Most recent update: [July 22nd , 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or Aave, made available on the VirgoCX Platform, including an opinion that Aave is not itself a security and/or derivative.
What Is Aave?
Aave is an open source, non-custodial, decentralized finance (DeFi) protocol based on the Ethereum network that facilitates a decentralized platform without intermediaries.
Aave protocol is run by a Decentralized Autonomous Organization or DAO and is governed by the community. The native token of the platform is AAVE, which is a governance token. Under the current V2 governance model, token holders can: create a new Aave Improvement Proposal (AIP), update risk parameters, add new liquidity markets, delegate voting rights, delegate proposal creation, among others. The governance rights belong to both AAVE and stkAAVE token holders, where the latter represents the staked version of AAVE tokens that are locked up.
The platform does not currently require any Know Your Customer (KYC) process to enter any agreements on its platform for retail users but did launch a KYC-enabled permissioned liquidity pools under Aave Pro (rebranded as Aave Arc) for Institutional clients to access regulated DeFi.
You can learn more about Aave by visiting their FAQ here.
Who Is the Founder and What Is the History of Aave?
The founder and CEO of Aave is Stani Kulechov. He currently resides in Como, Lombardia, Italy. Kucherov received an MD in Law from the University of Helsinki in 2018 while he was working as a legal trainee for various firms between 2016 and 2018 in Finland and Russia. His career in the legal profession was short but he was known to be an experienced developer working on a project in the crypto space. 2017 would be the year that Kucherov would go on to become founder and CEO of ETHLend. He is also a prominent figure in the crypto space as an advisor to numerous crypto projects and is an angel investor in 23 startups.
What Makes Aave Unique and What Gives Aave Token Value?
There are a few things that make the Aave protocol unique.
Aave has one of the more diverse ranges of collateral in the DeFi space. Not only can you deposit stablecoins, but you can deposit other ERC-20 tokens like BAT, ENJ, LINK, SNX, and others.
The AAVE token has a few key value drivers.
- Value is derived from its 16 million token supply, making the token scarce.
- It also gains value as a governance token to be used for creating/delegating proposal creations and voting.
- The protocol uses earned fees on the platform to buy AAVE tokens and burn them, thus it can be considered a deflationary token
What is the Aave Token Supply and Total Value Locked (TVL)?
The current circulating supply of Aave tokens is around 12.95 million. The maximum token supply is capped at 16 million, so about 80% of the total token supply is currently in circulation. It’s important to note that the circulation of tokens is linked to the total value locked (TVL) on the Aave protocol as tokens are burned when gas fees are issued.
The Aave token is an ERC-20 token that functions on the Ethereum blockchain. In 2021 due to the scalability issues and network congestion on Ethereum causing high gas fees, Aave has also launched on Polygon and the Matic network. Polygon is a layer two scaling solution for Ethereum that helps bring the gas fees down significantly and also has faster block times.
Currently, the TVL on Aave has surpassed USD $23 billion.
What Are Some Recent Developments for Aave? In July 2021, Aave Pro was launched to be a primary gateway to allow institutional investors an opportunity to participate in the decentralized finance industry. By late July Aave Pro was rebranded as Aave Arc. Aave Arc is partnering with Fireblocks, a digital asset custody firm, to adhere to strict regulation around institutional participants. This platform will require very strict KYC and compliance documentation with anti-money laundering (AML) and anti-fraud controls. Aave is focused on creating a rail that allows family offices, hedge funds, corporations, and large institutions that have a risk appetite to participate in DeFi.
It’s important to note that the governance for Aave Arc doesn’t change. AAVE token holders will govern the protocol regardless of institutional or retail users.
What Are The Risks or Drawbacks of Aave? There are risks that are worth mentioning when we look at Aave and the acceleration of DeFi.
- As with other crypto assets, Aave is subject to short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk, and cyber security risk. As the DeFi space matures and innovation continues, overcollateralized models may become obsolete, requiring governance votes to change the current structure.
- DeFi protocols in general are subject to security risk, governance risk, oracle risk, market price, and higher short history risk when compared to more established cryptocurrencies like Bitcoin.
- The risk of regulatory crackdowns on Aave with the introduction of Aave Arc. There is a chance that regulators may attempt to shut down the project as it is operating in the permissioned and permissionless realms. On one hand Aave is running a fully decentralized DeFi protocol and on the other, with Aave Arc, it is running a regulated KYC permissioned project that caters to the current centralized institutional clients. This may cause blurred lines for regulators and may bring the Aave project to a crossroads. Something to consider in the future.
- Low yields over time may make the AAVE protocol less appealing to users as they go in search of higher yield DeFi protocols that are less capital inefficient and have more lucrative collateral and yield options.
Prior to listing Aave on the VirgoCX Platform, VirgoCX performed due diligence on Aave and determined that Aave is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Aave and/or its primary development team;
- The supply, demand, maturity and liquidity of Aave; and
- Legal and regulatory risks associated with Aave.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.