Behind the interest rate difference game, who profits the most among users, platforms, and agreements?

Written by: Thejaswini M A

Translated by: Saoirse, Foresight News

The most expensive thing in front of people is the need to make decisions independently. In comparison, the cost of fees is negligible. People are willing to pay for peace of mind and convenience, and that’s all.

The platform’s harvesting logic originates from this: alleviating the decision-making burden for users. There is a term in Tim Wu's book "Age of Extraction" that I really like - "passive bondage." Platforms complete their harvesting by depriving users of the right to choose autonomously.

Don’t know how to pick stocks? No problem, index funds and the S&P 500 will handle it for you. Confused by lending products? Just change the name, repackage it as a savings account, and promote it aggressively. They are essentially charging a "peace of mind service fee": relieving users of decision-making thoughts, and sometimes even pocketing the excess returns that should belong to users, all while the public remains indifferent.

Traditional DeFi goes against this trend, piling on numerous complex choices for users: which public chain to choose, which liquidity pool, how real-time interest rates are, when to allocate funds, whether cross-chain bridges have security risks, and distinguishing whether the page is the official platform or a phishing site generated by Claude before July 12. Aave has only accumulated 2.5 million users after six years, while Revolut, which promotes minimal operations, boasts 65 million users. Therefore, saying Aave needs to align with the needs of ordinary users and optimize the user experience is not an unreasonable opinion.

From January to July this year, the annualized interest rate for Aave's USDC liquidity pool fluctuated wildly between 2% and 9%. Fluctuations in interest rates are a norm in DeFi: users monitor the rise and fall of rates, moving funds wherever returns are higher. But this model is entirely unsuitable for the general public. Emerging digital banks cannot explain to users that deposit returns are determined by market lending demand, which may drop directly to 2% one day. Users will not entrust their funds to products filled with uncertainty, which is also the core reason why the vast majority of people never engage with crypto financial applications.

On July 9, Aave Labs launched a solution - Stable Vaults. This article will break down its operational logic, who profits from it, and why ordinary users will continue to use this product even if they are aware of the costs.

Stable Vaults Operation Mechanism

Any business only needs to complete a one-time integration to launch savings deposit services, applicable subjects include digital banks, crypto wallets, and payroll service providers. The funds deposited by users will ultimately flow into the Aave lending market. Users only need to check the earnings in the app they use daily and can directly participate if they feel it is worthwhile.

The core feature of the vault is: fixed returns, which are quite rare in the crypto industry. The returns from Aave’s underlying lending pool change in real-time according to market borrower demand, while Stable Vaults essentially build a buffering layer above the underlying, allowing the operators to retain the authority to adjust interest rates: operators can customize the rates displayed externally, for example, set at 4%. After that, regardless of how the Aave underlying market interest rates fluctuate, the vault will consistently pay users an annualized return of 4%, with all profit and loss risks from interest rate fluctuations borne entirely by the operators. The portion of underlying returns exceeding 4% is entirely owned by the operators.

Perspective of Deposit Users

Users essentially receive "return guarantees." When the Aave USDC pool interest rate dropped to 2% this past spring, the vault still paid out the committed annualized return of 4%, with the operators covering the interest gap.

In financial markets, transferring risk always requires compensation, and this is no exception. It can be likened to fixed-rate mortgages: compared to floating rates, fixed rates are usually 50 to 100 basis points higher, and this premium is the cost borrowers pay for return predictability.

Using the vault, users need not create their own crypto wallets, safeguard mnemonic phrases, operate across chains, or filter public chains; the platform provides customer service, account recovery, facial recognition login services, and if there is an issue with assets, a physical company is responsible for the interface. The official Aave application has SOC 2 security certification and supports two-factor authentication, which are indeed services ordinary users are willing to pay for.

However, users must also pay a corresponding price: returns have a ceiling. When underlying pool returns rise to 9% or 6%, users still only receive the fixed 4% determined by the operators, who will set differentiated fixed rates based on user membership levels. Floating interest rates allow users to visually perceive the actual market returns, while fixed rates obscure the profits earned by intermediaries.

At the same time, users add a layer of counterparty risk: this model adds two new types of risks to fund safety. One is the financial status of the operating financial enterprise itself, and the other is the risk of private script code vulnerabilities that dispatch funds in the background. Directly depositing into Aave, users only bear the risk from the underlying code of the protocol; but using the vault, even if the Aave protocol itself has no vulnerabilities, if the operating enterprise goes bankrupt or backend scripts malfunction causing fund transfer loss, user assets will also be at risk.

