Author: Thejaswini M A
Compiler: Saoirse, Foresight News
The most expensive thing for a person is to make their own decisions. In comparison, the cost of fees is trivial. People are willing to pay for peace of mind and convenience, nothing more.
The logic behind platform 'extraction' stems from this: removing the burden of decision-making from users. There's a term I like in Tim Wu's book The Age of Extraction — "passive constraint." Platforms achieve extraction by stripping away users' right to autonomous choice.
Don't know how to pick stocks? No problem, index funds, the S&P 500 will handle it for you. Don't understand lending products? Then change the name, package them directly as savings accounts and advertise them heavily. They all essentially charge a "peace-of-mind service fee": sparing users the need to think and decide, sometimes also taking away the excess returns that should belong to the users, something the masses don't seem to mind.
Traditional DeFi does the exact opposite, piling on users a multitude of complex choices: which public chain to choose, which liquidity pool, what the real-time interest rate is, when to move funds, whether there are security risks with the cross-chain bridge, and also having to discern if the webpage is the official platform or a phishing site clone generated using Claude before July 12th. Aave has only accumulated 2.5 million users after six years of deep cultivation, while Revolut, which focuses on ultra-simple operations, boasts 65 million users. Therefore, saying that Aave needs to cater to the needs of ordinary users and optimize the user experience is not an unfair assessment.
From January to July this year, the annualized interest rate of Aave's USDC pool fluctuated wildly between 2% and 9%. Interest rate fluctuations are the norm in DeFi: users watch the rise and fall of rates, moving funds to wherever yields are higher. But this model is simply impossible to push to the general public. Emerging digital banks can't explain to users that deposit returns are determined by market borrowing demand and could one day drop directly to 2%. Users won't hand over their funds to a product full of uncertainty, which is also the core reason why the vast majority of people never touch crypto wealth management applications.
On July 9th, Aave Labs launched a solution — Stable Vaults. This article will dissect its operating logic, who profits from it, and why ordinary users will still use this product even after knowing the cost.
Stable Vaults Operating Mechanism
Any company only needs to complete integration once to launch a savings deposit service. Applicable entities include digital banks, crypto wallets, and payroll service providers. Funds deposited by users will ultimately flow into the Aave lending market. Users only need to check the returns within their daily-use App, and if it looks good, they can directly participate.
The core feature of the vaults: fixed returns, which is quite rare in the crypto industry. The returns of Aave's underlying lending pool fluctuate in real-time with market borrower demand. Stable Vaults essentially builds a buffer layer on top of the underlying layer, giving operators the authority to adjust interest rates: operators set the externally displayed rate, for example, at 4%. Thereafter, regardless of how the underlying market rate on Aave fluctuates, the vault will stably pay users a 4% annualized rate. All profit and loss risks from interest rate fluctuations are borne entirely by the operator. The difference portion where the underlying yield exceeds 4% belongs entirely to the operator.
Depositor Perspective
Users essentially get "yield guarantees." When the Aave USDC pool rate dropped to 2% this spring, vaults promising a 4% annualized rate still paid in full, with the interest rate gap covered by the operator.
In financial markets, transferring risk always requires paying a price, and this is no exception. It can be likened to a fixed-rate mortgage: compared to a floating rate, a fixed rate is usually 50 to 100 basis points higher. This premium is the cost paid by the borrower for certainty of payment.
Using the vaults, users don't need to create their own crypto wallets, keep mnemonic phrases, operate cross-chain transactions, or select public chains; the platform will provide customer support, account recovery, and facial recognition login services. If assets have issues, there is a physical company responsible for handling it. The official Aave application has SOC 2 security certification and supports two-factor authentication—these are the services ordinary users are truly willing to pay for.
But users also pay a corresponding price: there is a ceiling on returns. When the underlying pool yield rises to 9% or 6%, what users receive is still only the 4% set by the operator. Operators will set differentiated fixed rates based on user membership levels. Floating rates allow users to directly see the market's real returns, while fixed rates completely obscure the spread earned by middlemen.
Simultaneously, users add an extra layer of counterparty risk: this model overlays two new types of risk onto fund security. One is the operational condition of the financial enterprise itself, and the other is vulnerabilities in the private script code that schedules funds in the background. Depositing natively and directly into Aave, users only bear the risk of the protocol's underlying code; but using the vaults, even if the Aave protocol itself has no vulnerabilities, if the operating company goes bankrupt or the background script malfunctions causing fund transfer loss, user assets will still suffer.
