TL;DR

• Aave is a multi-chain lending protocol whose core business is to realize P2C (peer-to-contract) lending of crypto assets through dynamic interest rate models and liquidity pools. It currently ranks third among DeFi projects in terms of total value locked (TVL), especially taking the leadership position in the lending category. Avara, the parent company of Aave, is gradually expanding its business into new areas, including cross-chain lending, stablecoins, open social protocols, and institutional lending platforms.

• The total supply of AAVE tokens is 16 million, of which 13 million are allocated to token holders and the remaining 3 million are injected into the reserves of the Aave ecosystem. The total number of AAVE tokens currently circulating in the market is approximately 14.8 million.

• As Aave’s business continues to expand and mature, AAVE’s TVL and price will increase against the backdrop of market recovery in 2024. Avara announced an upgrade plan for the Aave V4 version in May, focusing on further improving Aave’s liquidity and asset utilization.

• Aave V3 has largely replaced V2, with its business model and user base becoming more stable, putting Aave far ahead of other lending protocols in terms of TVL, trading volume, and the number of supported chains.

• Avara has had some challenges scaling its business. At present, its main income still relies on traditional lending business. Stablecoin GHO has recently regained its peg after a period of de-anchoring. Institutional lending platform Aave Arc’s TVL has been trading at lower levels for an extended period of time after a sharp decline.

• For Aave’s future development, suggestions include further optimizing its cross-chain lending solutions, strengthening its stablecoin business and integrating it deeply with the Aave platform, incorporating Aave’s DeFi capabilities into emerging businesses like social platforms, and integrating the currently relatively independent business segments into a comprehensive ecosystem.

Introduction

In the first quarter of 2024, the DeFi market demonstrated significant growth and vitality, with both fees and revenue reaching yearly highs. The DeFi market collected more than $1.6 billion in fees last quarter, with total revenue exceeding $467 million. In particular, monthly revenue in March reached $230 million, setting a new high for the year.

Lending, as one of the core functions of the cryptocurrency ecosystem, uses smart contracts to achieve functions such as matching of borrowers and lenders, asset locking, interest calculation and repayment execution. According to defillama data, as of mid-May 2024, the total TVL value in the lending field reached $29.586b, accounting for 36% of the TVL in the entire DeFi field.

Against this background, as an important participant in the DeFi lending market, Aave’s performance is particularly worthy of attention. Aave’s total borrowings reached $6.1 billion in the first quarter of 2024, up 79% sequentially, a growth rate that far outpaced the market average.

In addition, Aave’s lending revenue also increased by 40% during the quarter, reaching $34.9 million, continuing to maintain its leading position in the DeFi lending market. Despite facing stiff competition from rivals, Aave still dominates in terms of total value locked (TVL) and revenue.

Studying Aave’s performance in the DeFi market is also of great significance for understanding the development trends and future potential of the entire DeFi market. Aave’s success stories and operating model can also serve as references and inspirations for other DeFi projects.

1. About Project

In May 2017, Stani Kulechov founded the ETHLend project. Initially, ETHLend encountered severe liquidity challenges during operations. At the end of 2018, ETHLend underwent a strategic transformation, changing from a P2P (point-to-point) model to a P2C (point-to-contract) model, introducing a liquidity pool model, and officially changed its name to Aave. This transformation marks Aave’s official launch in 2020.

In November 2023, Aave Companies announced a rebranding to Avara. Avara has gradually launched new businesses including stablecoin GHO, social network protocol Lens, and institutional lending platform Aave Arc, and has begun strategic layouts in crypto wallets, games, and other fields.

The current Aave V3 version has been stably put into use, and its services have been expanded to 12 different blockchains. At the same time, Aave Labs further attempted to upgrade the lending platform, announcing an upgrade proposal to the V4 version in May 2024.

According to data provided by Defillama, as of May 15, 2024, AAVE ranked third in total locked value (TVL) in the DeFi (decentralized finance) field, reaching $1.0694 billion.

2. Team background and financing situation

2.1 Team background

Aave’s parent company, Avara, is headquartered in London, England. It started with an innovation team of 18 people and now has a total of 96 employees according to LinkedIn.