In the traditional interest rate swap market, sufficient comparison on both supply and demand sides brings fixed rates back to a reasonable range, but under the Stable Vaults model, interest rates are set unilaterally by the operators, and users lack horizontal comparison channels. Users do not compare 4% with Aave's underlying 6% real returns but directly benchmark with traditional bank deposits: Aave's official page juxtaposes its own rates with the national average savings rate of 0.4% as reported by the Federal Deposit Insurance Corporation (FDIC), and amidst this contrast, the vault returns seem quite attractive.

Source: aave.com

Perspective of the Operating Entity

For example: a digital bank that holds $200 million in idle stablecoins, where the customer acquisition cost has already been incurred. It only needs to complete a one-time technical integration to launch Stable Vaults and publicly promote a fixed annual return of 4%. If the underlying Aave liquidity pool has an annual yield of 6%, relying solely on a 2% yield spread can generate an additional $4 million in profits each year. This idle capital, which would otherwise incur idle costs, now becomes a source of reliable low-investment returns.

The payroll service provider Rise is a typical example: this platform pays salaries for contractors in 190 countries and has processed over $1.5 billion in funds. Companies typically pre-fund salaries in USDC a week in advance, which has previously been sitting idle. Therefore, Rise launched its own financial management feature Rise Earn, temporarily depositing the pre-funded salaries into Aave's USDC liquidity pool on the Arbitrum chain until the salary payout date.

Rise only charges 1% of the total earnings as a service fee, with no other deductions. From the 6% annualized return, the service provider only takes 6 basis points, leaving contractors with 5.94%, and the floating interest rate from the Aave underlying is displayed in real-time throughout.

If the same capital operates through Stable Vaults, the operator can earn a spread of 200 basis points, with the earnings difference reaching as high as 33 times.

Perspectives of Aave and Stable Vaults

Aave profits by selling the tiered interest rate features of the vault: the operating party can set differentiated earnings based on membership levels and marketing campaigns, with senior members earning 5% annually and regular users 3.5%, all deriving from the same underlying lending pool earnings. Financial technology companies issuing their own stablecoins can also register their stablecoins as vault deposit assets, creating a closed-loop capital circulation system. Stable earnings will increase user retention rates, and the continuously deposited assets themselves are crucial for the platform’s user retention.

The operators do not profit from the price difference out of thin air; they must bear the rate fluctuation-related losses both ways. This spring, when the underlying liquidity pool yield fell to 2%, all operators of vaults promising fixed rates above 2% needed to cover the yield gap from their own pockets.

The event on April 18 of this year fully exposed the potential risks of this model: the Kelp DAO cross-chain bridge was hacked, triggering a market-wide run on the Aave liquidity pool, causing the pool’s fund utilization rate to instantly reach 100%, and all withdrawal operations were frozen, with the operators’ unrealized gains trapped along with users’ principal in the withdrawal queue.

When the capital utilization rate reaches its limit, the vault, like ordinary users, cannot withdraw any funds. The surplus of underlying earnings must remain on the books, tied to the users' principal.

If market liquidity recovers later, operators can settle the accumulated unrealized earnings from the run during the freeze all at once. This surplus is essentially the market paying a premium for exhausted liquidity, and the cost of liquidity freeze is always borne by deposit users. If liquidity cannot recover for a long time, and the liquidity pool incurs bad debts, the vault will experience an earnings shortfall; Aave's documentation only states that authorized entities can fill system gaps but does not establish a corresponding reserve fund mechanism for guarantee.

Aave will argue externally that the protocol contract has never been hacked, that the vulnerabilities originated from the Kelp cross-chain bridge rather than its own code, and that risk collateral assets rsETH were frozen within hours; these statements are accurate. However, prior to this, the community voted to accept this high-risk collateral asset with a collateral rate as high as a dangerous 93%, after which the risk manager resigned, ultimately leaving ordinary users to bear all losses from systemic failures.

Stable Vaults seems to fill in the last piece of the puzzle for Aave’s commercialization aimed at the general public.

The payroll service provider Rise connects idle payroll funds to Aave; crypto exchange Kraken has launched a customized protocol Tydro based on Aave V3 on its own second-layer network, connecting all of its retail financial management features to this protocol, thereby indirectly making Kraken’s financial management users Aave users; Cap Finance also deposits stablecoin reserves into the Aave liquidity pool.

