Aave: The leader in the Decentralized Finance space is being significantly undervalued

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

In January 2020, Aave launched on the Ethereum mainnet and has now entered its fifth year. Currently, Aave has become the largest lending protocol with an active loan total of $7.5 billion, which is five times that of the second-ranked Spark.

Indicators continue to grow, surpassing the previous bull market peak

Aave is one of the few DeFi protocols whose metrics have surpassed the levels of 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 momentum remains strong, with a month-on-month growth rate of 50-60%.

Since the beginning of the year, Aave's TVL (Total Value Locked) has nearly doubled, benefiting from an increase in deposits and the rise in prices of underlying assets such as WBTC and ETH, recovering to 51% of the peak in the 2021 cycle. This indicates that Aave demonstrates greater resilience compared to other leading Decentralized Finance protocols.

Strong profits reflect high market fit of the product

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

Currently, the token incentives of the main chain have dried up, and Aave's own token incentives have also fallen 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 have boosted active lending and borrowing rates.

In addition, 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 plummeted, Aave's revenue remained strong, thanks to its successful collection of liquidation fees during the loan repayment process. This proves that Aave has the ability to withstand market fluctuations in different collateral and multi-chain environments.

Strong fundamentals are recovering, yet the price-to-sales ratio is at its lowest level in three years.

Despite a strong recovery in metrics 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 solidify its leadership position in the decentralized lending space.

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

1. The protocol's security management records are良好: So far, Aave has not experienced any major smart contract-level security incidents.

2. Bilateral network effects: DeFi lending is a typical two-sided market, with depositors and borrowers constituting the supply and demand sides, where growth on one side drives growth on the other.

3. Effective DAO Management: 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 on all deployed chains except for BNB Chain, the TVL remains leading.

Reform the token economics to promote value accumulation

The Aave Chan Initiative (ACI) has recently proposed a reform of the AAVE token economics, aiming to introduce a revenue-sharing mechanism to enhance the token's usability. 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 to enhance the alignment of interests between AAVE stakers and GHO borrowers.
3. Implement a burn and distribution plan that allows the net excess protocol revenue to be redistributed to token stakers.

Aave's Growth Potential

Future growth drivers for Aave include:

1. The launch of Aave v4 will revolutionize the interaction experience of Decentralized Finance, enhancing the accessibility of the platform.
2. The growth is positively correlated with BTC and ETH as asset classes.
3. Benefit from the growth of the stablecoin market.

Conclusion

As a leader in the decentralized lending space, Aave's prospects are optimistic. With strong network effects and excellent token liquidity and composability, Aave is expected to continue to consolidate and expand its market dominance. The upcoming tokenomics upgrade will further enhance the protocol's security and strengthen its value capture capabilities.

Currently, AAVE offers highly attractive risk-adjusted investment opportunities in the cryptocurrency industry, and its valuation is not expected to remain mismatched with the fundamentals for the long term.