Introduction
AAVE stands as one of the largest and most extensively tested lending protocols in the decentralized finance (DeFi) ecosystem. As an undisputed leader in the on-chain lending space, it boasts a highly competitive and sticky economic moat. Despite being a frontrunner in one of crypto's most critical sectors, AAVE remains significantly undervalued by the market, presenting substantial potential for future growth.
Launched on the Ethereum mainnet in January 2020, AAVE has now been operational for five years. Over this period, it has emerged as one of the most battle-tested protocols in the DeFi and lending industry. To illustrate its dominance, AAVE currently facilitates $7.5 billion in active loans—five times the volume of Spark, the second-largest lending protocol.
(Data as of August 5, 2024)
Protocol Performance and Growth
AAVE is among the few DeFi protocols that have surpassed metrics from the previous market cycle peak in 2021. For instance, its quarterly revenue has exceeded the highs seen in Q4 2021. Remarkably, revenue growth continued to accelerate even during the relatively flat market period between November 2022 and October 2023. As market conditions improved in Q1 and Q2 of 2024, growth remained robust, with quarter-over-quarter increases of 50–60%.
(Source: Token Terminal)
Total Value Locked (TVL) on AAVE has doubled year-to-date, driven by increased deposits and rising prices of underlying collateral assets like WBTC and ETH. As a result, TVL has recovered to 51% of its previous cycle peak, demonstrating resilience compared to other leading DeFi protocols.
(Data as of August 5, 2024)
Sustainable Revenue and Product-Market Fit
During the previous bull market, revenue for many protocols—including AAVE—peaked due to heavy token incentives from smart contract platforms like Polygon, Avalanche, and Fantom. These incentives attracted users and liquidity but also led to unsustainable levels of mercenary capital and leverage.
Today, most of those native token incentives have dried up, and AAVE’s own token incentives have been reduced to negligible levels.
(Source: Token Terminal)
This indicates that the recent growth in protocol metrics is organic and sustainable, primarily driven by the return of market speculation, which has increased active loans and borrowing rates.
Furthermore, AAVE has demonstrated an ability to strengthen its fundamentals even during market downturns. During the early August global market crash, AAVE’s revenue remained strong due to liquidation fees generated from loan repayments. This resilience underscores its capacity to withstand volatility across various collateral types and on-chain market conditions.
(Source: TokenLogic, data as of August 5)
Valuation Multiples at Historic Lows
Despite strong fundamental recovery, AAVE’s price-to-sales (P/S) ratio remains depressed, hitting a three-year low—well below its three-year median of 62x.
(Source: CoinGecko, Token Terminal)
Key Competitive Advantages
AAVE’s economic moat is supported by four primary factors:
- Proven Security and Risk Management: Most new lending protocols experience security incidents within their first year of operation. AAVE, by contrast, has not suffered any significant smart contract-level security events. Strong risk management is a top priority for DeFi users—especially large investors—when selecting a lending platform.
- Two-Sided Network Effects: DeFi lending is a classic two-sided market. Depositors and borrowers represent supply and demand; growth on one side stimulates growth on the other. Higher liquidity also improves entry and exit efficiency for large funds, further accelerating platform growth.
- Effective DAO Governance: AAVE is fully governed by a decentralized autonomous organization (DAO). This model ensures thorough disclosure, community discussion, and informed decision-making. The AAVE DAO includes high-quality institutional participants such as risk management providers, market makers, development teams, and financial advisors, leading to active and sophisticated governance.
- Multi-Chain Ecosystem Strategy: AAVE is deployed on nearly all significant EVM-compatible Layer 1 and Layer 2 chains and leads in TVL on all except BNB Chain. The upcoming AAVE V4 will introduce cross-chain liquidity linking, further enhancing its multi-chain advantage.
(Data source: DeFiLlama, as of August 5)
Enhanced Tokenomics for Value Accumulation
The AAVE Chan Initiative recently proposed a major overhaul of the $AAVE token economic model, introducing a dividend-like mechanism to improve token utility.
Key changes include:
- Elimination of Slashing Risk: The current security module requires staked $AAVE (stkAAVE) and Balancer LP tokens (stkABPT) to be slashed in case of a shortfall event. These assets are poorly correlated with collateral and often lead to sell pressure during market stress.
