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Original title: Aave – the core pillar of decentralized finance and on-chain economy
Author: 0xArthur, founder of DeFiance Capital; compiled; 0xxz@bitchain vision
Aave is the largest and most tested lending agreement
As an undisputed leader in the on-chain lending category, Aave has an extremely strong and sticky moat, we believe,A category leader in one of the most important areas of cryptocurrencies, Aave is seriously undervalued and has a huge growth space in the future that the market has not yet caught up with..
Aave went live on the Ethereum mainnet in January 2020, and this year marks its fifth year of operation.Since then, it has become one of the most tried and tested protocols in DeFi and lending.Aave is currently the largest lending agreement with active loans of $7.5 billion, 5 times the second largest deal, Spark, which is a testament to that.
Data ends on August 5, 2024
The protocol indicators continue to grow, exceeding the highest value of the previous cycle
Aave is also one of the few DeFi protocols that exceed the 2021 bull market indicators.For example, its quarterly revenue has exceeded revenue in the fourth quarter of 2021 at the peak of the bull market.It is worth noting that although the market consolidated sideways from November 22 to October 23, revenue growth continued to accelerate.As the market recovered in the first and second quarters of 2024, growth continued to remain strong, up 50-60% month-on-month.
Source: Token Terminal
Aave TVL has nearly doubled so far this year, thanks to increased deposits and the rise in token prices for underlying collateral assets such as WBTC and ETH.As a result, TVL returned to 51% of its 21-cycle peak level, which is more resilient than other top DeFi protocols.
Data ends on August 5, 2024
Excellent profit quality indicates product market fit
Aave’s revenue peaked in the last cycle, when multiple smart contract platforms such as Polygon, Avalanche and Fantom invested a lot of token incentives to attract users and liquidity.This has resulted in unsustainable employment capital and leverage levels, which has supported the revenue data for most agreements during the period.
Fast forward to today, token incentives from major public chains have dried up, and Aave’s own token incentives have also dropped to trivial levels.
Source: Token Terminal
This shows that the growth of indicators over the past few months has been organic and sustainable, driven primarily by the return of speculative markets, which has driven up active lending and borrowing rates.
Furthermore, even during periods of sluggish speculation, Aave demonstrates the ability to grow fundamentals.During the global risk asset market crash in early August, Aave’s revenue remained resilient as it successfully received liquidation fees when repaying its loans.This also proves its ability to withstand market volatility across different collateral bases and on-chain markets.
Data ends on August 5, 2024 Source: TokenLogic
Despite a strong recovery in fundamentals, Aave’s trading PE ratio remains at its lowest level in three years
Despite strong rebounds in indicators over the past few months, Aave’s price-to-sales ratio (P/S) has remained as low as 17 times, falling to its lowest level in three years, well below its 3-year median of 62 times.
Source: Coingecko, Token Terminal
Aave is expected to expand its dominance in decentralized lending
Aave’s moat consists mainly of the following 4 points:
1. Records of protocol security management: Most new lending agreements will encounter safety accidents in the first year of operation.Aave has not had a major smart contract-level security incident to date.The platform’s robust risk management is often the primary consideration for DeFi users to choose a lending platform, especially large users with strong funds.
2. Bilateral network effect: DeFi lending is a typical bilateral market.The depositor and the borrower constitute both the supply and demand parties.The growth of one side will stimulate the growth of the other side, making it increasingly difficult for later competitors to catch up.In addition, the more sufficient the overall liquidity of the platform, the smoother the liquidity in and out of depositors and borrowers will be, and the more attractive it will be for large-capital users, which will stimulate further growth of the platform’s business.
3. Excellent DAO management: The Aave protocol fully realizes DAO management. Compared with the centralized team management model, DAO management information disclosure is more comprehensive, and the discussions on major decisions are more in-depth.In addition, Aave’s DAO community has a number of professional institutions with high governance levels, including top risk control service providers, market makers, third-party development teams, financial consulting teams, etc. The sources of participants are diversified and the governance participation is higher.
4. Multi-chain ecological positioning: Aave is deployed on almost all mainstream EVM L1/L2 chains, and its TVL (total locked value) is leading the way in all deployment chains except BNB Chain.In the upcoming Aave V4 version, cross-chain liquidity will be linked to make the advantages of cross-chain liquidity more prominent.See the following picture for details:
Data ends on August 5, 2024 Source: DeFiLlama
Improve token economics to drive value accumulation and eliminate fines
The Aave Chan initiative has just launched a proposal to overhaul AAVE’s token economics to enhance the practicality of tokens by introducing a revenue sharing mechanism
The first major shift is to eliminate the risk of being fined AAVE when mobilizing the security module.
● Currently, the Balancer LP tokens (stkAAVE – $228 million TVL) and the $AAVE/$ETH security modules are facing the risk of being fined tokens to cover up the shortage.
● However, stkAAVE and stkABPT are not good coverage assets due to lack of correlation with collateral assets that generate bad debts.$AAVE also loops to reduce overwrites in such events.
● Under the new Umbrella security module, stkAAVE and stkABPT will be replaced by stk aTokens starting with aUSDC and awETH.aUSDC and awETH suppliers may choose to pledge their assets to earn additional fees (in $AAVE, $GHO (Agreement Income) plus interest earned by the borrower. These pledged assets may be fined in the event of a shortageand burnt.
