post, we might get commission for promoting certain projects, if this is the case we will always make sure it is clear. We are strictly an educational content platform, nothing we offer is financial advice. We are not professionals or licensed advisors.
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