• Founder and Chief Executive Officer (CEO): Stani Kulechov received a master’s degree in law from the University of Helsinki. The topic of his master’s thesis was using technology to improve the efficiency of commercial agreements. He is also a Web 3 practitioner with serial entrepreneurial experience.
• Chief Operating Officer (COO): Jordan Lazaro Gustave came into contact with coding when he was more than ten years old and obtained a master’s degree from the Risk Management Department of University Paris X Nanterre.
• Chief Financial Officer (CFO): Peter Kerr graduated from Massey University and University of Oxford. He has worked for HSBC, Deutsche Bank, Sonali Bank, etc. and joined Avara as CFO in 2021.
• Institutional Business Leader: Ajit Tripathi graduated from IMD Business School and Indian Institute of Technology and has worked at Binance, ConsenSys and PwC.

2.2 Financing situation

• In 2017, ETHLend raised $16.2 million through an ICO, during which Aave Companies sold 1 billion units of LEND tokens.
• In 2018, the project brand was upgraded to Aave.
• In July 2020, Aave received US$3 million in Series A investment led by Three Arrows Capital.
• In October 2020, Aave received $25 million in Series B investment and launched the governance token $AAVE.
• In May 2021, the AAVE protocol was deployed on Polygon and will receive Matic lending mining rewards worth $200 million provided by Polygon within one year.

3. Historical event & K-line chart

Figure 1: Aave historical events

Major events and announcements tend to have a significant impact on the price and total value locked (TVL) of decentralized lending protocols. For example, after Aave V2 was launched at the end of 2020, both the price and TVL of AAVE increased significantly. This trend continued during the DeFi Summer of 2021, when lending and borrowing protocols continued to expand in staking and borrowing, sustaining Aave’s high price levels. By March 2022, the launch of Aave V3 once again drove significant growth in AAVE prices and TVL. However, the ensuing UST decoupling event and bear market resulted in an overall shrinkage in AAVE’s TVL and a fall in price.

On November 5, 2023, Aave temporarily suspended Aave V2 market trading after receiving reports of functional issues with the Aave protocol, resulting in a short-term decline in AAVE price and TVL. However, as the overall market improves and GHO gradually returns to anchoring, AAVE’s price and TVL have shown a clear upward trend in the near future.

Figure 2: Aave price & historical event

Figure 3: Aave TVL & historical event

4. Business sectors and implementation mechanisms

4.1 Core lending business

4.4.1 Changes in Aave Architecture - V3 Enhances Capital Utilization via Efficient Mode, Isolation Mode and Cross-Chain Transmission Portal

Since Aave’s debut in January 2020, it has established its important position in the decentralized finance (DeFi) field with its core features such as its lending pool, aToken model, innovative interest rate mechanism, and flash loan functionality. As Aave evolves from V1 to V3, its lending business model has demonstrated continued and steady development.

In December 2020, Aave released the V2 version, which significantly improved the user experience by simplifying and optimizing its architecture and introducing features such as debt tokenization and flash loan V2. According to the official white paper, V2’s architectural optimization is expected to reduce gas costs by approximately 15% to 20%. In January 2023, Aave launched the V3 version, which further enhanced the capital utilization based on V2, and the overall architecture has not changed much. The V3 version introduces three innovative features: E-mode, Isolation Mode and Portal.

In May 2024, Aave proposed a V4 version proposal. It plans to adopt a new architecture in the design of the new version, and introduce a unified liquidity layer, fuzzy control interest rate, GHO native integration, Aave Network and other designs. The relevant mechanisms of the V4 version are specific. The details will be elaborated in the subsequent section 4.1.6.

Figure 4: Architecture changes of Aave protocol V2 and V3

4.1.2 Aave Interest Rate Model - Adjust liquidity in the fund pool by using dynamic interest rate model

Borrowing interest rate

Aave has designed a specific Interest Rate Strategy contract for each type of reserve. Specifically, the following is defined in the basic strategy contract:

The variable interest rate calculation formula is:

By analyzing the interest rate model, we can find that when the current utilization rate is lower than the optimal utilization rate in a given market, the borrowing rate slowly increases. However, when the current utilization rate exceeds the optimal utilization rate, the lending rate will rise sharply as the utilization rate increases, that is: when liquidity in the trading pool is high, low interest rates encourage lending; when liquidity is low, high interest rates maintain liquidity.

