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

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

Aave launched on the Ethereum mainnet in January 2020, and this year marks its 5th anniversary. Currently, Aave is the largest lending protocol, with a total active loan amount of $7.5 billion, more than 5 times that of the second place.

The protocol metrics continue to grow, surpassing the previous cycle high.

Aave is also one of the few DeFi protocols that have surpassed the metrics of the 2021 bull market. 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's momentum remains strong, with a month-on-month growth rate of 50-60%.

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

![Is Aave severely undervalued? Why it is a core pillar of Decentralized Finance and on-chain economy])https://img-cdn.gateio.im/webp-social/moments-a94f889c47e92c0f66a5826b519f9b8d.webp(

) Strong profit performance reflects a high alignment between the product and the market.

Aave's revenue peaked in the last cycle, coinciding with multiple smart contract platforms issuing substantial token incentives to attract users and liquidity. This brought in unsustainable speculative capital and leverage levels, amplifying the revenue figures of most protocols.

Now, 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 metric growth over the past few months has been organic and sustainable, driven primarily by a rebound in market speculation activities, which has pushed up active loan and borrowing rates.

Moreover, even during periods of reduced speculative activity, Aave has demonstrated the ability to drive fundamental growth. In early August, when the global risk asset market faced a significant downturn, Aave's revenues remained robust, thanks to its successful collection of liquidation fees during the loan repayment process. This proves that Aave has the capability to withstand market fluctuations in different collateral 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 in indicators over the past few months, Aave's price-to-sales ratio is only 17 times, the lowest level in three years, far below the median level of 62 times during the same period.

![Aave seriously undervalued? Why it is a core pillar of Decentralized Finance and on-chain economy]###https://img-cdn.gateio.im/webp-social/moments-8f6359b18c274d5feda446e009c9aeb5.webp(

) 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 records are good: Most new lending protocols encounter security issues during their early operations. To date, Aave has not experienced any significant smart contract-level security incidents. A strong risk management capability leading to a good security record is often the primary consideration for DeFi users when choosing a lending platform, especially for whale users holding large amounts of funds.

2. Bilateral Network Effects: DeFi lending is a typical two-sided market. Depositors and borrowers make up the supply and demand sides. Growth on one side will drive growth on the other side, making it increasingly difficult for newcomers to catch up. Furthermore, the more abundant the overall liquidity of the platform, the smoother the liquidity inflow and outflow for depositors and borrowers, which in turn increases the platform's attractiveness to large capital users and can further stimulate the growth of the platform's business.

3. Effective DAO Management: The Aave protocol has fully implemented a DAO-based management model. Compared to centralized team management models, DAOs involve more comprehensive information disclosure and more thorough community discussions. In addition, Aave's DAO community brings together a group of highly skilled governance professional organizations, such as top risk management service providers, market makers, third-party development teams, and financial advisory teams. This diverse structure of participants contributes to an active governance participation level on the platform.

4. Multi-chain Ecosystem Positioning: Aave has been deployed on almost all mainstream EVM L1/L2s, and its TVL remains leading across all deployed chains except for BNB Chain. The upcoming Aave V4 version will enable cross-chain liquidity, further highlighting its advantages in cross-chain liquidity.

Reforming token economics to promote value accumulation and eliminate reduction risks.

The Aave Chan Initiative ###ACI( has just launched a proposal aimed at reforming the AAVE tokenomics, hoping to introduce a revenue-sharing mechanism to enhance the token's utility.

The first major change is to eliminate the risk of AAVE being reduced when activating the security module.

Currently, in the security module, staked AAVE tokens ) stkAAVE - $228 million TVL ( and AAVE/ETH Balancer LP tokens ) stkABPT - $99 million TVL ( face the risk of token reduction to compensate for shortage events.

However, due to the lack of correlation between stkAAVE and stkABPT and the collateral assets of accumulated bad debts, they are not ideal coverage assets ). In such events, the selling pressure of AAVE will also inversely reduce the level of collateral.

Based on the new Umbrella security module, stkAAVE and stkABPT will be replaced by stk aToken, starting with aUSDC and awETH. aUSDC and awETH suppliers can choose to stake assets to earn additional fees on top of the interest paid by borrowers, which includes AAVE, GHO, and protocol revenue (. These staked assets are subject to reduction and destruction risks during shortage events.

This arrangement will benefit both platform users and AAVE holders.

In addition, the yield distribution mechanism will further enhance the demand for AAVE.

Introducing Anti-GHO:

Currently, stkAAVE users enjoy a 3% discount when minting and borrowing GHO. This will be replaced by a new "anti-GHO" token, which is generated by stkAAVE holders who mint GHO. Its generation is linear and proportional to the interest accumulated by all GHO borrowers.