In the traditional interest rate swap market, sufficient comparison between supply and demand allows fixed rates to return to a reasonable range. But in the Stable Vaults model, the interest rate is completely unilaterally set by the operator, and users lack channels for horizontal comparison. Users won't compare the 4% with the Aave underlying real return of 6%; they will only benchmark against traditional bank deposits: Aave's official page will juxtapose its own interest rate with the national average savings rate of 0.4% as counted by the Federal Deposit Insurance Corporation (FDIC). In this contrast, the vault's returns look quite attractive.
Source: aave.com
Operator Perspective
For example: a digital bank holds $200 million in user idle stablecoins, with user acquisition costs already sunk. It only needs to complete one technical integration to launch Stable Vaults, advertising a 4% fixed annualized rate. If the underlying Aave pool's annualized return is 6%, just by earning the 2% spread difference annually, it can add $4 million in profit. This previously idle capital, which would only incur holding costs, now becomes a source of stable, low-input returns.
The payroll service provider Rise is a typical case: the platform pays salaries for contractors in 190 countries, having processed over $1.5 billion in funds. Companies typically prepay salaries in USDC a week in advance. This capital was completely idle before, so Rise launched its own wealth management feature, Rise Earn, temporarily depositing prepaid salaries into the USDC pool on Aave on the Arbitrum chain until the salary disbursement date.
Rise only charges 1% of the total returns as a service fee, with no other deductions. From the underlying 6% annualized return, the service provider only takes 6 basis points, contractors receive 5.94%, and the entire process displays Aave's underlying real-time floating rate.
Operating the same scale of funds through Stable Vaults, an operator could earn a 200 basis point spread difference, a profit-sharing gap as high as 33 times.
Aave and Stable Vaults Perspective
Aave profits by selling the vault's layered interest rate function: operators can set differentiated returns for membership levels, marketing campaigns—5% annualized for premium members, 3.5% for regular users—all derived from the same underlying lending pool returns. Fintech companies issuing their own stablecoins can also register their stablecoins as vault deposit assets, building a closed-loop capital circulation system. Stable returns increase user capital retention, and continuously deposited assets themselves are a core tool for platform user retention.
Operators don't earn the spread out of thin air; they must bear the profit and loss from interest rate fluctuations in both directions. When the underlying pool yield dropped to 2% this spring, all vault operators promising fixed rates above 2% needed to cover the yield gap out of their own pockets.
The incident on April 18th this year fully exposed the potential risks of this model: the Kelp DAO cross-chain bridge was hacked, triggering a large-scale market run on the Aave pool. The pool's capital utilization instantly hit 100%, freezing all withdrawal operations. Operator paper profits and user principal were trapped together in the withdrawal queue.
When capital utilization hits the limit, vaults, like ordinary users, cannot withdraw any funds. Underlying yield surpluses can only remain on paper, tied up with user principal.
If market liquidity recovers later, operators can settle the accumulated paper surpluses from the frozen run period in one go. This surplus is essentially the premium the market pays for liquidity drying up, but those bearing the cost of liquidity freeze are always the depositors. If liquidity cannot recover for a long time and the pool generates bad debts, vaults will experience yield shortfalls; Aave documentation only states that authorized entities can cover system shortfalls but does not establish a corresponding reserve fund backstop mechanism.
Aave would argue externally that the protocol contract has never been hacked, the vulnerability was in the Kelp cross-chain bridge, not its own code, and it froze the risky collateral asset rsETH within hours—these claims themselves are true. But before that, the community vote approved accepting this high-risk collateral asset with a dangerous collateralization rate of 93%, after which the risk lead directly resigned, ultimately letting ordinary users bear all losses from the system failure.
Stable Vaults seems to complete the last piece of the puzzle for Aave's mass-market commercialization.
Payroll service provider Rise connects idle salary funds to Aave; crypto exchange Kraken, based on Aave V3, launched a customized protocol, Tydro, on its own Layer 2 network, with all its retail wealth management features connecting to this protocol—Kraken's wealth management users essentially indirectly become Aave users; Cap Finance also deposits stablecoin reserves into Aave pools.
