On-chain lending is one of the most vital markets in the cryptocurrency industry. As the undisputed leader in this space, Aave possesses formidable competitive advantages and strong user loyalty. We believe Aave is significantly undervalued, with substantial room for growth that the market has yet to fully appreciate.
Launched on the Ethereum mainnet in January 2020, Aave is now in its fifth year of operation. Today, it stands as the largest lending protocol with $7.5 billion in active loans—five times more than its closest competitor, Spark.
Key Metrics Show Consistent Growth Surpassing Previous Cycles
Aave is among the few DeFi protocols that have exceeded their 2021 bull market peaks in several key metrics. For instance, its quarterly revenue has now surpassed the peak levels of Q4 2021. Remarkably, even during the market consolidation period from November 2022 to October 2023, Aave’s revenue continued to grow. As the market recovered in Q1 and Q2 of 2024, Aave maintained strong momentum, achieving quarter-over-quarter growth rates of 50–60%.
Year-to-date, Aave’s Total Value Locked (TVL) has nearly doubled, driven by increased deposits and rising prices of core assets like WBTC and ETH. Its TVL has now recovered to 51% of its previous cycle peak, indicating stronger resilience compared to other leading DeFi protocols.
Strong Earnings Reflect Strong Product-Market Fit
Aave’s revenue peaked in the last cycle, a period marked by aggressive token incentives from multiple smart contract platforms like Polygon, Avalanche, and Fantom aiming to attract users and liquidity. This led to unsustainable levels of speculative capital and leverage, artificially inflating revenue figures for many protocols.
Today, native chain incentives have largely dried up, and Aave’s own token incentives have been reduced to negligible levels. This indicates that the recent growth in metrics is organic and sustainable, driven primarily by renewed market speculation, which has increased active loans and borrowing rates.
Moreover, Aave has demonstrated its ability to sustain growth even during periods of reduced speculation. During the early August downturn in global risk assets, Aave’s revenue remained robust thanks to fees collected from loan liquidations. This underscores Aave’s capacity to withstand market volatility across various collateral types and multiple chains.
Despite Strong Fundamentals, Aave’s P/S Ratio Is at a Three-Year Low
Despite strong performance in recent months, Aave’s price-to-sales ratio sits at just 17x—a three-year low and well below its median value of 62x during the same period.
Aave Is Poised to Strengthen Its Dominance in Decentralized Lending
Aave’s competitive edge is built on four core pillars:
- Strong Security Track Record: Many new lending protocols encounter security issues early in their lifecycle. To date, Aave has not experienced any major smart contract-level security incident. A strong security record backed by rigorous risk management is often a top priority for DeFi users—especially those with large capital allocations.
- Two-Sided Network Effects: DeFi lending is a classic two-sided market. Depositors and borrowers represent both sides of supply and demand. Growth on one side fuels growth on the other, making it increasingly difficult for newcomers to compete. Higher liquidity also improves the experience for large users, attracting more capital and further stimulating platform growth.
- Effective DAO Governance: Aave is fully governed by a decentralized autonomous organization (DAO). This model encourages greater transparency, thorough community discussion, and more informed decision-making compared to centralized alternatives. The Aave DAO also includes participation from highly skilled professional entities such as top risk management providers, market makers, third-party dev teams, and financial advisors. This diversity fosters active and high-quality governance.
- Multi-Chain Strategy: Aave is deployed on almost all major EVM-compatible L1 and L2 chains and leads in TVL on all of them except BNB Chain. The upcoming Aave V4 will introduce cross-chain liquidity, further solidifying its multi-chain advantage.
Tokenomics Upgrade to Improve Value Accrual and Mitigate Risks
The Aave Chan Initiative (ACI) recently proposed an update to AAVE tokenomics aimed at introducing a revenue-sharing mechanism to enhance token utility.
One major change involves eliminating the slashing risk for AAVE tokens in the Safety Module.
- Currently, stakers of AAVE (stkAAVE – $228M TVL) and AAVE/ETH Balancer LP tokens (stkABPT – $99M TVL) face the risk of token slashing to cover shortfall events.
- However, these assets are not ideal coverage assets due to their lack of correlation with the collateral assets that may incur bad debt. Selling pressure on AAVE in such events could further reduce coverage levels.
- Under the new Umbrella safety module, stkAAVE and stkABPT will be replaced by stk aTokens, starting with aUSDC and awETH. Suppliers of these assets can choose to stake them to earn extra fees (including AAVE, GHO, and protocol revenue) on top of borrower interest. These staked assets would be subject to slashing and burning in case of a shortfall.
- This new structure benefits both platform users and AAVE holders.
Additionally, a new earnings distribution mechanism will further boost demand for AAVE.
Anti-GHO Mechanism:
- Currently, stkAAVE holders enjoy a 3% discount when minting and borrowing GHO.
- This will be replaced by a new “anti-GHO” token minted linearly in proportion 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 it into the GHO safety module to receive stkGHO.
- This improves alignment of interests between AAVE stakers and GHO borrowers and is the first step in a broader earnings-sharing strategy.
