Aave: The core pillar of Decentralized Finance and on-chain economy

On-chain lending is one of the important areas in the crypto industry, and Aave, as the leader in this market, has strong competitive advantages and user stickiness. Although Aave’s value is currently underestimated, it possesses enormous growth potential, which has not yet been fully recognized by the market.

Aave launched on the Ethereum mainnet in January 2020 and has been operating for 5 years now. Currently, Aave is the largest lending protocol by scale, with a total active loan amount of $7.5 billion, more than 5 times that of the second place.

Protocol metrics continue to grow, surpassing previous cycle highs

Aave is one of the few DeFi protocols that have surpassed the levels of the 2021 bull market. Its quarterly revenue has exceeded the peak of the bull market in the fourth quarter of 2021. Notably, Aave’s revenue has continued to grow even during the market correction period from November 2022 to October 2023. As the market rebounds in the first and second quarters of 2024, Aave’s growth momentum remains strong, with a month-on-month growth rate of 50-60%.

Since the beginning of the year, benefiting from increased deposits and the rise in the prices of underlying assets, Aave’s Total Value Locked (TVL) has nearly doubled, recovering to 51% of the peak value in the 2021 cycle. This demonstrates Aave’s stronger resilience compared to other leading Decentralized Finance protocols.

Strong profit performance reflects a high degree of alignment between products and the market

Aave’s revenue peaked in the last cycle, coinciding with multiple smart contract platforms issuing a large number of token incentives to attract users and liquidity. This brought in unsustainable speculative capital and leverage levels, amplifying the revenue figures of most protocols.

Currently, the token incentives of the main chain have been exhausted, and Aave’s own token incentives have also dropped to negligible levels. This indicates that the recent growth in indicators is organic and sustainable, primarily driven by a rebound in market speculation activities, which has boosted active loan and borrowing rates.

Even during periods of reduced speculative activity, Aave has demonstrated its ability to drive fundamental growth. Amid a significant downturn in the global risk asset market, Aave’s revenues remain robust, thanks to its successful collection of liquidation fees during the loan repayment process. This proves that Aave possesses the capability to withstand market fluctuations across different collateral types and multi-chain environments.

Strong fundamentals are recovering, and Aave’s price-to-sales ratio remains at its lowest level in three years.

Despite the recent strong recovery in indicators, Aave’s price-to-sales ratio is only 17 times, at its lowest level in three years, significantly lower than the median level of 62 times during the same period.

Aave is expected to strengthen its leading position in the Decentralized Finance lending sector.

Aave’s competitive advantages are mainly reflected in four aspects:

1. The protocol’s security management record is good: Aave has not experienced any major smart contract-level security incidents to date, which is the primary consideration for users when choosing a lending platform.

2. Bilateral Network Effects: DeFi lending is a typical two-sided market where depositors and borrowers mutually promote growth, forming a positive feedback loop.

3. Effective DAO Management: Aave implements a DAO-based governance model that involves comprehensive information disclosure and community discussions. Its DAO community brings together a diverse range of professional institutional participants.

4. Multi-chain ecosystem positioning: Aave has been deployed on almost all mainstream EVM-compatible chains and maintains a leading position on most chains. The upcoming V4 version will further enhance its cross-chain liquidity advantage.

Reform Token Economics to Promote Value Accumulation

The Aave Chan Initiative (ACI) recently proposed a reform of AAVE token economics, aiming to introduce a revenue-sharing mechanism to enhance token utility. The main changes include:

1. Eliminate the risk of AAVE being reduced in the security module.
2. Introduce a new Umbrella security module, replacing the existing stkAAVE and stkABPT with stk aToken.
3. Launch the “anti-GHO” token to enhance the alignment of interests between AAVE stakers and GHO borrowers.
4. Implement a burn and distribution plan to redistribute excess protocol revenue to token stakers.

These reforms will benefit both platform users and AAVE holders, increasing the demand for AAVE.

Growth Prospects of Aave

Aave has multiple growth drivers in the future:

1. Aave v4: Will revolutionize the Decentralized Finance interaction experience, enabling seamless cross-chain liquidity access, and integrating account abstraction and smart accounts.

2. Expand more chains and asset classes: Aave has voted to support deployment on zkSync and is considering entering non-EVM networks such as Aptos.

3. Positively correlated with the growth of BTC and ETH assets: With the launch of Bitcoin and Ethereum ETFs, it is expected to attract more capital into the digital asset market.

4. Benefit from the growth of stablecoin supply: The global central bank interest rate cut cycle may drive capital flow from traditional finance to the Decentralized Finance sector, stimulating stablecoin lending activities.

Summary

Aave, as a leader in the decentralized lending space, has a positive growth outlook for the future. Its strong network effects, excellent token liquidity, and composability will help it consolidate and expand its market dominance. The upcoming tokenomics upgrade will further enhance the protocol’s security and value capture capabilities.

Currently, the market’s valuation of DeFi protocols is generally low, and this mismatch between valuation and fundamentals is not expected to last long. AAVE offers investors a highly attractive risk-adjusted investment opportunity.