Historically, lending pools made conservative depositors subsidize aggressive loopers because of the lack of differentiation. Assets supplied into the same shared pool inherit the entire pool’s risk
Prime is Aave's answer within V4, a hub that admits only ETH- and BTC-correlated collateral. Today, it holds over $32M in deposits and is the second largest hub behind Core.
In this edition, we look at what Prime is, its designation as an institutional credit hub, and what it is becoming.
We covered the V4 architecture when it went live in March.
In V4, a Liquidity Hub is a segregated balance sheet. Each hub holds its own pool of supplied assets and issues credit lines to Spokes which are isolated markets where users supply and borrow. Core, Prime, and Plus are 3 separate pools of capital with different asset admission rules, and liquidity does not mix between them. Core supports the broadest range of assets, Plus supports mainly stablecoins, and Prime admits only ETH, BTC, and assets that track them, at high collateral factors and conservative parameters.
Segregation is the main value that V4 brings. In a V3-style shared pool, every supplier holds a slice of every risk asset the pool admits. When a long-tail collateral asset fails and leaves bad debt, the loss socializes across all depositors, even the ones who only ever touched ETH. Prime offers the option to opt out, and the “riskiest” asset a Prime depositor is exposed to is a wrapped or staked version of the 2 majors in crypto.
Narrow Selection of Collateral
Collateral factors set how much a user can borrow per dollar of collateral, and they are bounded by how far collateral and debt prices can diverge before liquidation. When the collateral is wstETH and the debt is ETH, the two move nearly together, so divergence risk is small and the protocol can permit high LTV ratios without bringing on bad debt. Correlated asset markets everywhere in DeFi are home to looping, borrowing ETH against staked ETH repeatedly to multiply staking yield, and Prime is built to house it.
The same restriction stabilizes supplier rates, which in our March piece, we mention shielding suppliers from variable-rate borrower demand. In a shared pool, one utilization curve serves every borrower type at once, so a speculative frenzy in an unrelated corner of the pool spikes utilization and whipsaws the rate paid to every supplier. Prime’s borrow demand comes overwhelmingly from correlated looping and dollar borrowing against bluechip collateral, both structural rather than episodic, so utilization and the supply rate derived from it move in a narrower band. V4-wide utilization sits near 34%, below the kink in the curve where rates steepen.
Clean collateral also borrows cheaply. V4 prices each borrower as a base rate plus a user risk premium scaled to collateral quality, and in Prime everyone’s collateral is a blue chip, so premiums are near zero. On top of that, since mid-July USDC borrowers on Prime receive 1% back on their borrow rate, paid in USDC.
Borrowing dollars against BTC and ETH at a predictable rate is the core product of every CeFi lending desk and prime broker in crypto. Prime offers this product with segregated, non-custodial collateral.
Aave V4 Growth
V4 as a whole saw deposits grow from $5.5M on April 1 to $352.7M today, with active loans at ~$121M. Deposits roughly doubled in the month to late July, and governance has raised supply and borrow caps multiple times to keep up with demand.
V4, however, remains a fraction of Aave TVL overall, since V3 still holds the large majority of protocol TVL, and Prime’s $32.5M is under 10% of V4’s total deposits. Part of the growth is also incentivized, because the USDC rebate on Prime and up to $15M of Avalanche Foundation incentives on the July 15 multichain expansion both subsidize the deposit growth.
The historical defect in DeFi lending was the absence of risk differentiation. Every depositor in the same pool had the same risk profile. Prime was the first attempt to fix that by offering high-LTV looping and dollar borrowing against bluechip collateral inside a segregated pool. If organic demand holds after the incentives expire, it will have demonstrated that modular hubs can finally separate risk without sacrificing liquidity.
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