Figure 5: Aave deposit interest rate change trend

Each asset has a predetermined optimal utilization rate. Based on the above interest rate model, Aave V3 has divided into three interest rate model strategies according to the risk status of different assets:

Figure 6: Comparison of three interest rate model strategies in Aave V3

4.1.3 Aave Lending Process and Liquidation Mechanism

In Aave’s interactive process, the lending process is as follows:

• Depositors can obtain the corresponding aToken by depositing tokens into Aave’s asset pool. As deposit certificates, these aTokens not only prove the deposit behavior, but can also be freely traded and transferred in the secondary market.
• For borrowers, they can borrow cryptocurrencies through overcollateralization or flash loans. When the borrower is ready to repay the debt, in addition to returning the principal, it also needs to pay interest calculated based on asset utilization and market supply and demand. Once the debt is settled, the borrower will not only be able to redeem its mortgaged assets, but the aToken linked to its mortgaged assets will also be burned accordingly.

Aave’s liquidation mechanism is as follows:

Aave’s liquidation mechanism will be triggered when the market value of mortgage assets declines or the value of borrowed assets increases, causing the value of the borrower’s collateral to fall below the established liquidation threshold. Different Tokens will have different loan to value ratios (Loan to Value, LTV) and liquidation thresholds based on their risk characteristics. When liquidation occurs, in addition to paying principal and interest, the borrower also needs to pay a certain proportion of Liquidation Bonus to the third party that performs liquidation.

Related parameters:

• Loan-to-value ratio (LTV): Determines the maximum amount of assets a borrower can lend. For example, an LTV of 70% means that for collateral worth 100 USDT, the borrower can borrow up to 70 USDT.
• Health factor: reflects the safety level of the borrowing position. The higher the health factor, the stronger the borrower’s solvency. On the contrary, the lower the health factor, the weaker the solvency. Once the health factor drops below 1, it indicates that the collateral may be facing liquidation.

• Liquidation Threshold: Sets the minimum ratio between the value of the collateral assets and the value of the borrowed assets. When a borrower’s position hits this threshold, its collateral is at risk of being liquidated.

4.1.4 Flash Loan Mechanism

In the Aave protocol, Flash Loans is a groundbreaking financial innovation that relies on the atomic nature of Ethereum transactions: all operations in the transaction are either fully executed or not executed at all. This mechanism enables participants to borrow large amounts of assets without providing collateral. Borrowers borrow funds from Aave within the time frame of one block (approximately 13 seconds) and complete repayment within the same block, thus achieving a fast closed-loop lending process.

Flash loans greatly simplify the process of executing price arbitrage, automated trading strategies, and other decentralized finance (DeFi) operations, while effectively avoiding liquidity risks. In the Aave V3 protocol, the handling fee for each flash loan transaction is 0.05%, which is significantly lower than the 0.3% of Uniswap V2, bringing users a more economical lending option.

4.1.5 Credit Delegation Mechanism

Figure 7: Credit Delegation Mechanism

Aave launched a credit delegation mechanism in August 2020. Through credit delegation, depositors can delegate their unused credit lines to other users, and borrowers can use this to obtain additional borrowing capacity.

In addition, Opium launched Credit Default Swaps (CDS) for Aave’s credit delegation mechanism in September 2020. As a risk management tool, CDS adds an extra layer of protection to the credit delegation mechanism by allowing investors to transfer the risk of default by a specific borrower. The following uses a case provided by Aave to explain the operation and implementation details of the credit delegation mechanism:

Figure 8: Aave credit delegation case

1. As a depositor, Karen deposits $1 million in USDT into Aave. According to Aave’s settings, her annual percentage yield (APY) is 5%. Karen receives $1 million worth of aUSDT as proof of deposit.
2. In order to further participate in the credit delegation mechanism, Karen needs to create a CDV (Credit Delegation Vault) smart contract. The contract will allow Karen to deposit $1 million worth of aUSDT and set various parameters including a credit limit. To do this, Karen needs to pay a 3% ETH stability fee.
3. Based on the parameters she set, Karen and Chad agreed on the terms of the loan through the OpenLaw platform, agreeing to borrow at an annual percentage rate (APR) of 8%. Both parties agreed to the agreement and formally signed it.
4. Karen then adds Chad’s payment address to CDV’s whitelist, so that Chad can borrow $750,000 worth of ETH from CDV based on this credit line without providing any collateral assets.
5. In this case, Karen’s actual annualized percentage yield (APY) is calculated as the original 5% minus the 3% stability fee plus the 8% borrowing interest rate, that is, 5% - 3% + 8% = 10% . This yield is higher than what she would have received if she had deposited directly through Aave. Chad successfully borrowed $750,000 worth of ETH without collateral and agreed to pay an annual interest rate of 8%.

