The price of the currency doubled, TVL returned, and reinterpreted the first old-fashioned leadingAave to recover.

Original Author | Green Light Capital

Compilation | Odaily Planet Daily (@OdailyChina)

Translator｜Azuma（@azuma_eth）

Editor’s Note: Leading lending platform Aave (AAVE) has experienced a reverse trend in the past few months, standing out from the weak performance of the zone. While the tokens of many established Decentralized Finance protocols have been stagnant, the price of AAVE has quietly doubled, surging from around $80 on August 5th to over $170 today.

As the Fed officially enters a rate-cutting cycle, the discussion about the return of the “copycat season”, especially the growing call for the resurgence of Decentralized Finance, has been getting louder and Aave seems to have completed the recovery first. In the following article, Green Light Capital has reanalyzed the fundamental situation of Aave today through multiple dimensions, which may help investors clarify the current pump logic and future trend expectations of AAVE.

The following is the full text of Green Light Capital, compiled by Odaily Star Daily.

Why is it said that AAVE may dominate in this round of Bull Market?

The DeFi track may seem daunting at first glance, and it is often considered the most difficult part to understand in the crypto industry. It is also often seen as less attractive compared to the latest projects with innovative value propositions.

However, the actual situation is quite the opposite. Despite the downturn in interest in the Decentralized Finance track after the crash of Terra Luna and Celsius, there are now some protocols that are offering the best investment opportunities in the industry.

Today, we will further explore this topic through an analysis of Aave, hoping that it can help you understand all the necessary information before making investment decisions.

Aave Overview (Familiar can be skipped)

Aave, which started in 2017 (formerly known as ETHLend), quickly grew into a leading project in the Decentralized Finance (DeFi) field. As a lending platform, Aave primarily offers a trustless, transparent, and secure TradFi proposal solution.

°How does it work?

For 80% of AAVE users, the protocol is primarily used to provide Liquidity. They can connect their Wallet, deposit ETH, stablecoins or other encryption assets, and earn interest on these deposits. Most users’ usage ends here, and their income comes entirely from borrowers who borrow assets - as a return for borrowing, borrowers need to pay interest. The Interest is then redistributed to all deposit users after deducting a fee called the reserve factor, while the deducted fee belongs to Aave DAO.

To borrow assets on Aave, users must provide Collateral. Typically, borrowers deposit assets such as BTC, WBTC, or ETH, or assets related to ETH, such as stETH or $WETH, while borrowing stablecoins. When users anticipate a rise in the value of BTC or ETH, they are more inclined to adopt this strategy, as it allows them to repay the loan at a lower cost. However, if the value of the Collateral sharply declines due to unexpected market events and is no longer sufficient to cover the debt, liquidation will occur. In this case, the liquidator will repay the debt on behalf of the borrower in exchange for a portion of the Collateral as a reward. This liquidation process can protect the entire protocol and ensure the safety of Liquidity Providers’ assets.

Considering that liquidators may not cover all losses, Aave has also set up a ‘Safety Module’ consisting of $500 million worth of AAVE Tokens. This module is supported by users who voluntarily collateralize their AAVE or provide liquidity in AAVE and ETH. In return for this security measure, these users act as a second line of defense to protect the protocol in a Black Swan Event.

Key Catalysts for AAVE

In the next section, we will follow the key catalysts that are expected to help AAVE surpass other alts in the current cycle.

Catalyst One: Paradigm Shift - Stakers will share protocol income

On July 25, 2024, Marc Zeller, Aave’s integration lead, proposed a proposal called the ‘AAVEnomics Update’, which aims to implement a ‘buy and distribute’ plan. The plan hopes to directly reward DAO participants with the excess revenue of the protocol. This marks a significant change in AAVE’s Tokenomics, which is set to enhance AAVE’s appeal by providing tangible financial benefits to holders.

Interested readers can learn about this governance proposal that could completely change everything about AAVE in this article:

Catalyst 2: Cooperation with BlackRock

Aave has proposed to integrate BlackRock’s tokenization fund BUIDL into its GHO stablecoin module (GSM).

The plan is to use idle USDC to mint BUIDL managed by BlackRock, supported by physical assets such as US Treasury bonds and cash, to improve capital efficiency. This will not only enhance GHO’s reserve management capabilities, but also increase Liquidity within the Aave ecosystem. BUIDL Token generates Dividend daily, providing participants with stable income, and diversifying Aave’s sources of revenue—increasing RWA exposure.

In addition, the integration can also be used to achieve seamless exchange between GHO and USDC by utilizing the 100 million USDC redemption fund supported by Circle, thereby effectively addressing market demand Fluctuation and enhancing the stability of GHO.

