Aave's Stable Vault

People crave safety, predictability, and most importantly—convenience.

Written by: Thejaswini M A

Compiled by: Block unicorn

The most expensive thing in front of people is a decision. In comparison, various fees are trivial. People pay just for convenience and ease, nothing more.

This is how platforms extract user benefits, stripping users of their choices. "Couch locking"—a term I love from Tim Wu's book, "The Age of Extraction."

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

Not quite sure if you should lend. Why not call it a savings account, and you’ll feel proud.

They only charge removal fees. What gets removed is not just decision-making power, but sometimes the best benefits. People simply don’t care.

The role of DeFi is to increase. But which chain, which liquidity pool, what rates, when to migrate, where to bridge? Is this really Aave? Or was it concocted by Claude Fable 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 must be smarter?

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

In the DeFi space, price volatility is the norm. You observe price rises and falls, and transfer funds at the right moment.

But this structure simply doesn’t work elsewhere. New banks cannot explain to users that interest rates are determined by lending demand, and that in a case where they are clearly advertising a savings account, rates might plummet to 2%. People won’t invest money in a chaotic environment. That’s why people never use cryptocurrency apps daily, let alone cryptocurrency savings apps.

On July 9, Aave Labs discovered a workaround called Stable Vault. Today, I want to show you 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 could be a new bank, an e-wallet, or a payroll processing platform. Deposits go directly into Aave's lending market. Users can check interest rates in the applications they use daily; if the rates are right, they will open an account.

The interest rates are fixed. I know it’s hard to say this in the cryptocurrency space.

Aave's market pays borrowers their repayment amount for the week. Stable Vaults sit above it and provide operators with a dial. The application inputs a number, say 4%. From then on, regardless of what Aave does underneath, the vault pays 4% returns every second. This is an issue for the application, not you. Any earnings generated beyond that number belong to the operator.

Perspective: The Funders

They all enjoy rated insurance. This spring, Aave's USDC pool paid a 2% premium, while a vault promising a 4% premium still paid 4%, with the operator covering the difference.

In any other context, transferring risk comes at a cost, and this is no exception. Take fixed-rate mortgages, for example; they cost 50 to 100 basis points more than floating-rate mortgages, and this premium is essentially the fee borrowers pay for fixed rates.

Users don’t need to create wallets, save seed phrases, build bridges, or choose blockchains. They can get support hotlines, account recovery, facial ID, and addresses provided by the company (in case something goes wrong). Aave's application has passed SOC 2 certification and supports two-factor authentication (2FA), promoting both features simultaneously, as that’s exactly what customers are buying.

Users lose the most. When the prize pool pays 9%, they only get 4%; when the prize pool pays 6%, they still only get 4%. This is a fixed ratio set by the application based on user levels. A dynamic ratio refers to real-time data you can actively view; a fixed ratio completely hides the intermediary's cut.

Users also choose a second counterparty. Through this setup, they add two new risk models to their balance sheets: one is the financial health of the fintech company operating the application, and the other is the code quality of the hidden private scripts that allocate their funds in the background. In pure decentralized finance (DeFi), your only risk lies in the core protocol code. Here, if the intermediary goes bankrupt, or if their private backend script crashes leading to fund loss, even if Aave itself runs perfectly, your funds could still be lost.

In a true swap market, fixed rates are pulled down to near fair value because both parties can shop around. Here, operators set rates unilaterally, and customers have no reference point. Users won’t compare a 4% rate with Aave's 6%, but rather with their bank's rate. Aave's application page displays its rates alongside the national average savings rate of 0.40% set by the Federal Deposit Insurance Corporation (FDIC), making any rate seem very attractive in comparison.

Perspective: The Operators

Imagine a new bank with $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 4% return, and if the strategy's return reaches 6%, it only needs to recognize $4 million in revenue on its balance sheet annually, which was originally a cost. Low investment, but a high return of 2%, quite nice.

Rise is a payroll service company that pays contractors in 190 countries, having processed over $1.5 billion in payroll. In the past, if the company prepaid salaries a week in advance, these USDC would sit idle, so Rise developed Rise Earn, depositing it into Aave's USDC pool on the Arbitrum platform until payday.

Rise charges 1% interest, and no other fees. Assuming a yield of 6%, the fee charged by Rise would be 6 basis points. Employees actually receive 5.94% returns, and all they see is Aave's real-time rates.

If the same funds are used, the Stable Vault operator would charge a fee of 200. The intermediary's cut increased 33 times.

