This article analyzes the reasons behind Aave's strong performance by examining its key metrics, tokenomics, and future developments.
As the undisputed leader in the on-chain lending space, Aave possesses an extremely solid and nearly unshakable competitive moat. We believe that as a leading protocol in one of cryptocurrency's most critical sectors, Aave is significantly undervalued with substantial future growth potential that the market has yet to fully recognize.
Launched on the Ethereum mainnet in January 2020, Aave has operated steadily for over five years. During this period, it has become one of the most battle-tested protocols in decentralized finance (DeFi) and lending. The best evidence of this achievement is that Aave currently stands as the largest lending protocol with active loans totaling $7.5 billion—five times larger than its closest competitor, Spark.
Key Metrics Show Sustained Growth Exceeding Previous Cycle Highs
Aave stands among the few DeFi protocols that have surpassed their 2021 bull market metrics. For instance, Aave's quarterly revenue has exceeded the peak revenue levels achieved during the height of the 2021 Q4 bull market. More remarkably, even during the market consolidation period from November 2022 to October 2023, Aave's revenue growth momentum not only continued but accelerated, maintaining strong growth trajectory. Entering Q1 and Q2 2024, as the market gradually recovered, Aave's growth momentum remained robust with quarter-over-quarter growth maintained between 50-60%.
Year-to-date, Aave's Total Value Locked (TVL) has nearly doubled, driven both by increased deposits and the rising prices of underlying collateral assets like WBTC and ETH. Consequently, Aave's TVL has recovered to 51% of its previous cycle peak levels, demonstrating remarkable resilience compared to other leading DeFi protocols.
Exceptional Profitability Demonstrates Product-Market Fit
During the previous cycle, Aave's revenue peaked when multiple smart contract platforms like Polygon, Avalanche, and Fantom spent substantial token incentives to attract users and liquidity. This led to speculative capital and leverage ratios soaring to unsustainable levels, supporting revenue metrics for most protocols at that time.
Today, native chain token incentives have largely dried up, and Aave's own token incentives have been reduced to negligible amounts.
The growth in Aave's metrics over recent months has been organic and sustainable, primarily driven by the recovery of market speculation activities, which in turn has pushed up active loans and borrowing rates.
Furthermore, Aave has demonstrated its ability to strengthen its fundamentals even during periods of reduced speculative activity. Take the global risk asset market crash in early August 2024 as an example—Aave's revenue performance remained strong thanks to successful collection of liquidation fees during loan repayments. This充分证明了 Aave's capability to withstand market volatility across different underlying collateral assets and chains.
Despite Strong Fundamental Recovery, Market Performance Reaches Three-Year Low
Despite strong recovery across various metrics over recent months, Aave's Price-to-Sales (P/S) ratio has dropped to its lowest level in three years, remaining at around 17x—significantly below its three-year median of 62x.
Aave Poised to Expand Its Dominance in Decentralized Lending
Aave's competitive moat primarily consists of four key elements:
Proven Security and Reliability Track Record
Most new lending protocols experience security incidents within their first year of operation. Aave has maintained smooth operations throughout its history without any major smart contract-level security events. The platform's strong risk management and security record are primary considerations for DeFi users when choosing a lending platform, especially for large capital holders.
Bilateral Network Effects
DeFi lending represents a classic bilateral market where depositors and borrowers constitute the supply and demand sides respectively. Growth on one side stimulates growth on the other, making it increasingly difficult for latecomers to catch up. Additionally, greater overall platform liquidity enables smoother entry and exit for both depositors and borrowers, attracting more large capital users who further stimulate platform business growth.
Excellent DAO Governance
The Aave protocol has fully implemented DAO-based governance. Compared to centralized team management models, DAO governance provides more comprehensive information disclosure and deeper community discussion around important decisions. Furthermore, Aave's DAO community includes several professional institutions with high governance capabilities, including risk management service providers, market makers, third-party development teams, and financial advisory teams. This diversity of participants promotes more active governance participation.
Multi-Chain Ecosystem Positioning
Aave has deployed on nearly all major EVM L1/L2 chains and leads in TVL on all deployed chains except BNB Chain. In the upcoming Aave V4 release, cross-chain liquidity will be connected, making cross-chain liquidity advantages more prominent.