By partnering with global financial giant BlackRock, Aave can not only enhance its reputation, but also position itself as a pioneer in the integration of TradFi and Decentralized Finance, opening the door for future institutional collaboration.

This cooperation also played a key role in achieving the key milestone required for the Aave revenue distribution proposal:

• GHO supply needs to reach 175 million: By using idle USDC to mint BUIDL, the increase in income has increased the demand for GHO, raising the possibility of GHO breaking through the 175 million circulating supply.
• Absorb large-scale GHO sales with minimal Slippage: The USDC redemption fund ensures that large-scale GHO sales (such as a $10 million exchange) can be achieved with minimal Slippage (1% price impact), maintaining the stability of GHO.

Catalyst Three: Entering Solana

For months, Aave has been hinting at expanding to Solana.

Marc Zeller has mentioned that his role is to help the Aave DAO maximize profits, which means they must operate flexibly and explore various ways to increase protocol revenue. Aave’s view on Solana has changed since the FTX collapse. As a data-driven platform, Aave will only propose a migration plan to Solana when the potential income on Solana exceeds the cost of modifying the code and security audits.

Currently, the potential income from Solana is not enough to justify this migration, but Marc pointed out that the situation is gradually improving and Solana is becoming more and more attractive. Aave is following its development.

Aave believes that expanding to Solana is not difficult, and with their influence, they can quickly establish a leading position on the network.

Catalyst 4: Leading Position & Brand Reputation

In the past few years, due to the collapse of FTX and Terra Luna, multiple attacks on Decentralized Finance protocols by Hackers, and continuous theft of Wallets, users of Decentralized Finance and the broader encryption community have become increasingly disgusted with risks.

Therefore, users find it increasingly difficult to trust Decentralized Finance protocols that use Decentralization to manage their assets. In this ecosystem, brand reputation plays the most critical role in winning investor trust. This is where Aave’s biggest advantage lies, and it is also why we believe that it will be difficult for new protocols to surpass Aave in the coming years. Since 2017, Aave has been an important part of the Decentralized Finance ecosystem, and although it has experienced some minor security incidents, they were mainly related to external Smart Contracts or liquidity pools. Aave has never suffered a major Hacker attack that directly threatened its core protocol. Aave has been actively addressing security issues, conducting multiple audits, and running a bug bounty program to incentivize vulnerability identification.

Therefore, Aave is considered one of the safest Decentralized Finance platforms, with its clients mainly being Whales who hope to earn attractive returns while lending out funds. These Whales will prioritize security and are unlikely to simply transfer assets to newer, less tested protocols just for slightly higher returns. As more institutional participants enter Decentralized Finance, Aave is fully capable of maintaining its leadership position.

With a 67% market share in the lending sector, Aave is expected to continue to strengthen its leading position and consolidate its position as a market leader in the coming years.

Market Outlook Analysis

As you know, borrowing on Aave requires depositing Collateral. Therefore, we have been looking for a consistent lending model in TradFi that is comparable to Aave’s business, in order to compare and highlight the huge potential rise of Decentralized Finance in the coming years.

In our analysis, Margin loans seem to be most similar to Aave’s loan model, as they allow stock market investors to borrow more stocks/securities by using existing assets as Collateral.

On top of Aave, borrowers are typically individuals who believe that the crypto market will continue to pump. They usually use assets like BTC and ETH as collateral to borrow stablecoins and buy more cryptocurrency. If the market pumps, their borrowing costs decrease relative to their profits from trading. However, if the market falls, they will also face additional margin and potential liquidation risks, similar to the risks faced by margin loan users in TradFi.

Upon closer analysis of the active loans in Decentralized Finance, it is evident that the sector is recovering and is expected to return to the All-time high (ATH) of around $20 billion last seen in late 2021. Currently, there are $11 billion in active loans in the Crypto Assets space, with $7.4 billion coming from the AAVE protocol, further highlighting its market dominance. However, compared to the Margin loan market in TradFi, which currently has a total of $800 billion (a difference of up to 80 times), it is clear that there is still significant room for growth in the encryption lending market in the coming years.

Valuation Comparison

The best way to assess whether an asset is overvalued or undervalued is to use key indicators such as Market Cap/TVL multiples to compare it with other assets. We conducted this analysis a few weeks ago, and the results showed that AAVE is currently significantly undervalued.

In this post (12-month price and market capitalization forecast.

Token Economy Model

The token of Aave was initially launched as LEND during the era of ETHLend. In 2020, Aave introduced a token swap, significantly reducing the maximum supply of tokens.

