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

On-chain lending is one of the most important markets in the crypto industry, and Aave, as the leader in this market, possesses strong competitive barriers and user stickiness. Aave's value may be severely underestimated, as it has enormous growth potential that the market has yet to fully recognize.

In January 2020, Aave launched on the Ethereum mainnet, marking its 5th year since inception. Today, Aave has become 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 metrics continue to grow, surpassing the previous cycle's peak.

Aave is one of the few DeFi protocols that has surpassed the bull market levels of 2021. For example, its quarterly revenue has exceeded the peak of the bull market in the fourth quarter of 2021. Notably, even during the market consolidation period from November 2022 to October 2023, Aave's revenue continued to accelerate. As the market warms up in the first and second quarters of 2024, Aave maintains its momentum, with a month-on-month growth rate of 50-60%.

Since the beginning of the year, thanks to the increase in deposits and the rise in the prices of underlying assets such as WBTC and ETH, Aave's TVL (Total Value Locked) has nearly doubled, recovering to 51% of the peak value during the 2021 cycle. This indicates that Aave is more resilient compared to other leading Decentralized Finance protocols.

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

Aave's revenue peaked in the last cycle, coinciding with multiple smart contract platforms issuing large amounts of 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 depleted, and Aave's own token incentives have also dropped to negligible levels. This indicates that the metric growth over the past few months has been organic and sustainable, driven primarily by a rebound in market speculative activities, which have pushed up active lending and borrowing rates.

Furthermore, even during periods of reduced speculative activity, Aave has demonstrated the ability to drive fundamental growth. Amid a significant decline in the global risk asset market, Aave's revenue remains robust, thanks to its successful collection of liquidation fees during the loan repayment process. This proves that Aave possesses the ability to withstand market fluctuations in different collateral and multi-chain environments.

Strong Fundamentals Recovery, Aave's Price-to-Sales Ratio Remains at Its Lowest Level in Three Years

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

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

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

1. The protocol's security management record is good: To date, Aave has not experienced any significant security incidents at the smart contract level.

2. Bilateral network effects: Depositors and borrowers constitute the supply and demand sides, and growth on one side will drive growth on the other side, making it increasingly difficult for latecomers to catch up.

3. Well-managed DAO: The Aave protocol has fully implemented a DAO-based management model, involving more comprehensive information disclosure and more thorough community discussions.

4. Multi-chain ecosystem positioning: Aave has been deployed on almost all mainstream EVM L1/L2, and its TVL remains leading on all deployed chains except for BNB Chain.

Reform the token economics, promote value accumulation, and eliminate reduction risks

The Aave Chan Initiative (ACI) has just launched a proposal aimed at reforming the AAVE token economics, hoping to introduce a revenue-sharing mechanism to enhance the token's utility. The main changes include:

1. Eliminate the risk of AAVE being reduced when adjusting the security module.
2. Introduce Anti-GHO mechanism
3. Implement the destruction and distribution plan

These reforms will benefit both platform users and AAVE holders.

Aave is expected to achieve significant growth

Aave has multiple growth drivers in the future:

1. Aave v4: Will enhance its competitiveness by building a unified liquidity layer and simplifying the cross-chain lending process.

2. Positive correlation with the growth of BTC and ETH as asset classes: The launch of Bitcoin and Ethereum ETFs will attract a large amount of capital, further integrating digital assets into mainstream portfolios.

3. Pegged to stablecoin supply: Global central banks may enter a rate-cutting cycle, and investors may turn to stablecoin farming in the Decentralized Finance sector for higher returns.

Summary

As a leader in the decentralized lending space, Aave has an optimistic outlook for the future. With strong network effects and excellent token liquidity and composability, Aave will continue to solidify and expand its market dominance. The upcoming tokenomics upgrade will further enhance the protocol's security and strengthen its value capture capabilities.

In recent years, the market has lumped all DeFi protocols together and priced them as an asset class with limited growth potential. We believe that this misalignment between valuation and fundamentals will not last long. AAVE currently offers an excellent risk-adjusted investment opportunity in the crypto industry.