Enhanced Tokenomics to Drive Value Accumulation and Eliminate Slashing Risk
The Aave Chan Initiative recently proposed reforms to Aave's token economics that would enhance token utility through the introduction of revenue-sharing mechanisms.
The first major change involves eliminating the risk of significant AAVE slashing when activating security modules.
- Currently, stakers of AAVE (stkAAVE, total staked value $228 million) and AAVE/ETH Balancer LP tokens (stkABPT, total staked value $99 million) face the risk of token slashing to cover shortfall events.
- However, stkAAVE and stkABPT lack correlation with collateral assets that accumulate bad debt, making them poor collateral assets. In such events, selling pressure on AAVE would cyclically reduce coverage ratios.
- Under the new Umbrella Safety Module, stkAAVE and stkABPT will be replaced by stk aTokens starting with aUSDC and awETH. Providers of aUSDC and awETH can choose to stake their assets to earn additional fees (in AAVE, GHO, protocol revenue, etc.) on top of interest paid by borrowers. These staked assets may be slashed and burned during shortfall events.
- This arrangement benefits both platform users and AAVE token holders.
Additionally, more demand-driven factors for AAVE will be introduced through revenue-sharing mechanisms.
Introduction of Anti-GHO
Currently, stkAAVE users enjoy a 3% discount when minting and borrowing GHO.
This will be replaced by a new "anti-GHO" token generated by stkAAVE holders who mint GHO. Anti-GHO token generation is linear and proportional to the interest accumulated by all GHO borrowers.
Users can claim Anti-GHO and use it in two ways:
- Burn Anti-GHO to mint GHO, which can be used to repay debt for free
- Deposit into the GHO safety module for stkGHO
This enhances alignment between AAVE stakers and GHO borrowers and represents the first step in a broader revenue-sharing strategy.
Burn and Distribution Plan
Aave will allow net excess protocol revenue to be redistributed to token stakers, subject to the following conditions:
- Aave Collector net holdings calculated based on 2-year service provider recurring costs over the past 30 days
- Aave protocol 90-day annualized revenue representing 150% of all year-to-date protocol expenditures, including AAVE acquisition budget and aWETH and aUSDC Umbrella budgets
- We will begin observing Aave protocol consistently repurchasing 8-figure amounts, with expectations for further increases as the protocol continues growing
Additionally, AAVE is almost fully diluted with no significant supply unlocks in the future, creating a stark contrast to recently issued tokens that experienced sharp price declines after Token Generation Events (TGE) due to low initial circulation and high Fully Diluted Valuation (FDV) characteristics.
Significant Growth Ahead for Aave
Aave possesses multiple growth factors and is well-positioned to benefit from the long-term growth of cryptocurrency as an asset class. Fundamentally, Aave's revenue can grow through several avenues:
Aave v4
Aave V4 aims to further enhance its functionality and set the protocol on track to attract the next billion users to decentralized finance (DeFi). First, Aave will focus on revolutionizing how users interact with DeFi by building a unified liquidity layer. By enabling seamless liquidity access across multiple networks (including EVM and eventually non-EVM networks), Aave will eliminate cross-chain conversion complexities in the lending process. The unified liquidity layer will also heavily rely on account abstraction and smart accounts to allow users to manage multiple positions across isolated assets.
Second, Aave will improve its platform accessibility by expanding to other chains and introducing new asset classes. In June of this year, the Aave community supported the protocol's deployment on zkSync, marking Aave's entry into its 13th blockchain network. Then in July, the Aptos Foundation proposed Aave's deployment on Aptos. If approved, the Aptos deployment would represent Aave's first foray into non-EVM networks and further solidify its position as a truly multi-chain DeFi leader. Additionally, Aave will explore integrating Real World Asset (RWA)-based products built around GHO. This move has the potential to connect traditional finance with DeFi, attract institutional investors, and bring substantial new capital to the Aave ecosystem.