Through this exchange, holders can exchange 100 LEND Tokens for 1 AAVE Token, reducing the total supply from 1.3 billion LEND to 13 million AAVE. In addition, the team has allocated an additional 3 million Tokens to the Aave ecosystem reserve to support the development of the protocol.

The migration from LEND to AAVE marked the introduction of an internal governance mechanism for the protocol, allowing the community to submit Aave Improvement Proposals (AIPs) and participate in the project’s development. Governance has thus become a core utility of the AAVE Token.

The initial distribution structure of AAVE Token is as follows.

Financing and Unlocking Status

In 2017, the Aave team conducted an initial Tokenissuance (IC0), raising $16.2 million from investors at a price of $0.0184 per LEND Token (equivalent to $1.84 per AAVE Token). As of today, the investors in this round have received a return of 78 times, and during AAVE’s All-time high (ATH), the return rate was as high as 360 times. However, given that this was 7 years ago, it is unlikely that many initial investors still hold their Tokens.

During the 2020 Token exchange period, Aave also completed several rounds of financing. These rounds of financing mainly involved selling tokens from the Aave treasury, raising a total of 32 million dollars. Unfortunately, specific details about these rounds of financing (such as unlocking schedule) have not been disclosed. It is speculated that most VCs may have sold their holdings during the 2021 bull market, so the risk of these institutions dumping AAVE on a large scale again is not high.

From the unlocking status, the circulating supply of AAVE is currently 14.9 million, accounting for the vast majority of the total supply of 16 million tokens. In addition, there are approximately 1 million tokens still remaining in the treasury for stake rewards of the safety module and incentives for liquidity providers. Since most AAVE tokens are already in circulation, there will be no large-scale token unlocking in the future, which ensures that AAVE will not suffer significant value dilution.

This is the best Token structure, with almost all Tokens already in circulation.

Token Utility

Currently, the use of AAVE Token is relatively limited, and it can be roughly summarized into two main aspects. The first is governance utility, where AAVE holders can vote on proposals or initiate new proposals (AIPs) that can affect the risk parameters, incentive measures, product improvements, and upgrades of the protocol. The second is stake utility, where AAVE holders can choose to allocate Tokens to the Safety Module. In the event of a Black Swan Event, the staked Tokens will be reduced by the protocol to repay the remaining debt, protecting the assets of Liquidity Providers. As a reward for safeguarding protocol security, AAVE stakers will receive corresponding incentives.

As the new income distribution proposal advances, the utility of AAVE will also change. The most significant change is that the current Safety Module will transition to a ‘Legacy Safety Module’, which means that the existing system - AAVE staked in the extreme case may be reduced to compensate for the protocol deficit - will evolve into a more efficient and user-friendly model.

Under the new model, the stake mechanism of AAVE Token will depeg from the protocol security responsibility. AAVE holder can still stake their Tokens to earn income rewards, but these rewards will be directly linked to the protocol’s income, rather than being associated with protocol risks. This means that the risk of stake being lost due to protocol security events will be eliminated, making stake more attractive to Token holders.

K-line Analysis

From a technical perspective, AAVE’s outlook looks attractive in the coming months, especially considering its recent strong performance relative to BTC and ETH.

When analyzing the AAVE/ETH trading pair, we observed a significant change in the trend on the weekly timeframe. AAVE has successfully set a new high, indicating a potential trend reversal or suggesting that the downward trend associated with the Bear Market may be over. In our view, the bottom of AAVE relative to ETH has likely been established.

When analyzing the trend of AAVE alone, we can see that the Token has finally broken out of the weekly range oscillation that started in May 2022. The Token seems to be regaining strength and attracting more investors’ interest, especially after announcing the distribution of excess income to Token holders.

After such a long period of accumulation, we expect AAVE to quickly reprice and then enter a positive pump state.

Investment Notes

According to our analysis, AAVE seems to be an obvious choice in the current Bull Market. The new income distribution plan has fundamentally changed AAVE’s value capture ability, linking the interests of Token holders with the profits of the Aave protocol.

The lending market in Decentralized Finance is still small, but it may experience significant rise in the coming years, especially as more institutional participants gradually get on board. With its strong brand reputation and leading position, Aave has the ability to absorb these newly incoming funds, and is expected to expand horizontally to more new markets (such as Solana).

In addition, by comparing the “Market Cap/TVL” ratio, it can be found that although AAVE has recently experienced a significant pump, its price is still being undervalued.

AAVE has recently broken out of a year-long trading range, and given its current undervalued state, we expect the market to reprice it soon.