ParaFi invests $4.5 million in DeFi lending protocol Aave

A Silicon Valley DeFi VC fund has invested big into Aave, which offers flash loans.

ParaFi, a Silicon Valley venture capital firm that’s pumped millions into decentralized finance (DeFi) protocols, is now pumping a few million more.

The firm today announced it has invested $4.5 million in DeFi lending protocol Aave. 

Aave’s main offering is flash loans. Flash loans let you take out cryptocurrency, use it for a very specific purpose—say, a trade—then immediately return it back with interest.

Because there’s very little risk (theoretically, at least), flash loans don’t require any collateral. That means that you can get access to huge, life-changing loans with your lunch money. 

Aave launched its mainnet in January 2020. In the seven months since then it has grown to be the third most popular DeFi lending protocol (and the fifth most popular DeFi protocol overall), with $158.8 million locked in its smart contracts, according data pulled from DeFi metrics site Defi Pulse.

Far ahead of Aave are Maker and Compound, with $624.9 million and $681.6 million locked in their smart contracts, respectively.

Aave has also integrated with Uniswap and was the first DeFi protocol to support Tether. It also recently announced a service whereby depositors can lend money with undercollateralized loans that are backed by legal agreements (not just code). 

@AaveAave is starting native Credit Delegation (CD). Aave depositors can delegate their credit lines. For example, Karen deposits an asset such as USDT to @AaveAave and delegates her credit line to Chad, who draws funds such as ETH from Aave Protocol. pic.twitter.com/MwU1faThIi

— stani.eth Credit Delegation is so hot right now (@StaniKulechov) July 7, 2020

Why has ParaFi invested in Aave? 

“We were initially drawn to the novelty of Aave’s Flash Loans, which solve for market inefficiencies across DeFi markets, and unlock new use cases,” said Santiago Roel Santos, partner at ParaFi, in a statement. 

ParaFi plans to take part in the governance of the protocol once it makes the move into a DAO, or decentralized autonomous organization. 

“In aggregate, ParaFi has become one of the earliest and largest institutional investors in LEND [Aave’s native token] owning ~$4.5M (at the time of writing),” Stani Kulechov, founder and CEO of Aave, told Decrypt.

Kulechov said in a statement that ParaFi is the first institutional fund to make a direct investment in the protocol. Since launching in 2018, ParaFi has invested in MakerDAO, Compound and Kyber. 

Pac Man Theory of DeFi : big protocols eat small ones. Why?

– build faster + secure
– have + distribution
– have + liquidity
– have + $ to incentivize supply (LPs) & demand

Will be interesting to see how much consolidation (“winner take all”) happens in the space

— Santiago R Santos (@santiagoroel) July 7, 2020

“We look forward to actively participating in governance and supporting the growth of the protocol,” said Santos, in reference to Aave. But he must say that to all the protocols.