Aave: The Core Pillar of Decentralized Finance and on-chain Economy

On-chain lending is one of the important markets in the crypto industry. Aave, as a leader in this field, has strong competitive advantages and user stickiness. Although Aave has enormous growth potential, the market currently seems to have not fully recognized its value.

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

The protocol indicators continue to grow, surpassing the previous cycle's peak.

Aave is one of the few DeFi protocols that have surpassed the levels reached during the 2021 bull market. Its quarterly revenue has exceeded the peak of the bull market in the fourth quarter of 2021. Notably, even during the market downturn from November 2022 to October 2023, Aave's revenue continued to grow. With the market warming up 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 the increase in deposits and the rise in prices of underlying assets such as WBTC and ETH, Aave's total locked value (TVL) has nearly doubled, recovering to 51% of the peak in the 2021 cycle. This indicates that Aave has shown stronger resilience compared to other leading Decentralized Finance protocols.

Strong profit performance reflects the high alignment of the product with the market.

Aave's revenue peaked in the last cycle, coinciding with multiple smart contract platforms offering substantial token incentives to attract users and liquidity. This brought about 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 metrics is organic and sustainable, driven primarily by a rebound in market speculation activities, which has pushed up active lending and borrowing rates.

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

Although the fundamentals are recovering strongly, Aave's price-to-sales ratio is still at its lowest level in three years.

Despite a strong recovery of indicators in the past few months, Aave's price-to-sales ratio is only 17 times, the lowest level in three years, well below the median level of 62 times during the same period.

Aave is expected to strengthen its dominance in the Decentralized Finance lending space.

Aave's competitive advantages are mainly reflected in four points:

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

2. Bilateral Network Effects: DeFi lending is a typical bilateral market, where depositors and borrowers mutually promote growth. The overall liquidity of the platform is more abundant, the stronger the attraction for large capital users.

3. Effective DAO Management: Aave has fully implemented a DAO-based governance model, bringing together professional institutions to participate in governance.

4. Multi-chain ecosystem positioning: Aave has been deployed on almost all mainstream EVM L1/L2 and maintains a leading position on most chains.

Reform token economics, promote value accumulation, eliminate reduction risks.

The Aave community is considering a proposal to reform the AAVE tokenomics, aimed at introducing a revenue-sharing mechanism to enhance token utility. The main changes include:

1. Eliminate the risk of AAVE being reduced: The new Umbrella security module will replace the existing stkAAVE and stkABPT with stk aToken.

2. Introduction of Anti-GHO token: Replacing the existing GHO discount mechanism to enhance the alignment of interests between AAVE stakers and GHO borrowers.

3. Burn and Distribution Plan: Allows the net excess protocol revenue to be redistributed to token stakers, initiating a continuous buyback plan.

Aave is expected to achieve significant growth.

Aave has multiple growth drivers in the future:

1. Aave v4: Will build a unified liquidity layer, simplify cross-chain lending processes, and expand to more chains and asset classes.

2. Positively correlated with the growth of BTC and ETH: The launch of ETFs is expected to attract significant capital into the digital asset market, indirectly driving the growth of Aave's TVL and revenue.

3. Pegged to stablecoin supply: Expectations of global interest rate cuts and risk appetite in a bull market may stimulate stablecoin lending activities in the Decentralized Finance sector.

Overall, Aave, as a leader in the decentralized lending space, possesses strong network effects and token liquidity. The upcoming token economics upgrade will further enhance the protocol's security and value capture capabilities. The current valuation of AAVE is misaligned with its fundamentals, providing investors with a favorable risk-adjusted investment opportunity.