4.1.6 Aave V4 Brings Brand-New Features

According to the description of the Aave V4 protocol development proposal, Aave V4 will be built using a new architecture and adopt an efficient and modular design while minimizing the impact on third parties and providing more convenient conditions for third parties to expand their work.

Liquidity layer

• Unified liquidity layer
  The liquidity layer is designed on top of the Aave V3 version of the Portal concept. Taking Aave as an example, the current Aave V2 and Aave V3 have dispersed liquidity due to version updates, and it has taken a long time to complete the migration of overall liquidity from V2 to V3. The liquidity layer proposed by V4 aims to uniformly manage supply and lending caps, interest rates, assets and incentives, allowing other modules to draw liquidity from it. In short, when Aave DAO plans to add or remove new functional modules in the future (such as isolation pools, RWA modules, and CDP), there will be no need to migrate liquidity. Each type of module can simply draw liquidity from the unified liquidity layer.

Figure 9: unified liquidity layer

• liquidity premium
  Aave V4 introduces a liquidity premium feature, which adjusts borrowing rates based on the collateral risk profile. Risk factors are assigned to each asset and dynamically adjusted based on market and external risk factors. Lower-risk assets (such as Ethereum) will enjoy lower lending rates, while higher-risk assets (such as altcoins) will have relatively higher borrowing costs.

Figure 10: liquidity premium

Fuzzy control interest rate

Currently, Aave’s interest rate setting not only increases the complexity of governance, but also affects capital efficiency. The Aave V4 version proposal introduces a fully automatic interest rate mechanism that uses fuzzy interest rates to dynamically adjust the slope and inflection point of the interest rate curve. This innovative approach to interest rate management will allow Aave to flexibly increase or decrease the base rate based on real-time market demand, thereby providing more optimized rates to depositors and borrowers.

Figure 11: Fuzzy control interest rate

Aave V4 Lending Module

Aave V4 version optimizes the security and user experience related to lending and simplifies the governance process by introducing a series of innovative features:

• The design of smart accounts and vaults greatly improves the user experience. Smart accounts allow users to manage multiple positions through a single wallet. The vault function implemented by smart accounts allows users to borrow money without directly providing collateral to the liquidity layer. The collateral will be locked when the borrowing is active or a liquidation event occurs, increasing the convenience and security of user interaction.
• The V4 version also proposes dynamic risk allocation to adjust risk parameters when market conditions change. Users are linked to the current allocation of assets when they borrow, and new asset allocations are made available to new users, avoiding the impact on existing borrowers. In addition, V4 introduces an automatic delisting mechanism to simplify the asset delisting process.

Excess Debt Protection Mechanism

Due to the risk of bad debt spreading with shared liquidity, Aave V4 introduces a new mechanism to track undercollateralized positions and automatically handle their accumulated excess debt. This mechanism sets a debt threshold, and once this threshold is exceeded, the corresponding assets will automatically lose their borrowing capability, preventing the spread of bad debt and protecting the shared liquidity model from contagion.

GHO native integration solution

Aave V4 proposes plans to strengthen integration with GHO, aiming to improve user experience and increase revenue for stablecoin providers.

1. Native GHO casting: The V4 version proposes to efficiently perform native casting of GHO in the liquidity layer;
2. GHO “soft” liquidation: Borrowing from crvUSD’s liquidation model, V4 introduces a Lending-Liquidation Automated Market Maker (LLAMM) to simplify the liquidation process. Users can choose to convert to GHO when the market is down, or buy back collateral when the market is rising;
3. Stablecoin interest is paid in GHO: V4 will support depositors to receive interest payments in GHO. When stablecoin depositors choose this option, interest payments will be converted into V4’s PCV (Protocol Controlled Value), and the interest payment process will also enhance the stability of GHO and improve capital efficiency.
4. Emergency Redemption Mechanism: V4 introduces an emergency redemption mechanism to address extreme de-pegging situations. When this mechanism is triggered, collateral corresponding to the least healthy positions will be redeemed for GHO and used to repay their debt.

