Aave founder reveals: Why is lending at the core of financial empowerment?

Author: Stani.eth

Translation: Ken, Chaincatcher

Original Title: Aave Founder: Why Lending Is the Most Empowering Financial Product?

On-chain lending began around 2017, initially as a fringe experiment related to crypto assets. Today, it has grown into a market exceeding $100 billion, primarily driven by stablecoin lending, backed mainly by crypto-native collateral such as Ethereum, Bitcoin, and their derivatives. Borrowers release liquidity through long positions, execute leverage cycles, and engage in yield arbitrage. What matters is not creativity but validation. Behavior over the past few years shows that, even before institutional attention, automated lending based on smart contracts already had genuine demand and product-market fit.

The crypto market remains volatile. Building lending systems on the most active assets forces on-chain lending to address risk management, liquidation, and capital efficiency immediately, rather than hiding these issues behind policies or discretionary human decisions. Without crypto-native collateral, it’s impossible to see how powerful fully automated on-chain lending can be. The key isn’t crypto as an asset class but the cost structure transformation enabled by decentralized finance.

Why On-Chain Lending Is Cheaper

On-chain lending is cheaper not because it’s new technology, but because it eliminates layers of financial waste. Today, borrowers can access stablecoins on-chain at around 5% cost, while centralized crypto lending platforms charge 7% to 12% interest plus fees, service charges, and various surcharges. When conditions favor borrowers, choosing centralized lending isn’t conservative—it’s irrational.

This cost advantage doesn’t come from subsidies but from capital aggregation within open systems. Permissionless markets outperform closed markets in capital pooling and risk pricing structurally because transparency, composability, and automation drive competition. Capital flows faster, idle liquidity is penalized, and inefficiencies are exposed in real time. Innovation spreads instantly.

When new financial primitives like Ethena’s USDe or Pendle emerge, they absorb liquidity from the entire ecosystem and expand the use of existing primitives (like Aave) without sales teams, reconciliation processes, or back-office departments. Code replaces management costs. This isn’t just incremental improvement; it’s a fundamentally different operating model. The cost advantages are passed on to capital allocators and, more importantly, benefit borrowers.

Every major historical transformation follows this pattern: heavy asset systems become lightweight; fixed costs become variable; labor becomes software; centralized economies of scale give way to localized repetitive building; excess capacity transforms into dynamic utilization. Initially, these changes seem bad—they serve non-core users (e.g., crypto lending rather than mainstream use cases), compete on price before quality improves, and before scale and existing players can respond, they appear unserious.

On-chain lending fits this pattern perfectly. Early users were mainly niche crypto holders. User experience was poor. Wallets felt unfamiliar. Stablecoins didn’t reach bank accounts. But none of this mattered because costs were lower, execution faster, and access global. As everything else improves, it becomes easier to access.

How It Will Develop Next

During bear markets, demand drops, yields compress, revealing a more important dynamic. Capital in on-chain lending is always in competition. Liquidity doesn’t stagnate due to quarterly committee decisions or balance sheet assumptions. It is constantly re-priced in a transparent environment. Few financial systems are as ruthless.

On-chain lending isn’t capital-starved; it’s collateral-starved. Today, most on-chain lending merely recycles the same collateral for the same strategies. This isn’t structural; it’s temporary.

Crypto will continue generating native assets, productive primitives, and on-chain economic activity, expanding lending coverage. Ethereum is maturing into a programmable economic resource. Bitcoin is consolidating as a store of economic energy. Neither is the final state.

For on-chain lending to reach billions of users, it must absorb real economic value, not just abstract financial concepts. The future involves integrating autonomous crypto-native assets with tokenized real-world rights and obligations—not to replicate traditional finance but to operate it at extremely low costs. This will be a catalyst for decentralized finance to replace legacy financial backends.

What’s Wrong with Lending Today

Today’s lending isn’t expensive because capital is scarce. Capital is abundant. High-quality capital’s liquidation rate is 5% to 7%. Risk capital’s liquidation rate is 8% to 12%. Borrowers still pay high interest because everything around capital is inefficient.

The lending process is bloated due to customer acquisition costs and lagging credit models. Binary approval processes lead to high costs for quality borrowers and subsidies for bad ones until default occurs. Service layers remain manual, heavily regulated, and slow. Incentive misalignments exist at every level. Those pricing risk rarely bear it themselves. Brokers don’t assume default risk. Loan originators immediately sell off risk exposure. Regardless of outcomes, everyone gets paid. The real cost of lending is the flawed feedback mechanism.

Lending hasn’t been disrupted because trust overrides user experience, regulation stifles innovation, and losses are hidden before they explode. When a lending system collapses, the consequences are often catastrophic, reinforcing conservatism rather than progress. As a result, lending still looks like an industrial-era product patched onto digital capital markets.

Breaking the Cost Structure

Unless loan origination, risk assessment, servicing, and capital allocation are fully native to software and on-chain, borrowers will continue paying excessive fees, and lenders will rationalize these costs. The solution isn’t more regulation or marginal user experience improvements. It’s breaking the cost structure. Automate processes. Increase transparency over discretion. Replace reconciliation with certainty. That’s the disruption decentralized finance can bring to lending.

When on-chain lending becomes clearly cheaper than traditional lending end-to-end, adoption isn’t a question—it’s inevitable. Aave emerged precisely in this context, serving as a foundational capital layer for a new type of financial backend, supporting everything from fintech companies to institutional lenders and consumers.

Lending will become the most empowering financial product simply because the cost structure of decentralized finance allows rapidly flowing capital to reach the most needed applications. Abundant capital will generate countless opportunities.