The original author: Arthur, Founder of DeFiance Capital
Original translation: Ismay, BlockBeats
Editor's note: This article delves into Aave's dominant position in the decentralized lending market and its future growth prospects. With the launch of Bitcoin and Ethereum ETFs, Aave is expected to benefit from the continued growth of cryptocurrency assets as an emerging asset class. In addition, as global demand for stablecoins increases, Aave's revenue and TVL (Total Value Locked) will continue to rise. The article also analyzes the upcoming V4 version of Aave and its token economic model upgrade, which will further consolidate its market position and provide investors with more attractive risk-adjusted returns. Through a comprehensive analysis of Aave's current status and potential, this article showcases the core competitiveness of this leading project and its growth potential in the future.
The following is the original content:
Aave is currently the largest and most rigorously tested lending protocol.
As the undisputed leader in the on-chain lending field, Aave has a highly defensive and sticky moat. We believe that Aave, as the leader in this important crypto industry, is severely undervalued, and still has huge growth potential in the future, which the market has not fully reflected.
Aave was launched on the Ethereum mainnet in January 2020, and this year marks its fifth year of operation. Since its launch, Aave has firmly established itself as one of the most reliable protocols in the DeFi and lending fields. As evidence of this, Aave is currently the largest lending protocol, with an active loan amount of $7.5 billion, five times that of the second-largest protocol, Spark.
(Data as of August 5, 2024)
Protocol metrics continue to grow and have surpassed the previous cycle's peak
Aave is one of the few DeFi protocols that has surpassed its peak in the 2021 bull market indicators. For example, its quarterly revenue has exceeded the peak of the fourth quarter of 2021. It is worth noting that even when the market was in a consolidation phase from November 2022 to October 2023, Aave's revenue growth continued to accelerate on a quarterly basis. As the market warmed up in the first and second quarters of 2024, its growth rate continued to remain strong, growing by 50-60% each quarter.
(Source: Token Terminal)
Due to the increase in deposits and the rise in token prices of underlying collateral assets (such as WBTC and ETH), Aave's TVL has nearly doubled since the beginning of the year. Therefore, the TVL has recovered to 51% of the 2021 cycle peak, demonstrating its resilience compared to other top DeFi protocols.
Data as of August 5, 2024.
Outstanding revenue quality demonstrates the alignment of products and the market
Aave's revenue reached its peak in the previous cycle, when multiple smart contract platforms (such as Polygon, Avalanche, and Fantom) attracted users and liquidity through a large number of token incentive measures. This led to unsustainable "hot money" and leverage inflows, which pushed up the revenue data for most protocols during that period.
However, today, the token incentive measures of major chains have largely dried up, and Aave's own token incentives have also decreased to almost negligible levels.
(Source: Token Terminal)
This indicates that the growth in metrics over the past few months has been organic and sustainable, mainly driven by the speculative rebound in the market, thereby increasing active loans and borrowing rates.
In addition, Aave has demonstrated its ability to grow its fundamentals even during periods of waning speculation. During the global risk asset collapse in early August, Aave's revenue remained resilient as it successfully collected liquidation fees as loans were repaid. This also demonstrates its ability to cope with market fluctuations based on different collateral bases and on-chain responses.
(Data as of August 5, 2024, Source: TokenLogic)
Despite strong fundamental recovery, Aave's P/E ratio is at its lowest level in three years
Despite the strong recovery of Aave's metrics in the past few months, its Price-to-Sales (P/S) ratio remains depressed, currently at 17 times, falling to its lowest level in three years, far below the median of 62 times over the past three years.
(Source: Coingecko, Token Terminal)
Aave is expected to continue to consolidate its leading position in the decentralized lending field
Aave's moat consists of the following four aspects:
Good record of protocol security management: Most emerging lending protocols experience security incidents within the first year of operation, while Aave has not experienced any major smart contract-level security incidents to date. For DeFi users, especially large users with substantial funds, a platform's robust risk management and security record are usually the primary considerations when choosing a lending platform.
Bidirectional network effects: DeFi lending is a typical two-sided market, with depositors and borrowers constituting the supply and demand sides, respectively. The growth of one side will stimulate the growth of the other, making it increasingly difficult for latecomers to catch up. In addition, the more abundant the overall liquidity of the platform, the smoother the inflow and outflow of liquidity for depositors and borrowers, making the platform more attractive to large fund users, further promoting the growth of the platform's business.
Excellent DAO management: The Aave protocol has fully implemented DAO-based management. Compared to centralized team management models, DAO management provides more comprehensive information disclosure and deeper community discussions on important decisions. In addition, Aave's DAO community includes a group of high-governance professional institutions, including top risk management service providers, market makers, third-party development teams, and financial advisory teams. The diverse sources of participants have led to active governance participation.
Positioning in a multi-chain ecosystem: Aave is deployed on almost all major EVM L1/L2 chains, and on all deployment chains except BNB Chain, its TVL (Total Value Locked) is in a leading position. In the upcoming Aave V4 version, cross-chain liquidity will be connected, making the advantages of cross-chain liquidity more prominent. See the details in the following figure:
(Data as of August 5, 2024, Source: DeFiLlama)
Redesigned Token Economic Model to Drive Value Accumulation and Eliminate Slashing Risk
The Aave Chan Initiative has just released a proposal aimed at completely reforming the token economic model of $AAVE by introducing a revenue-sharing mechanism to enhance the token's utility.
The first major change is the removal of the slashing risk faced by $AAVE when using the Safety Module.
Currently, $AAVE stakers (locked value of $228 million) and $AAVE / $ETH Balancer LP token holders in the Safety Module (locked value of $99 million) may face slashing to address shortfall events.
