People yearn for safety, predictability, and most importantly - convenience.

Written by: Thejaswini M A

Translated by: Block unicorn

The most expensive thing in front of people is a decision. In comparison, various costs are trivial. People pay only for convenience and ease, that's it.

This is how platforms extract user interests; they deprive users of choice. "Sofa lock-in" - this is a term I particularly like that Tim Wu mentioned in his book "The Age of Extraction".

Can't select stocks? Of course, you can, index funds, S&P 500 index funds...

Not quite sure if you should lend. Better call it a savings account, and you would be proud of it.

They only charge removal fees. What is removed is not only the decision-making power but sometimes also the best benefits. People do not care at all.

The role of DeFi is to increase. But which chain, which liquidity pool, what rates, when to migrate, where's the bridge? Is this really Aave? Or was it something Claude Fable conjured up before July 12? Aave has 2.5 million users and has been operating for six years. Revolut has 65 million users. Is it fair to say Aave needs to be smarter?

From January to July, Aave's USDC pool rate fluctuated between 2% and 9%.

In the DeFi space, price fluctuations are the norm. You would observe the rise and fall of prices and transfer funds at the right moments.

But this structure simply does not work elsewhere. New banks cannot explain to users that interest rates are determined by lending demand, and that in a case where it is clearly marketed as a savings account, rates could plummet to 2%. People won't invest their money in chaotic environments. This is why people never use cryptocurrency applications daily, let alone cryptocurrency savings applications.

On July 9, Aave Labs discovered a workaround named Stable Vault. Today, I want to show everyone how it works, who benefits from it, and why I believe ordinary users will ultimately use it.

Stable Vaults allow any business to start offering savings account services with just one integration. It can be a new bank, an e-wallet, or a payroll processing platform. Deposits go directly into Aave's lending market. Users can see the rates in the applications they use daily; if the rates are suitable, they will open an account.

The interest rate is fixed. I know this is hard to say in the cryptocurrency space.

Aave's market pays borrowers their repayment amount for the week. Stable Vaults sit above them and provide operators with a dial. The application inputs a number, such as 4%. From that point on, regardless of what Aave executes below, the treasury will pay out a yield of 4% every second. This is an application issue, not yours. Any earnings produced over that figure go to the operator.

Perspective: The Investor

They all enjoy rated insurance. This spring, Aave's USDC liquidity pool paid a premium of 2%, while a vault that promised a 4% premium still paid 4%, with the operator bearing the difference.

Everywhere else, transferring risk comes at a cost, and this is no exception. Take fixed-rate mortgages as an example; they cost 50 to 100 basis points more than variable-rate mortgages, and this premium is essentially the fee borrowers pay for the fixed rate.

Users do not need to create wallets, save mnemonic phrases, build bridges, or choose blockchains. They can get support hotlines, account recovery, facial ID, and addresses provided by companies (in case something goes wrong). Aave's application is SOC 2 compliant and supports two-factor authentication (2FA), promoting both features because this is exactly what customers are purchasing.

The amount users lose is maximized. When the prize pool pays 9%, they only receive 4%; when the prize pool pays 6%, they also only receive 4%. This is a fixed proportion set by the application based on user tiers. A dynamic proportion refers to the real-time data you can actively view; whereas a fixed proportion completely hides the cut taken by intermediaries.

Users also chose a second counterparty. With this setup, their balance sheet increased two new risk models: the financial state of the fintech company operating the application, and the quality of the code of the hidden private script responsible for allocating their funds behind the scenes. In pure decentralized finance (DeFi), your only risk lies in the core protocol's code. Here, if the intermediary goes bankrupt, or if their private backend script crashes causing a loss of funds, your funds would also be entirely lost even if Aave itself is running perfectly.

In a true swaps market, because both sides can compare prices, fixed rates would be pulled down to near fair value levels. Here, operators unilaterally set the rates, leaving customers without any reference. Users will not compare a rate of 4% with Aave's 6%, but rather with their bank's rates. Aave's application page lists its rates next to the 0.40% national savings average set by the Federal Deposit Insurance Corporation (FDIC); in comparison, any rate looks highly enticing.

Perspective: The Operator

Assume a new bank has $200 million in idle user stablecoins. It already has the funds and users, and these users were paid for. It just needs to complete one integration, advertise a return of 4%, and if the strategy's rate of return reaches 6%, it only needs to confirm $4 million in revenue on its balance sheet annually, which would have been a cost. Low input, high yield of 2%, quite good.

Rise is a payroll services company that pays contractors across 190 countries with a total of over $1.5 billion in payroll processed. Previously, if the company prepaid salaries a week in advance, these USDC would remain idle, so Rise developed Rise Earn, depositing it into Aave's USDC pool on the Arbitrum platform until payday.

Rise would charge 1% of the interest, with no other fees. Suppose the yield is 6%, then Rise would charge 6 basis points. Employees would receive an actual yield of 5.94%, and what they see is only Aave's real-time rate.

If using the same funds, the Stable Vault operator would charge a fee of 200. The intermediary's cut increased 33-fold.

