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

On-chain lending, as one of the most important markets in the cryptocurrency industry, Aave is undoubtedly a leader in this field. The protocol has strong competitive barriers and user stickiness, but its true value seems to have not been fully recognized by the market.

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

Protocol metrics continue to grow, surpassing the previous cycle peak

Aave is one of the few DeFi protocols whose metrics have surpassed the levels seen during the 2021 bull market. Its quarterly revenue has exceeded the peak of the bull market in Q4 2021. It is noteworthy that even during the market downturn from November 2022 to October 2023, Aave's revenue has continued to accelerate. With the market warming up in the first and second quarters of 2024, Aave's momentum remains strong, achieving a quarter-on-quarter 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 total locked value ( TVL ) has nearly doubled, recovering to 51% of the peak cycle value in 2021. This indicates that Aave has demonstrated stronger resilience compared to other leading DeFi protocols.

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

Aave's revenue peak in the last cycle coincided with a time when multiple smart contract platforms were issuing a large number of token incentives. Now, the token incentives on the main chain have basically run dry, and Aave's own token incentives have also fallen to negligible levels.

This indicates that the recent growth in indicators is organic and sustainable, primarily driven by a rebound in market speculation activities, which has pushed up active loan and borrowing rates. Even during periods of weakened speculation, Aave has demonstrated the ability to drive fundamental growth. Amid the global downturn in risk asset markets, Aave's revenue remains robust, thanks to the liquidation fees successfully collected during the loan repayment process. This proves that Aave has the capability to withstand market volatility across different collateral and multi-chain environments.

Strong fundamental recovery, Aave's price-to-sales ratio remains at a three-year low.

Despite a strong recovery in the indicators in recent 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 leading position in the Decentralized Finance lending space.

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

1. The protocol security management records are good.
2. Bilateral Network Effects
3. DAO management is effective
4. Multi-chain ecosystem positioning

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

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

1. Eliminate the risk of AAVE being reduced when the security module is activated.
2. Introduce a new "Anti-GHO" token
3. Implement the destruction and allocation plan

These reforms will benefit both platform users and AAVE holders, and may initiate a sustained large-scale buyback program.

Growth Prospects of Aave

Aave has multiple growth drivers going forward:

1. Aave v4: Will introduce a cross-chain unified liquidity layer, integrate account abstraction and smart accounts, and expand to more chains and asset classes.
2. Positive correlation with the growth of BTC and ETH as asset classes.
3. Linked to the growth of stablecoin supply

Overall, Aave, as a leader in the Decentralized Finance lending space, has a bright future ahead. Its strong network effects, excellent token liquidity and composability, as well as the upcoming tokenomics upgrade, will further solidify its market dominance. Currently, AAVE offers an attractive risk-adjusted investment opportunity in the cryptocurrency industry.