- New Umbrella Security Module: This will replace stkAAVE and stkABPT with staked aTokens (beginning with aUSDC and aWETH). Suppliers can stake these to earn additional fees in $AAVE and $GHO, alongside borrowing interest. These assets may be slashed and burned during shortfall events, improving alignment between users and token holders.
Additional demand drivers for $AAVE will be introduced through revenue-sharing mechanisms:
- Anti-GHO Mechanism: Replaces the current 3% discount for stkAAVE users minting $GHO with a new “Anti-GHO” token. This token can be burned to mint GHO fee-free or deposited into the GHO safety module.
- Burn-and-Distribution Plan: Excess protocol revenue will be redistributed to token holders once certain conditions are met, including covering deferred costs and achieving revenue equal to 150% of annual protocol expenses.
Moreover, $AAVE is nearly fully diluted with no major future unlocks—a stark contrast to many recent launches that suffer from low float and high fully diluted valuation (FDV) dynamics.
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Future Growth Drivers
AAVE is well-positioned to benefit from the long-term growth of crypto as an asset class. Key growth avenues include:
AAVE V4 Upgrade
AAVE V4 aims to enhance functionality and onboard the next billion users into DeFi. Key features include:
- A unified liquidity layer enabling seamless cross-chain borrowing and lending across EVM and non-EVM networks.
- Heavy use of account abstraction and smart accounts for improved user experience and isolated asset management.
- Expansion into new chains and asset classes, including real-world assets (RWA) built around $GHO.
These developments may culminate in the AAVE Network—a dedicated L1 or L2 chain where $GHO is used for fees and $AAVE serves as the primary validator collateral.
Correlation with BTC and ETH Growth
The introduction of Bitcoin and Ethereum ETFs has lowered barriers to entry for institutional and retail investors, driving capital into digital assets. Since over 75% of AAVE’s asset base consists of non-stable assets (mainly BTC and ETH derivatives), its TVL and revenue growth are directly tied to the appreciation of these assets.
Stablecoin Supply Growth
AAVE is also poised to benefit from growth in the stablecoin market. As global central banks enter rate-cutting cycles, opportunity costs for yield-seeking investors will decline, likely driving capital into DeFi yield farming. Additionally, higher risk appetite during bull markets may increase stablecoin borrowing utilization on platforms like AAVE.
Frequently Asked Questions
What is AAVE?
AAVE is a decentralized lending protocol that allows users to lend and borrow a variety of cryptocurrencies without intermediaries. It is one of the oldest and most secure DeFi protocols, with a strong focus on risk management and community governance.
How does AAVE generate revenue?
AAVE earns revenue through borrowing interest rates and liquidation fees. A portion of this revenue is distributed to stakers and token holders, especially under the newly proposed tokenomics model.
What makes AAVE different from other lending protocols?
AAVE differentiates itself through its multi-chain presence, proven security record, strong DAO governance, and innovative features like flash loans and cross-chain liquidity. Its upcoming V4 upgrade aims to further improve user experience and capital efficiency.
Is AAVE a good investment?
While this article does not provide investment advice, AAVE’s strong fundamentals, undervalued status, and upcoming tokenomics upgrades make it a noteworthy protocol in the DeFi space. Always conduct your own research and consider your risk tolerance.
What is GHO?
GHO is AAVE’s native overcollateralized stablecoin. It is minted by users who deposit collateral and can be borrowed at interest rates determined by market demand.
How secure is AAVE?
AAVE has not experienced any major smart contract breaches since its launch. Its security module and risk management frameworks are designed to protect user funds even during market volatility.
Conclusion
AAVE remains a leading project in the decentralized lending market with significant growth potential. Its strong network effects, liquidity, and composability are expected to help it capture additional market share. The upcoming tokenomics upgrade should further enhance protocol security and value accumulation.
Despite strong fundamental growth, AAVE’s valuation multiples remain compressed, suggesting a potential mispricing. For risk-adjusted exposure to the DeFi sector, $AAVE presents a compelling opportunity.
This article is for informational purposes only. The views expressed should not be considered investment advice. Readers are advised to conduct their own due diligence before investing.