Burn and Distribution Plan:
Aave will allow net excess protocol revenue to be redistributed to token stakers, provided:
- The Aave Collector’s net holdings are sufficient to cover 30 days of recurring costs for two annual service providers.
- The protocol’s 90-day annualized revenue reaches 150% of all year-to-date protocol expenses (including AAVE acquisition and Umbrella module budgets).
- This would initiate an ongoing eight-figure buyback program that scales with protocol growth.
AAVE is nearly fully diluted with no major supply unlocks on the horizon. This stands in stark contrast to recent token launches that have suffered significant value dilution due to low float and high fully diluted valuations (FDV) at token generation events (TGE).
Several Growth Catalysts Lie Ahead
Aave is well-positioned to benefit from the long-term growth of crypto as an asset class. Several fundamental drivers could propel its revenue higher:
Aave V4
Aave V4 is set to significantly boost the protocol’s competitiveness and help onboard the next wave of users into DeFi. Key improvements include:
- A unified liquidity layer that will revolutionize the DeFi user experience by enabling seamless liquidity access across multiple networks (including EVM and eventually non-EVM chains).
- Deeper integration with account abstraction and smart accounts, allowing users to manage positions across multiple isolated assets.
- Expansion to more chains and introduction of new asset classes. The community recently voted to deploy on zkSync (its 13th chain), and a proposal to deploy on Aptos (its first non-EVM chain) is under discussion.
- Exploration of real-world asset (RWA) products built around GHO, which could bridge TradFi and DeFi, attract institutional investors, and bring significant new capital into the Aave ecosystem.
These developments will culminate in the Aave Network, a dedicated L1 or L2 that will serve as the central hub for stakeholder interaction. GHO will be used for fee payment, and AAVE will serve as the primary staking asset for validators. We expect the market to revalue the token to reflect the value of this new infrastructure layer.
Growth Correlated with BTC and ETH Appreciation
The launch of Bitcoin and Ethereum ETFs this year is a major milestone in crypto adoption. These regulated instruments offer investors an easy way to gain exposure to digital assets without the complexities of direct ownership. By lowering barriers to entry, these ETFs are expected to attract significant capital from both institutions and retail investors, further integrating digital assets into mainstream portfolios.
This is bullish for Aave, as over 75% of its supplied assets are non-stablecoins (primarily Bitcoin and Ethereum derivatives). Therefore, Aave’s TVL and revenue growth are directly tied to the appreciation of these assets.
Growth Linked to Stablecoin Supply Expansion
Aave is also poised to benefit from growth in the stablecoin market. With global central banks signaling a shift toward rate-cutting cycles, the opportunity cost for investors seeking yield will decrease. This may incentivize capital to move from traditional yield products to stablecoin farming in DeFi for higher returns. Additionally, in a bull market, rising risk appetite and increased leverage will further stimulate stablecoin borrowing activity on platforms like Aave.
Frequently Asked Questions
What makes Aave different from other lending protocols?
Aave stands out due to its strong security record, deep liquidity, effective decentralized governance, and multi-chain presence. These factors create a powerful network effect that makes it the preferred choice for many users, especially those with large capital allocations.
How does Aave generate revenue?
Aave earns revenue through interest rate spreads between lenders and borrowers. It also collects fees during liquidations. Revenue is used to cover operational costs, and future upgrades may allow excess revenue to be shared with AAVE stakers.
Is staking AAVE tokens safe?
Aave has a strong security history with no major smart contract breaches. Proposed tokenomics changes aim to make staking even safer by replacing slashing mechanisms with a more aligned and sustainable model using staked aTokens.
What is GHO and how is it related to Aave?
GHO is Aave’s native over-collateralized stablecoin. It is minted by users who deposit collateral. Changes proposed in the Aavenomics update aim to better align the interests of GHO borrowers and AAVE stakers, strengthening the ecosystem.
How can I stay updated on Aave governance proposals?
The best way is to follow the official Aave governance forum, where community members discuss and propose changes. Major upgrades and policy changes are proposed and voted on by AAVE token holders.
Where can I learn more about advanced DeFi strategies?
For those looking to deepen their understanding of decentralized finance mechanisms and liquidity strategies, 👉 explore advanced lending techniques that can help optimize your portfolio.
Conclusion
We remain optimistic about Aave’s prospects as the leading and continuously expanding protocol in the decentralized lending space. We have highlighted the core elements driving its future growth and explained how each contributes to its expansion.
We believe that Aave’s strong network effects, superior token liquidity, and composability will allow it to further consolidate and extend its market leadership. The upcoming tokenomics upgrade will enhance protocol security and improve its value capture mechanisms.
In recent years, the market has often lumped all DeFi protocols together, pricing them as a homogenous asset class with limited growth potential. This is evident in Aave’s steadily rising TVL and revenue amid declining valuation multiples. We believe this disconnect between valuation and fundamentals is temporary. AAVE currently presents one of the most compelling risk-adjusted investment opportunities in the crypto industry.