However, as staking assets, stkAAVE and stkABPT are not ideal coverage assets due to their lack of correlation with the collateral assets that generate defaults. In such events, the selling pressure of $AAVE would also reduce the coverage capacity.
Under the new Umbrella Safety Module, stkAAVE and stkABPT will be replaced by stkaTokens, primarily aUSDC and awETH. Suppliers of aUSDC and awETH can choose to stake their assets to earn additional fees (paid in $AAVE, $GHO, and protocol revenue) on top of the interest paid by borrowers. These staked assets may be slashed and burned in the event of a shortfall.
·This arrangement is beneficial for both platform users and $AAVE token holders.
Additionally, the introduction of the revenue-sharing mechanism will bring in more demand-driving factors for $AAVE.
·Introduction of the Anti-GHO Mechanism:
Currently, stkAAVE users enjoy a 3% discount when minting and borrowing $GHO.
This will be replaced by the new "anti-GHO" token, generated by users staking $AAVE when minting GHO. The generation of anti-GHO is linear and proportional to the interest accumulated by all GHO borrowers.
Users can use anti-GHO in two ways:
·Burn anti-GHO to mint GHO and repay debts for free
·Deposit it into the GHO Safety Module to earn stkGHO
This will align the interests of AAVE stakers and GHO borrowers and serve as an initial step in a broader revenue-sharing strategy.
·Burn and Distribution Plan
Aave will allow the redistribution of net surplus protocol revenue to token stakers under the following conditions:
·The net holdings of Aave Collector reach the recurring costs of two-year service providers in the past 30 days.
·The 90-day annualized revenue of the Aave protocol reaches 150% of YTD all protocol expenses, including the AAVE buyback budget and the aWETH & aUSDC Umbrella budget.
Through this plan, we will begin to see consistent eight-figure buybacks of the Aave protocol, a trend that will further expand with the continued growth of the Aave protocol.
Furthermore, $AAVE is almost fully diluted, with no major supply unlocks in the future, in stark contrast to recent issuances. Many new tokens face severe price declines after the Token Generation Event (TGE) due to low circulation and high fully diluted valuation (FDV) dynamics.
Significant Growth Prospects for Aave
Aave has several growth factors in the future and is well-positioned in the long-term growth of cryptocurrencies as an asset class. Fundamentally, Aave's revenue can grow in multiple ways:
Aave V4
Aave V4 will further enhance its capabilities and propel the protocol towards introducing DeFi to the next billion users. Firstly, Aave will focus on innovating the user interaction with DeFi by building a unified liquidity layer. By achieving seamless liquidity access across multiple networks (including EVM and future non-EVM networks), Aave will eliminate the complexity of cross-chain lending. The unified liquidity layer will also rely on account abstraction and smart accounts, allowing users to manage multiple positions across isolated assets.
Secondly, Aave will improve platform accessibility by expanding to other blockchains and introducing new asset categories. In June, the Aave community supported the protocol's deployment on zkSync, marking Aave's entry into the 13th blockchain network. Following this, in July, the Aptos Foundation proposed the deployment of Aave on Aptos. If approved, this will be Aave's first foray into a non-EVM network, further solidifying its position as a true multi-chain DeFi giant. Additionally, Aave will explore products based on real-world assets (RWA), built around GHO. This has the potential to bridge traditional finance with DeFi, attracting institutional investors and bringing in significant new capital to the Aave ecosystem.
These developments will ultimately lead to the creation of the Aave Network, which will serve as the central hub for stakeholders to interact with the protocol. GHO will be used to pay fees, and AAVE will be the primary staking asset for decentralized validators. Given that the Aave Network will be developed as an L1 or L2 network, we expect the market to reprice its token accordingly to reflect the additional infrastructure layer being built.
Growth Aligned with the Growth of BTC and ETH as Asset Classes
The launch of Bitcoin and Ethereum ETFs this year marks a significant turning point in the mainstream adoption of cryptocurrencies, providing investors with a regulated and familiar tool to gain exposure to digital assets without directly holding them. By lowering the barriers to entry, these ETFs are expected to attract significant funds from institutional investors and retail participants, further integrating digital assets into mainstream portfolios.
For Aave, the overall growth of the crypto market is a boon, as over 75% of its asset base consists of non-stable assets (primarily BTC and ETH derivatives). Therefore, Aave's TVL and revenue growth are directly correlated with the growth of these assets.
Growth Tied to Stablecoin Supply
We can also expect Aave to benefit from the growth of the stablecoin market. With central banks signaling a shift towards a lower interest rate cycle, this will reduce the opportunity cost for investors seeking yield sources. This may drive capital from traditional financial yield instruments to stablecoin farms in DeFi to seek more attractive returns. Additionally, during bull markets, we can expect higher risk appetite behavior, increasing the utilization of stablecoin lending on platforms like Aave.
Final Thoughts
To reiterate, we are optimistic about the prospects of Aave as a leading project in the decentralized lending market. We have further outlined key drivers supporting future growth and detailed how each factor will further expand Aave's influence.
We also believe that Aave will continue to dominate market share with its strong network effects, benefiting from the liquidity and composability of its token. The upcoming token economic model upgrade will further enhance the protocol's security and strengthen its value-capturing capabilities.
In recent years, the market has lumped all DeFi protocols together and priced them as if they have little room for future growth. This can be seen from the trend of Aave's TVL and revenue running rates increasing while its valuation multiples compress. We believe that this deviation between valuation and fundamentals will not last long, and $AAVE currently offers some of the best risk-adjusted investment opportunities in the cryptocurrency space.
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