The Horizon platform collaborates with Circle and Franklin Templeton to support tokenized treasury bill collateralized lending; Aave's official application directly targets C-end retail users; Stable Vaults opens integration channels to the entire industry, packaged externally as an asset diversification solution.
Aave actually doesn't lack deposits. Kulechov (Stani Kulechov, Aave Founder and CEO) stated in a March interview with The Block that the current DeFi market overall has excess liquidity, and the industry's focus must shift to the borrowing demand side, which is also the core reason why the underlying USDC yield has long remained at 2%-3%, never returning to the previous 8% highs. For a long time, DeFi capital has been extremely yield-chasing; a mere 50 basis point yield difference would cause large-scale capital flight. But by channeling flows through user-relationship applications like payroll platforms and wallets, previously highly volatile crypto funds transform into stable stock funds akin to traditional bank deposits.
The Aave Economic Model 3.0 mechanism, officially launched on June 27th, will use protocol revenue to automatically buy back and burn AAVE tokens. Regardless of market bull or bear, the platform needs stable revenue to sustain buybacks; in a bear market environment, deposit funds with high retention attributes are key to ensuring the continuous flow of buyback funds, and Stable Vaults is precisely the tool to acquire such stock funds.
Coinbase's platform USDC wealth management yields about 4% annualized; Robinhood launched its wealth management feature on July 1st, with yields close to 7%, the platform has accumulated 2.8 million funded accounts. Both platforms call their wealth management products savings accounts.
Coinbase's backend connects to the Morpho and Ethena protocols; Robinhood's wealth management system relies on Morpho and Maple, with risk parameters set by a third-party agency, Steakhouse.
Both platforms invested heavily in building the entire wealth management system, including custody partnerships, asset selection, risk control teams, and months of legal processes. The core value of Aave Stable Vaults is to eliminate all self-building costs: any application only needs one integration to display fixed yield numbers to users, with all profit and loss from the spread between the underlying Aave pool yield and the front-end displayed fixed rate handled entirely by the integrating party.
Traditional banks can legally conduct savings and lending business, supported by a century of perfected legal systems: reserve requirements, regular on-site inspections, deposit insurance systems, and regulatory agencies can conduct unannounced inspections. The root of this regulatory system is societal consensus that banks lend depositor funds, and there must be robust mechanisms to handle lending default risks.
All wealth management functions that Stable Vaults can provide can be achieved by ordinary users themselves in just 20-30 minutes: create a crypto wallet, transfer in USDC stablecoins, and deposit them natively into the Aave pool. Self-operation doesn't require KYC identity verification, intermediary operators, or background rebalancing scripts, won't incur yield spreads, and the full underlying 6% yield can be received, with real-time access to all pool data.
I understand the considerations of platform operators are far more long-term than the short-term gains and losses of ordinary users, and I also never think ordinary people choosing vault products lack judgment.
Iyengar and Huberman's research on retirement savings plans showed that the more fund product options available, the lower the proportion of users who actively participate in savings; faced with an overwhelming number of choices, most people simply give up on saving. Since then, all consumer finance products targeting the masses have designed their logic following this research conclusion.
For the past fifteen years, the industry has repeatedly promoted the security of self-custodial crypto wallets, but the real market choice is the opposite: the vast majority of on-chain card spending funds still go through custodial platforms. This is the real preference verified by the masses over time; the security logic of custodial platforms aligns better with ordinary people. For newcomers with only $2,000 in assets and no cryptocurrency knowledge, the two highest-frequency scenarios for asset loss are losing the mnemonic phrase and entering the wrong transfer address; custodial Apps with facial ID and account recovery functions directly eliminate these types of human operational risks. Users paying a 200 basis point spread are essentially buying insurance for their own operational errors, a completely rational consumption decision.
Therefore, Aave's launch of Stable Vaults is a commercially logical and correct strategic move. For DeFi protocols sitting on massive liquidity but lacking user loyalty, this is an inevitable choice; all applications in the crypto industry targeting ordinary consumers are iterating in the same direction, because the underlying human logic is everywhere.
Ultimately, this product is an acceptance of human nature: ordinary people pursue asset safety, predictable returns, and most importantly, simple, hassle-free operation. Managing personal assets already consumes a lot of energy; no one wants to personally operate a private central bank-like wealth management system. Users just want to close the App and see their account return number remain stable and unchanged.