Perspective: Aave and Stable Vault

Aave's selling point is that its vaults can set different rates based on user loyalty, activity, or level. For example, premium members can earn 5%, while other users earn 3.5% from the same borrowing interest pool. Fintech companies issuing their own stablecoins can register them as deposit assets, achieving closed-loop transactions. Moreover, the earning balances won’t leak, meaning the earnings themselves are also a retention tool.

Do operators get these earnings for free? Certainly not. They short the bid-ask spread. This spring, when Aave paid a 2% yield, all vaults promising higher yields had to pay higher fees.

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

When liquidity utilization reaches its limit, including vaults, no one can profit from it. Surplus funds pile up on the books, sitting alongside users' principal.

If liquidity recovers, operators will clear the surplus funds accumulated during the period when users couldn’t exit. This surplus is the fee the market pays for insufficient liquidity. The users are the ones providing the insufficient liquidity. If liquidity fails to recover, bad debts enter the liquidity pool, and the vault will face a funding shortfall. Aave's documentation shows that authorized parties can top up the system. The word "can" here does not imply any reserves.

Aave would claim that their contracts were never exploited, that it was Kelp's bridge that had issues, not Aave's code. rsETH was frozen within hours. This is true. Just before their risk manager resigned, they voted to accept highly risky collateral, with loan-to-value ratios reaching 93%, forcing ordinary users to bear the brunt of the collapse of this application.

Now it seems the Stable Vault is the last piece of the puzzle?

Rise runs payroll fluctuations through Aave. Kraken has integrated Aave v3 into its Tydro protocol on its L2 layer, directing its retail product Earn to that protocol, so Kraken users are also Aave users when using the Earn feature. Cap Finance stores stablecoin reserves in Tydro.

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

Aave doesn’t need more deposits. Kulechov told The Block in March that there is an oversupply of liquidity in the DeFi space, and the focus must shift to lending. His point is correct, which is also why the yield on USDC has dropped from 8% to 2-3%. Aave has always faced the issue that DeFi funds are highly liquid, and a 50 basis point drop in yield can lead to outflows. By controlling the flow of funds through an application like payroll, the most volatile funds in finance can be converted into assets as stable as deposits.

Aavenomics 3.0 launched on June 27, now automatically repurchasing AAVE from revenue. Regardless of market conditions, revenue needs to keep flowing. In a bear market, stable deposits are key to maintaining repurchase operations. How to obtain these deposits? The answer is: Stable Vault.

Coinbase offers about 4% yield on USDC balances. Robinhood launched its Earn service on July 1, with a yield of about 7%, and has already attracted 28 million accounts. Both refer to it as a savings feature.

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

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

Banks can use this system because it is backed by a century of legal support. Reserve requirements, scrutiny, deposit insurance, and regulatory bodies that can conduct surprise inspections are all built on a consensus reached long ago: banks will lend your money, so when loans go wrong, someone must be held accountable.

All functionalities of Stable Vaults can be achieved in 20-30 minutes. But you need to create a wallet first, bridge some USDC, and then provide it to Aave. This way, you don’t need to do KYC verification, communicate with operators, or wait for funds to rebalance. Moreover, you won’t suffer any losses from spreads. You will earn 6% instead of 4%, and can view the liquidity pool throughout.

I understand that the system considers issues from a much longer-term perspective than my logic. And when people don’t do this, I don’t think they are foolish.

Iyengar and Huberman's research on retirement plans found that as the number of fund choices increases, participation rates actually decrease. Faced with more choices, people ultimately choose not to participate in any plan. This conclusion underpins all consumer finance products thereafter.

For fifteen years, self-insurance has been the right choice, and this is well-known. Even so, most on-chain credit card spending still goes through custodial platforms. This is a repeatedly mentioned and large-scale preference. Moreover, their security algorithms are superior to ours. For someone with $2,000 and no cryptocurrency background, the most likely way to lose funds is by losing their seed phrase or sending it to the wrong address. An application with facial recognition and account recovery features can eliminate this failure mode that could lead to their loss. They pay 200 basis points to insure against their own risk, which is a reasonable expense.

So Aave's approach is correct. This is exactly what a company with liquidity but lacking user loyalty should do, and all consumer applications in the cryptocurrency space are competing in the same direction because the same logic exists wherever we go.

Ultimately, this is an acceptance of human nature. People crave safety, predictability, and most importantly—convenience. Life is already hard enough; why should they manage a private bank account? They just want to close the app and see that still number.