Aave Cranks Up Institutional Play With Launch on Layer 2 Networks

Aave’s institutional deployment, Aave Arc, will launch on leading Layer 2 rollup networks Optimism and Arbitrum after receiving resounding support in a governance snapshot.

Until now, much of the narrative surrounding L2s has focused on unburdening retail DeFi users from the soaring fees associated with transacting on Ethereum’s mainnet. But Aave believes the improved performance and scalability offered by Layer 2 could also prove vital to onboarding institutions to decentralized finance.

Governance Proposals

Governance proposals supporting the L2 deployments of Aave’s v3 iteration have received widespread support from the protocol’s community. The snapshots on Jan. 18 showed that 583,000 or 99.99% of voters support Arc on Arbitrum, and 431,000 or 100% back its deployment on Optimism.

The news comes about two weeks after Aave Arc’s mainnet launch. The Aave community is also voting on whether to launch additional v3 deployments on Fantom and L2 Boba Network.

First teased in May 2021, Aave’s permissioned platform requires users to complete due diligence checks, including Know Your Customer (KYC) and Anti-Money Laundering (AML) reviews. That enables institutions to access DeFi while remaining compliant with regulators.

Sole Whitelister

Institutions are on-boarded by third-party firms, with crypto custodian Fireblocks currently operating as the sole whitelister for Aave v3. At launch, Aave reported that more than 30 firms had signed up for Arc, including institutional asset managers Galaxy Digital and CoinShares.

Aave v3 currently supports borrowing and lending in BTC, ETH, AAVE, and USDC. Additional assets are expected to be supported in the future.

Arbitrum and Optimism were long tipped to emerge as leading Ethereum’s first and fourth largest Layer 2s by total value locked (TVL), with both teams receiving grants from the Ethereum Foundation for audits.

Institutional Audience

While Arbitrum has quickly emerged as the sector’s clear leader representing nearly 53% of the $6.3B L2 TVL, Optimism has struggled to stand out from its competitors and currently ranks fourth with roughly 7% of the asset locked in L2 networks.

Aave currently ranks as the fourth-largest DeFi protocol with $13.1B locked across the Ethereum, Avalanche, and Polygon networks. Approximately 62% of Aave’s TVL is on Ethereum, with 20% on Avalanche and 18% on Polygon.

With Aave v3 catering to an institutional audience rather than retail, Optimism is likely hoping that hosting an institutional-facing DeFi blue-chip will give the network an edge over its rivals.