Perspective: Aave and Stable Vault

Aave's selling point is that its vaults can set different rates based on user loyalty, activity, or tier. For instance, premium members can receive a yield of 5%, while other users would earn 3.5% from the same loan interest pool. Fintech companies issuing their stablecoins can register them as deposit assets, thus achieving a closed-loop transaction. Moreover, any profitable balance will not evaporate, meaning the earnings themselves also serve as a retention mechanism.

Can operators get these earnings for free? Certainly not. It has shorted the bid-ask spread. This spring, when Aave paid a yield of 2%, all vaults promising a higher yield had to pay higher costs.

This led to the events of April 18, when the Kelp DAO bridge vulnerability triggered a massive run on Aave, pushing the liquidity pool's utilization to 100%, completely freezing all withdrawals and trapping both the operator's profits and users' funds in the same lock queue.

When the capital utilization hits the limit, no one can profit from it, including the vaults. Surplus funds will pile up on the books alongside users' principal.

If liquidity returns, operators will clear out the surplus funds accrued while users were unable to withdraw. This surplus is the fee the market pays for insufficient liquidity, and it is the users who provide this liquidity. If liquidity fails to recover, bad debts enter the liquidity pool, and the vault may experience a shortage of funds; Aave's documents indicate that grantors can replenish the system. The term "can" here does not imply that there are reserves.

Aave would assert that their contracts were never exploited, that it was the Kelp bridge operator that had issues, not Aave's code; rsETH was frozen within hours. This is indeed true. Not long before their risk manager resigned, they voted to accept collateral of extremely high risk, with loan-to-value ratios reaching 93%, forcing ordinary users to bear the disadvantages associated with this collapsing application.

Now it seems that Stable Vault was the last piece of the puzzle?

Rise runs payroll fluctuations through Aave. Kraken has integrated Aave v3 into its L2 layer's Tydro protocol and pointed its retail product Earn at this protocol, so when Kraken users utilize the Earn feature, they are also Aave users. Cap Finance keeps stablecoin reserves in Tydro.

Horizon collaborates with institutions like Circle and Franklin Templeton to collateralize loans with tokenized government bonds. The Aave App is directly consumer-facing. Stable Vaults are open to all other institutions, branding it as diversified investment.

Aave does not need more deposits. Kulechov told The Block in March that there is an excess of liquidity in DeFi, and the focus must shift toward lending. His point is correct, which is also the reason why USDC yields dropped from 8% to 2-3%. The ongoing problem for Aave has been that the liquidity of DeFi funds is extremely volatile; as soon as yields drop by 50 basis points, funds flee. An application that controls the flow of funds like paying salaries can convert the most unstable funds in finance into stable assets like deposits.

Aavenomics 3.0 launched on June 27 and is now automatically buying back AAVE from revenues. Regardless of the market's condition, revenues need to flow continuously. In a bear market, stable deposits are key to maintaining repurchase operations. How to obtain these deposits? The answer is: Stable Vault.

Coinbase offers approximately 4% yield on USDC balances. Robinhood launched Earn on July 1 with a yield of about 7%, already attracting 28 million accounts. Both label it as a savings feature.

Coinbase operates based on Morpho and Ethena. Robinhood operates on Morpho and Maple, with its risk parameters set by a company named Steakhouse.

Both had to build this system themselves: custodial protocols, custodians, risk teams, and months of legal work. Aave's contribution makes all this unnecessary. With just one integration, any application on earth can display a number on the screen and track the difference between that number and the actual repayment amount in real-time.

Banks can use this system because it has a century of legal backing. Reserve requirements, examinations, deposit insurance, and regulators who can conduct surprise audits, all constructed on a consensus long ago reached: banks lend out your money, so when loans go bad, someone must be accountable.

All functionalities of Stable Vaults can be implemented in just 20-30 minutes. But you need to first create a wallet, bridge some USDC, and then provide it to Aave. This way, you don’t have to perform KYC verification, communicate with operators, or wait for fund rebalancing. And you will not suffer any losses due to spreads. You will receive a yield of 6%, not 4%, and you can view the liquidity pool throughout the process.

I understand that the system's way of thinking is much more long-term than my logic. And I do not think people are foolish when they do not do this.

Iyengar and Huberman's research on retirement plans found that as the number of fund choices increased, participation rates decreased. Faced with more choices, people ultimately choose not to participate in any plan at all. All consumer finance products thereafter have been built on this conclusion.

For fifteen years, self-insurance has been the right choice, a fact well-known by now. Even so, most on-chain credit card transactions are still processed through custodial platforms. This is a widely cited and sizable preference. Moreover, their security algorithms outperform ours. For someone with $2000 and no cryptocurrency background, the most likely way they lose money is by forgetting their mnemonic phrase or sending it to the wrong address. An application with facial recognition and account recovery can eliminate this failure mode that could lead to their loss. They pay 200 basis points to buy insurance on their risks, which is a reasonable expenditure.

So Aave's approach is the right one. This is exactly what a business with liquidity and no user loyalty should do, and all consumer applications in the cryptocurrency space are competing in the same direction, because no matter where we go, the same logic applies.

Ultimately, this is an acceptance of human nature. People yearn for safety, predictability, and most importantly - convenience. Life is already hard enough, so why manage a private bank account? They just want to switch off the app and look at that still number.