Aave Network

At the same time, the Aave team also proposed the concept of Aave Network. The Aave team anticipates developing an Aave network that can serve as the main hub for Aave and GHO. The network will be powered by Aave V4, use GHO for payments, and be governed by community voting through Aave Governance V3, inheriting network security from Ethereum. Currently, the concept is still in the design stage, and the Aave team said they will pay close attention to L1 and L2 related technologies and select corresponding implementation solutions.

4.2 Stablecoin GHO - Enhance Aave’s Stability & Facilitate GHO Development Through Interoperability between Aave and GHO

The borrowing interest rate of GHO stablecoin is determined by AaveDAO and can be dynamically adjusted according to market conditions to adapt to fluctuations in the economic cycle and changes in capital supply and demand.

The innovative features of GHO stablecoin are mainly reflected in the following key aspects:

1. Facilitator: A protocol, entity or project that controls the minting and burning mechanism of GHO. Aave is the first facilitator of GHO.
2. Asset Bucket: The upper limit of GHO holdings is set by community governance through voting. This upper limit is to maintain the stability and liquidity of GHO price.
3. Discount mode: The lending rate will be adjusted and discounted based on the holding amount of stkAAVE.

The update of the Aave V3 version has also had a positive impact on the operation of the GHO stablecoin, which is specifically reflected in:

1. Isolation mode: GHO uses isolation mode to allow users to generate using various assets supported by the Aave protocol, reducing the impact of market fluctuations on system stability.
2. Efficient mode: Efficient mode allows users to borrow more GHO using non-volatile collateral assets to balance their positions, thereby increasing the supply of GHO in the market and reducing demand pressure.
3. Cross-chain portal: The portal function provides an ideal way for GHO to expand in a multi-chain ecosystem, thereby reducing the risk of cross-chain interactions.

Figure 12: GHO mechanism

4.3 Open Social Protocol - Determining that participants in social engagement hold all content through modularized underlying protocols

Lens Protocol is an innovative social network protocol launched by Aave on the Polygon blockchain. It is designed as a modular underlying protocol to promote community expansion and continued development. This protocol encourages developers to build a variety of social applications on top of it, while ensuring that users have full control over their content and social relationships.

4.3.1 Convert Behavior into NFT

The core innovation of Lens Protocol is to convert social media behaviors into NFTs (non-fungible tokens), which is mainly reflected in the following aspects:

1. Profile NFT: This is the user’s identity certificate in the Lens ecosystem, which users can obtain by casting or purchasing. It contains the history of all user posts, mirrors, comments, etc., and gives users complete control over these contents.
2. Collect NFT: This is the content profit model for creators in the Lens ecosystem. Followers can purchase the content created by the creator.
3. Follow NFT: This is the user’s follow mode in the Lens ecosystem. When users follow a profile on Lens Protocol, they will receive a Follow NFT.

4.3.2 Functional modules of Lens Protocol

The functional modules of Lens Protocol include:

1. Publication: divided into three types: posts, comments, and reposts. Publication is published directly to the user’s Profile NFT, ensuring that all content created by the user is owned by the user.
2. Comment: Allows users to comment on other people’s Publications. Comments also exist in the user’s NFT and are therefore fully owned by the user.
3. Mirror: equivalent to the forwarding function in traditional social media. Because they reference other Publications, they are subject to the conditions of the reference module of the original Publication and cannot be collected.

4.3.3 Analysis of Lens Products and Data

Currently, a variety of social-related applications have been developed based on Lens Protocol, such as the decentralized Twitter alternative Lenster.xyz, the video content platform Lenstube.xyz, and the decentralized resume platform Orb.ac. These applications illustrate Lens Protocol’s potential to reshape social media interactions.

Figure 13: Lens Protocol ecological panorama

4.4 Institutional Lending Platform Aave Arc - Provide Lending Open Social Protocols for Traditional Financial Markets

As decentralized finance (DeFi) grows in importance and influence in global financial markets, demand for DeFi solutions continues to grow among traditional financial technology companies, hedge funds, family offices, and asset management companies. In response to this market need, Aave launched Aave Arc – a private liquidity pool solution designed for institutional investors that meet strict regulatory requirements.

The private pools provided by Aave Arc are independent of the existing public liquidity pools on Aave, ensuring that participants can safely participate in the market in an environment that complies with regulatory standards.