Users can receive anti-GHO and have two ways to use it:

• Burn Anti-GHO to mint GHO, which can be used to repay debts for free.
• Deposit GHO into the security module to obtain stkGHO

This enhances the alignment of interests between AAVE stakers and GHO borrowers, and will be the first step towards a broad revenue sharing strategy.

Burn and Distribution Plan:

A certain platform will allow the net excess protocol income to be redistributed to token stakers, but must meet the following conditions:

• The net holdings of Aave Collector are equal to the recurring costs of two annual service providers over the past 30 days.
• Aave protocol's 90-day annualized income has reached 150% of the total expenditures of the protocol from the beginning of the year to date, which includes the AAVE acquisition budget and the aWETH & aUSDC Umbrella budget ).

As a result, the Aave protocol will launch a continuous 8-digit buyback plan, and as the protocol continues to grow, the scale of the buyback will also rise.

In addition, the circulation of AAVE has almost reached a fully diluted state, and there will not be a large-scale supply unlock in the future. In stark contrast, some recent token issuances have experienced significant value loss during the token generation event (TGE) phase due to low circulation and high fully diluted valuation (FDV).

( Aave is expected to achieve significant growth.

Aave has multiple growth drivers in the future, and with its current advantageous position, it is expected to benefit from the long-term growth trend of cryptocurrency as an asset class. From a fundamental perspective, Aave has several revenue growth avenues:

)# Aave v4

Aave V4 will further enhance its competitiveness, helping to attract the next wave of a billion users to Decentralized Finance. First, Aave will focus on revolutionizing the DeFi interaction experience by building a unified liquidity layer. By achieving seamless liquidity access across multiple networks ( including EVM, and eventually also including non-EVM ), Aave will simplify cross-chain lending processes. The unified liquidity layer will also deeply integrate account abstraction ### Account Abstraction ### and smart accounts ( Smart Accounts ), allowing users to manage positions of multiple isolated assets.

Secondly, Aave will enhance the platform's accessibility by expanding to more chains and introducing more asset classes. In June of this year, the Aave community voted to support the protocol's deployment on zkSync. This marks Aave's entry into its 13th blockchain network. Following that, in July, the Aptos Foundation issued a proposal for deploying Aave on Aptos. If the proposal is approved, this will be Aave's first entry into a non-EVM network, further solidifying its position as a true multi-chain Decentralized Finance giant. Additionally, Aave plans to explore the integration of products based on RWA, which will be built around GHO, with the hope of connecting traditional finance with DeFi, attracting institutional investors, and injecting a significant amount of new capital into the Aave ecosystem.

These developments ultimately gave rise to the Aave Network, which will become the central hub for stakeholders interacting with the Aave protocol. GHO will be used to pay fees, and AAVE will serve as 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 to revalue its tokens to reflect the value of this new infrastructure layer.

(# Growth is positively correlated with the growth of BTC and ETH as asset classes.

This year, the debut of Bitcoin and Ethereum ETFs marks an important watershed in the popularization of cryptocurrencies. Through this, investors have gained access to a traditional and regulated tool that allows them to easily obtain exposure to digital assets while avoiding the complexities associated with directly holding these assets. By lowering the barriers to entry, these ETFs are expected to attract substantial capital from both institutional and retail investors, further integrating digital assets into mainstream portfolios.

For Aave, the overall growth of the crypto market is a positive factor, as over 75% of its asset composition consists of non-stable assets ), mainly Bitcoin and Ethereum derivative assets (. Therefore, Aave's TVL and revenue growth are directly related to the growth of these assets.

)# Linked to the growth and supply of stablecoins

In the future, Aave is expected to benefit from the growth of the stablecoin market. As global central banks signal a clearer move into a rate-cutting cycle, the opportunity cost for investors seeking sources of yield will decrease. This may encourage capital to flow out of traditional financial yield instruments and into stablecoin farming in the DeFi space for higher returns. Additionally, during a bull market, investors' risk appetite increases, and risk-seeking behavior becomes more common, which will further stimulate stablecoin lending activities on platforms like Aave.

![Is Aave severely undervalued? Why it is a core pillar of Decentralized Finance and on-chain economy]###https://img-cdn.gateio.im/webp-social/moments-0143d98d7fee777f1b4d590ed421aa68.webp(

) Summary

To reiterate, we hold an optimistic view on the prospects of Aave, a leader in the decentralized lending space that continues to grow. We further elaborate on the core factors driving its future growth and analyze how each factor can further expand.

We also believe that with strong network effects, as well as excellent token liquidity and composability, Aave will continue to solidify and expand its market dominance. The upcoming tokenomics upgrade will further enhance the security of the protocol.