These developments ultimately contribute to the creation of the Aave Network, which will serve as a central hub for stakeholders to interact with the protocol. GHO will be used as a fee payment instrument, while AAVE will become the primary staking asset for decentralized stakers. Given that the Aave Network will be developed as an L1 or L2 network, we expect the market to accordingly re-evaluate its token value to reflect the additional infrastructure layer being built.
Growth Correlated with BTC and ETH as Asset Classes
The launch of Bitcoin spot ETFs and Ethereum spot ETFs this year represents a watershed moment for cryptocurrency adoption in traditional finance, providing investors with a regulated and familiar way to gain exposure to digital assets without the complexities of direct ownership. By lowering entry barriers, these ETFs are expected to attract substantial capital from both institutional and retail investors, further facilitating the integration of digital assets into mainstream investment portfolios.
Broader cryptocurrency market growth benefits Aave because over 75% of its asset base consists of non-stable assets (primarily BTC and ETH derivative assets). Therefore, Aave's TVL and revenue growth directly correlate with the growth of these assets.
Growth Linked to Stablecoin Supply
We can also anticipate Aave benefiting from stablecoin market growth. As global central banks signal a shift toward interest rate cut cycles, this will reduce opportunity costs for investors seeking yield sources. This may prompt capital to shift from traditional finance (TradFi) yield instruments to stablecoin staking in decentralized finance (DeFi) for more attractive returns. Furthermore, during bull markets, we can anticipate higher risk appetite behavior that will help increase stablecoin borrowing utilization on platforms like Aave.
Frequently Asked Questions
What makes Aave different from other lending protocols?
Aave distinguishes itself through its proven security track record, having operated without major smart contract incidents for over five years. The protocol's bilateral network effects create natural barriers to entry for competitors, while its multi-chain deployment strategy ensures broad accessibility. Additionally, Aave's sophisticated DAO governance structure involves professional institutions that contribute to robust decision-making processes.
How does Aave generate revenue?
Aave primarily generates revenue through lending fees charged to borrowers. The protocol takes a percentage of the interest paid on borrowed assets. During market volatility, Aave also earns significant revenue from liquidation fees when undercollateralized positions are automatically closed to maintain protocol solvency.
What is GHO and how does it benefit Aave?
GHO is Aave's native decentralized stablecoin pegged to the US dollar. Users can mint GHO by providing collateral, creating additional utility within the Aave ecosystem. The stablecoin generates revenue for the protocol through borrowing interest and strengthens Aave's product ecosystem by providing a native stable asset that can be integrated across various DeFi applications.
How does Aave ensure the safety of deposited funds?
Aave employs multiple security measures including regular smart contract audits, bug bounty programs, and a security module where stakers provide backup capital in exchange for protocol fees. The upcoming V4 upgrade will enhance these mechanisms further with improved risk management frameworks and more diversified collateral options for the safety module.
What advantages does Aave V4 bring to users?
Aave V4 introduces a unified liquidity layer that enables seamless cross-chain borrowing and lending without asset bridging. The update also incorporates account abstraction for improved user experience and smart accounts for sophisticated position management. These features significantly reduce complexity while expanding the protocol's capabilities across multiple blockchain networks.
Can Aave benefit from traditional finance adoption?
Absolutely. Aave stands to benefit significantly from traditional finance adoption through multiple channels. The protocol's integration with real-world assets creates bridges to traditional markets, while institutional adoption of cryptocurrencies through ETFs drives more capital into the ecosystem. 👉 Explore advanced DeFi strategies for maximizing returns in evolving market conditions.
Final Considerations
To reiterate, we remain optimistic about Aave's leading position in the vast and growing decentralized lending market. We have further outlined the key drivers supporting its future growth and detailed how each might develop further.
Since Aave has already established strong network effects driven by its token's liquidity and composability, the protocol will continue to capture market share. The upcoming tokenomics upgrades aim to further enhance the protocol's security and improve its value capture capabilities.
Over the past few years, the market has categorized all DeFi protocols together and priced them as if their future growth potential was limited. This trend is visible in Aave's rising TVL and revenue growth rates alongside compressing valuation multiples. We believe this divergence between valuation and fundamentals cannot persist indefinitely, and the AAVE token now presents one of cryptocurrency's best risk-adjusted investment opportunities.