The Horizon platform collaborates with Circle and Franklin Templeton to support tokenized treasury bond collateral lending; the Aave official app targets C-end retail users directly; Stable Vaults, in contrast, opens access channels to the entire industry, packaging itself as an asset diversification solution.

Aave does not actually lack deposits. Stani Kulechov, founder and CEO of Aave, stated in an interview with The Block in March this year that the current DeFi market suffers from overall oversupply of liquidity, and the industry focus must shift to the borrowing demand side, which is also the core reason why the USDC underlying return rate has long remained at 2%-3% and can never return to the previous high of 8%. For a long time, DeFi funds have been extremely profit-driven, and even a yield difference of just 50 basis points can cause funds to leave en masse; whereas guiding capital through platforms like payroll services and wallets, which have a grasp on user relationships, can transform crypto funds, which are typically highly unstable in liquidity, into stable stock funds akin to traditional bank deposits.

The Aave economic model 3.0 mechanism, officially launched on June 27, will use protocol revenue to automatically buy back and burn AAVE tokens. Whether in a bull or bear market, the platform needs stable revenue to maintain buybacks; in a bearish environment, deposits with high retention attributes are crucial for ensuring ongoing rotations of buyback funds, and Stable Vaults is exactly the tool for acquiring these stable funds.

The annualized return of USDC financial management on Coinbase's platform is around 4%, while Robinhood launched its financial management feature on July 1 with an annualized return close to 7%, with both platforms accumulating 2.8 million fund accounts, referring to their financial products as savings accounts.

Coinbase connects to the Morpho and Ethena protocols at the base level; Robinhood builds its financial management system relying on Morpho and Maple, with risk control parameters set by a third-party institution, Steakhouse.

Both platforms have invested significant costs to establish a complete financial management system, including custody partnerships, asset screening, risk control teams, and months of legal processes. The core value of Aave Stable Vaults is to eliminate all self-built costs: any application needs only one integration to present users with fixed return figures, with the profit and loss arising from the difference between the underlying Aave liquidity pool returns and the front-end displayed fixed rate all handled by the integrating party.

Traditional banks can legally conduct savings and lending operations backed by a century of refined legal frameworks: reserve requirements, periodic on-site inspections, deposit insurance systems, and regulatory agencies may inspect without notice. The root of this regulatory framework is a social consensus: banks will lend depositor funds and must have a robust mechanism for managing loan default risks.

All the financial management functions Stable Vaults can provide can be achieved by an average user in just twenty or thirty minutes: creating a crypto wallet, transferring in USDC stablecoins, and then depositing into the native Aave liquidity pool. Doing it independently doesn't require KYC identity verification, intermediary operators, or backend adjustment scripts, nor will they extract profit differences; the underlying 6% yield can be fully received, and all data from the liquidity pool can be viewed in real time.

I understand that the considerations of platform operators are much longer-term than the short-term gains or losses of ordinary users, and I also never believe that ordinary people who choose vault products lack judgment.

The research of Iyengar and Huberman on retirement financial planning indicates that the more optional fund products there are, the lower the proportion of users actively engaging in financial management; when faced with a plethora of choices, most people will simply give up on financial management. Consequently, all consumer financial products aimed at the public have adopted the design logic derived from this research conclusion.

Over the past fifteen years, the industry has repeatedly promoted the safety of self-custody crypto wallets, but the market's real choices are exactly the opposite: the vast majority of on-chain spending funds still flow through custodial platforms. This is the genuine preference validated by a vast number of users over a long period, and the security logic of custodial platforms is more aligned with ordinary people. For newcomers with only $2000 in assets and no knowledge of cryptocurrency, the two most common scenarios for asset loss are misplacing mnemonic phrases or entering the wrong transfer address; custodial apps equipped with facial ID and account recovery features eliminate these types of human operational risks directly. Users paying a 200 basis point difference is essentially purchasing insurance against operational errors, a decision that is completely rational.

Thus, Aave's launch of Stable Vaults is a correct commercial layout in line with the logic of business. For DeFi protocols that possess abundant liquidity but lack 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 omnipresent.

Ultimately, this product accepts human nature: ordinary people pursue asset safety and predictable returns, and most importantly, simple and worry-free operations. Managing personal assets already requires a significant amount of energy; no one wants to personally operate a private central bank-like financial management system. Users merely want to close the app and see that the yield numbers in their accounts remain stable and unchanged.