Signs of Potential Recovery in Decentralized Finance

Recently, some well-known figures in the industry have begun to hint that DeFi may be on the verge of a resurgence. An analyst recently shared an article that outlined several key factors that could drive a rebound in DeFi 2.0:

• The DeFi ecosystem has significantly evolved, showing improvements in scalability and security, and has introduced innovative applications such as the tokenization of real-world assets.
• The total locked value ( TVL ) has almost tripled since last October, and the trading volume of decentralized exchanges continues to grow relative to centralized platforms.
• Some large financial institutions are entering this field through tokenized funds and stablecoins, showing increased mainstream acceptance.
• The recent interest rate cuts have increased market liquidity, making DeFi yields more attractive compared to traditional investments.
• The DeFi ecosystem is now more mature and secure, ready for the next round of growth.

In a more macroeconomic environment, a 50 basis point rate cut may signify a turning point. The M2 money supply is rising again, and Bitcoin seems to be repeating the trends of past cycles, suggesting the possibility of a significant bullish market.

Despite warnings from some that aggressive rate cuts often signal a recession and ongoing geopolitical tensions, the market remains generally optimistic. This round of rebound seems different and may be preparing for an unexpected rise.

Considering the prolonged bear market, the current DeFi valuations are generally under pressure, and this sector may be undervalued. Next, we will focus on analyzing AAVE's market position and assessing its potential role in the strong recovery of DeFi.

AAVE: Ready to Take Off?

The TVL of DeFi has rebounded significantly from the low point in 2022, growing more than double to $77 billion. However, the current TVL is still 50% lower than the peak of $154 billion in 2021. This indicates that despite rising interest, the valuation of DeFi remains well below the peak of the last bull market.

1. Market Leadership and Activity

AAVE is one of the leaders in the Decentralized Finance space, allowing users to borrow and lend cryptocurrencies directly. Since its launch in 2017, the platform gained momentum during the DeFi boom in 2020, holding over 50% market share in lending for nearly three years. Its success is attributed to continuous upgrades and the launch of new products, such as the GHO stablecoin and safety measures like the $400 million security module. The "buy and distribute" mechanism supports long-term growth of the token by creating steady buying pressure.

In 2024, AAVE's TVL reached $13 billion, demonstrating strong user adoption and increased confidence. The launch of the GHO stablecoin broadened revenue sources, while expansion to non-EVM chains like Aptos expanded market coverage.

AAVE's active loans have also seen significant growth recently, with the latest data showing a reach of $7.4 billion, solidifying its dominant position in the Decentralized Finance lending space. This growth is attributed to recent adjustments in token economics, which have reduced inflationary pressure and redirected yields to stakers, enhancing appeal to lenders.

2. Underestimation and Accumulation Potential

Despite being dominant, DeFi projects like AAVE still appear undervalued. A few months ago, analysis pointed out that AAVE's price/earnings ratio was 2.8 times, with an annual revenue of $240 million. Considering that 93% of the tokens are already in circulation, the selling pressure AAVE faces is relatively small, and after 2.5 years of consolidation, it may welcome a rebound. Recent breakthroughs suggest that AAVE could be in the early stages of a new upward trend, becoming a potential asset for long-term accumulation. This technical trend, combined with solid fundamentals, supports the possibility of its price recovery, especially as DeFi projects regain attention.

3. Institutional Interest

Recently, institutional interest in AAVE has primarily stemmed from the launch of Aave Arc, a permissioned DeFi product designed for regulated financial institutions. Currently, more than 30 whitelist companies can use the platform. By providing a compliant digital asset lending environment, Aave Arc aims to connect traditional finance with DeFi, offering high-yield opportunities while meeting regulatory requirements.

In addition, a well-known investment institution has officially included AAVE in its digital asset portfolio. As the U.S. may lower interest rates, the traditional low-interest-rate environment will make the high yields of Decentralized Finance more attractive, thereby increasing demand.

The launch of the ETH ETF this year may also bring a significant influx of funds into Decentralized Finance (DeFi). As a major participant in the Ethereum lending market, AAVE is expected to benefit from the new capital from institutional investors.

4. Competitive Advantage

Compared to some competitors, AAVE stands out with its multi-chain capabilities and broader asset support. AAVE operates on multiple networks such as Polygon, Avalanche, and Fantom, offering wider coverage, lower fees, faster transactions, and greater appeal to users.

In addition, AAVE supports a more diverse range of collateral types, from traditional cryptocurrencies to tokenized assets and staked derivatives. This diversified product portfolio, combined with features such as flash loans and the GHO stablecoin, helps AAVE capture a larger market share in the DeFi space and maintain its leading position in the lending sector.

5. Future Catalysts

The AAVE 2030 strategic proposal aims to expand the protocol beyond Ethereum in the coming years and introduce new features. The main objectives include:

1. Multi-chain Expansion: Supports non-EVM chains and builds cross-chain Decentralized Finance platforms, allowing users to access AAVE services across different blockchain ecosystems.

2. V4 Upgrade: Introduces real-world asset integration, enhances capital efficiency, and improves governance tools. By integrating real assets with the GHO stablecoin, AAVE aims to diversify the collateral base and improve the stability of lending services.

3. Active Funding Model: Propose an active budgeting model for the 2030 plan, establishing clear fund allocation and goals. The initial budget includes 15 million GHO and 25,000 stkAAVE for research and development, as well as security audits.

The overall goal of AAVE is to establish a sustainable, cross-chain, and compliant Decentralized Finance ecosystem by 2030, adapting to market changes and becoming the core infrastructure for retail and institutional users.

Bullish Factors

• AAVE controls 67% of the Decentralized Finance lending market, managing $7.4 billion in active loans.
• Active on multiple blockchains, planning to expand to more chains.
• The GHO stablecoin is gaining recognition, increasing the platform's revenue sources.
• Aave Arc attracts institutional investors to participate in Decentralized Finance compliance.
• The potential launch of the ETH ETF and the interest rate cut environment may attract more capital inflow.

Bearish Factors

• A high market concentration means that technical issues or regulatory actions could have a significant impact on the entire industry.
• GHO's adoption and the rise of competitors may affect AAVE's revenue.
• A global economic recession may reduce the flow of funds into risk assets.
• The increase in geopolitical risks may affect investor confidence.
• Potential regulatory restrictions that may arise in the future remain a concern.