● This arrangement is for platform users and $AAVE token holders.
In addition, there are more demand drivers for introducing $AAVE through the revenue sharing mechanism.
● Introduce anti-GHO
Currently, stkAAVE users can enjoy 3% discount on coin and lending GHO.
This will be replaced by a new “anti-GHO” token generated by the stkAAVE holder who minted GHO.The generation of anti-GHOs is linear and proportional to the interest accumulated by all GHO borrowers.
Users can claim Anti-GHO and use it in two ways: burn Anti-GHO to mint GHO, which can be used to repay debts for free, deposit stkGHO’s GHO security module
This increases consistency between AAVE stakeholders and GHO borrowers and will be the first step in a broader revenue sharing strategy.
● Burning and distribution procedures
○ Aave will allow the reallocation of net excess agreement revenue to token stakeholders, subject to the following conditions:
■ Aave Collector Net Holdings is the recurring cost of 2 annual service providers over the past 30 days.
■ Aave Agreement’s 90-day annualized revenue is 150% of all agreement expenditures year-to-date, including the AAVE acquisition budget and the aWETH and aUSDC umbrella budget.
From then on, we will begin to observe that the Aave protocol’s repos continues to remain in the 8-digit numbers, and that the repos will grow further as the Aave protocol continues to grow.
and,AAVE is almost completely diluted, and there is no major supply unlock in the future, which is in sharp contrast to the recently released tokens, which are losing money in the token generation event (TGE) due to low circulation high full dilution valuation (FDV) dynamics.
Aave will achieve significant growth in the future
Aave has a number of growth factors in the future, and it is also expected to benefit from the long-term growth of cryptocurrencies as an asset class.Fundamentally, Aave’s revenue can grow in a number of ways:
Aave v4
Aave V4 will further enhance its capabilities and put the protocol on track to attract the next billion users to DeFi.First, Aave will focus on completely changing the user’s experience of interacting with DeFi by building a unified mobility layer.By enabling seamless liquidity access across multiple networks (EVM and ultimately non-EVM), Aave will eliminate the complexity of cross-chain conversion of lending.The unified liquidity layer will also rely heavily on account abstraction and smart accounts to allow users to manage multiple positions across isolated assets.
Second, Aave will increase accessibility to its platform by expanding to other chains and introducing new asset classes.In June, the Aave community endorsed the deployment of the protocol on zkSync.The move marks Aave’s entry into its 13th blockchain network.Not long after July, the Aptos Foundation drafted a proposal to deploy Aave on Aptos.If approved, Aptos’ deployment will be Aave’s first entry into non-EVM networks and will further consolidate its position as a true multi-chain DeFi powerhouse.In addition, Aave will explore integrating RWA-based products that will be built around GHO.The move has the potential to connect traditional finance with DeFi, attracting institutional investors and bringing a lot of new capital to the Aave ecosystem.
These developments ultimately led to the creation of the Aave network, which will serve as a central hub for stakeholders to interact with protocols.GHO will be used to charge fees, and AAVE will become the main staking asset for decentralized validators.Given that the Aave network will be developed as an L1 or L2 network, we expect the market will reprice its tokens accordingly to reflect the additional infrastructure layer being built.
Growth is positively correlated with growth in BTC and ETH as asset classes
The Bitcoin and Ethereum ETFs launched this year are a watershed in cryptocurrency adoption, providing investors with a regulated and familiar tool to invest in digital assets without having to directly own them.By lowering the barriers to entry, these ETFs are expected to attract large amounts of capital from institutional investors and retail participants, further promoting digital assets into mainstream portfolios.
Given that over 75% of Aave’s asset base consists of non-stable currency assets (mainly BTC and ETH derivative assets), the growth of the broader cryptocurrency market is a boon for Aave.Therefore, Aave’s TVL and revenue growth are directly related to the growth of these assets.
Growth is tied to stablecoin supply
We can also expect Aave to benefit from the growth of the stablecoin market.As central banks around the world signal toward a rate cut cycle, this will reduce the opportunity cost for investors seeking sources of returns.This could catalyze capital from traditional financial income tools to stablecoin farming in DeFi for more attractive returns.Additionally, we can expect higher risk-seeking behavior in bull markets, which helps improve borrowing utilization of stablecoins on platforms such as Aave.
The final thought
To reiterate, we are optimistic about the prospects of Aave as a leading project in the massive and growing decentralized lending market.We further outline the key drivers that underpin future growth and detail how each driver can further expand.
We also believe thatAave will continue to dominate the market share as it builds a strong network effect, thanks to the liquidity and composability of the tokens.The upcoming token economics upgrade will help further enhance the security of the protocol and further enhance its value acquisition aspect.
In the past few years, the market has classified all DeFi protocols into one category and priced them as protocols with little room for future growth.Aave’s TVL and revenue runs are on the rise while its valuation multiples are compressing, which illustrates this.We believe thatThis deviation between valuation and fundamentals will not last long, AAVE now offers some of the best risk-adjusted investment opportunities in the cryptocurrency sector.
Original link: https://x.com/Arthur_0x/status/1825595598609023039