In the Aave Arc ecosystem, USDC is the only stablecoin provided. The reason for its selection is that USDC is subject to strict supervision and is widely regarded as a stablecoin suitable for institutional investors. In addition to USDC, Aave Arc also supports three other mainstream assets: Bitcoin (BTC), Ethereum (ETH), and AAVE.

In order to satisfy institutional investors’ concerns about regulatory risks, Aave Arc has implemented strict customer identification (KYC) procedures and a “whitelist” mechanism, which not only further strengthens the security and compliance of the platform, but also provides institutional-level users with higher level of trust and reliability.

Figure 14: Aave Arc

According to data from Defillama, Aave Arc TVL continues to remain at lows after plummeting in November 2022, and there is no recent progress information.

Figure 15: Aave Arc TVL

1. Protocol Revenue Streams - Few protocols in the lending space that are able to consistently cover token incentive expenses.

According to data from Tokenterminal, as of May 15, 2024, the cumulative borrowing fees generated by the Aave V3 protocol reached $146.6 Millions. Borrowing fees on the Ethereum network accounted for the vast majority of this cumulative fee, reaching $45.6 million.

Figure 15: Aave Fees

Between 2023 and 2024, Aave V2’s total annual protocol revenue with V3 was $20,264,600, a decrease of 3.2% from $20,926,200 in 2022 to 2023. Despite a slight decrease in revenue, as of December 2022, the Aave protocol has generated enough revenue to cover its token incentive expenses and achieved a surplus, which is a sign of Aave’s soundness in financial management.

The main revenue of the Aave protocol can be divided into the following four categories:

Figure 16: Aave annual revenue analysis

• Borrowing income (i.e. protocol income): fees collected when providing loans to borrowers
• Flash loan handling fee: The handling fee charged to users who use the flash loan function. The Aave V3 protocol charges 0.05% for each flash loan transaction.
• Other function fees: other fees Aave obtains through clearing, portal bridge, Aave Arc, etc.
• GHO minting fee

6.1 Defi Lending

The lending industry plays a pivotal role in the decentralized finance (DeFi) field, and its total value locked (TVL) ranks second among all DeFi sectors, second only to the Liquid Staking industry. According to data provided by defillama, there are currently 379 lending protocols on the market. Among these protocols, top lending protocols include AAVE, JustLend, Spark, Compound, Venus, and Morpho.

Aave stands out as a significant leader in the DeFi space with its current TVL of $1.025 billion. Among the top five lending protocols, Aave has successfully logged into 12 different blockchain networks, while Compound, which has the largest number of login chains among other protocols, only has 4.

Specific to each chain, Aave (V2/V3) is the largest lending protocol on Ethereum, Arbitrum, Avalanche, Polygon and Optimism, and ranks fifth on BSC.

Figure 17: Comparison of Defi lending sectors

6.2 Flash Loan

As a key innovation in the DeFi ecosystem, flash loans play a crucial role in the development of the entire decentralized financial system. According to data from Dune, the total volume of flash loan transactions reached approximately $248,596 in the past month. Among the many flash loan tools, Balancer, Aave and Uniswap rank in the top three and have become the dominant forces in the market.

From a market share perspective, Balancer and Aave have performed particularly well in the past three months. Their market share is roughly around 40%, which is higher than Uniswap.

Specific to the situation on different blockchain networks, Aave’s market share on Ethereum, Avalanche, Optimism and Arbitrum is slightly lower than Balancer. However, on the Polygon network, Aave’s market share is significantly ahead of other flash loan tools, showing its strong competitiveness and user base on the chain.

Figure 18: Comparison of flash loan sectors

6.3 Cross-chain lending

As mentioned earlier, the Aave V3 version introduced the Portals function, and Aave V4 further designed the concept of a liquidity layer based on Portals, aiming to improve the cross-chain liquidity and utilization of assets. This is an important innovation in the DeFi ecosystem. Similar products or features on the market include Radiant Capital, Cedro Finance, Flux V3, Prime Protocol, and Paribus, among others. Although some cross-chain lending solutions have emerged in the DeFi ecosystem, this field is still in the development stage as a whole.

Radiant Capital V2 pioneered full-chain interoperability by leveraging LayerZero’s Omnichain technology (although Radiant Capital briefly suspended its lending market on Arbitrum in January 2024 due to security concerns).

Overall, cross-chain lending is an area that is gradually maturing and experiencing rapid development. Radiant Capital, leveraging its first-mover advantage, holds a certain leading position in market maturity and user engagement. Meanwhile, Aave, with its significantly higher TVL compared to other competitors, demonstrates immense potential in the cross-chain lending space.

Figure 19: Comparison of cross-chain lending tracks

6.4 Stablecoin

Since Aave launched its stablecoin GHO in July 2023, the price of GHO has been below $1 for a long time. In November 2023, Aave announced a series of measures to restore the anchor value of GHO, and these efforts were finally confirmed by Aave founder Stani Kulechov on February 7, 2024, announcing that GHO had successfully restored the anchor.

Currently, GHO accounts for approximately 0.504% of the non-cryptocurrency-collateralized stablecoin market. Compared with other more mature non-cryptocurrency-collateralized stablecoins on the market, GHO, as an emerging stablecoin, has a relatively small market value. Its main usage scenarios include staking on the Aave platform to obtain income, or exchanging it with other stablecoins for use.

Overall, the development of GHO is still in its early stages. Aave is taking a variety of measures to enhance the stability of GHO anchoring and has increased the minting limit to 50 million coins. Through these initiatives, it can be observed that Aave is working to deepen the integration of GHO with the Aave platform to promote the use of its stablecoin in a wider range of application scenarios.

Figure 20: Comparison of stablecoin areas

1. Economic Model

7.1 AAVE Token Allocation and Unlocking Periods

The AAVE token, as the native governance token of the Aave platform, plays a core role in platform governance and is also a key component of the staking reward mechanism. The precursor to the AAVE token was the LEND token issued by the ETHLend project in 2017, with an initial total supply set at 1.3 billion tokens.

As the Aave ecosystem continued to evolve, by 2020, Aave released its V1 version and underwent a rebranding, with the LEND token being converted to AAVE tokens at a ratio of 1:100. During this process, an additional 3 million AAVE tokens were minted to further support and promote the development of the Aave ecosystem. The total supply of AAVE tokens was thus set at 16 million.

According to the latest data from Coinmarketcap, the current circulating supply of AAVE tokens in the market is approximately 14.7 million tokens. This indicates that the circulating supply of AAVE tokens has accounted for the vast majority of its total supply, reflecting the active participation of the Aave community and the importance of governance tokens in the DeFi ecosystem.

Figure 21: AAVE token economics

Among the top ten holding addresses of Aave, only the ninth is a large currency holder, accounting for approximately 2.275.

Figure 22: Analysis of AAVE holdings

7.2 AAVE Token Usage & Value Capture ( Staking Mechanism & Governance Voting Rule)

In the Aave ecosystem, the AAVE token plays a crucial dual role: first, it participates in the governance of the Aave protocol, and second, it is staked in the safety module to receive protocol profit-sharing.

Figure 23: AAVE token usage

7.2.1 Governance

The governance of the Aave protocol is operated and managed in the form of a decentralized autonomous organization (DAO) by holders of governance tokens, which include AAVE, stkAAVE, and aAAVE. Governance token holders are allocated governance weight based on the combined balance of their holdings in AAVE, stkAAVE, and aAAVE, granting them corresponding proposal and voting rights. In Aave Governance V3, each proposal specifies a voting network, and all votes are conducted on that network.

Figure 24: AAVE governance process

7.2.2 Staking Rewards

The Aave protocol offers two staking options for AAVE token holders: pure AAVE staking and Aave Balancer Pool Tokens (ABPT) staking pools, with the latter consisting of 80% AAVE and 20% ETH.

Users can choose to stake AAVE tokens directly in Aave’s safety module or obtain ABPT by providing liquidity to a Balancer pool with AAVE and ETH, and then stake it in Aave’s safety module. This method allows users not only to earn staking rewards but also to have the opportunity to receive additional BAL rewards and trading fees.

Figure 25: Security module mechanism

Aave’s staking mechanism offers a balanced approach between risk and reward for investors. By staking AAVE tokens, users are willing to take on a certain level of risk in exchange for safety incentives. The safety module aims to provide funding support to the Aave protocol in case of financial issues. If the funds are insufficient to cover losses, the protocol initiates a “recovery issuance” mechanism, issuing additional AAVE tokens to replenish funds.

The auction module of the Aave protocol employs a Dutch auction, responsible for managing the market issuance of staked funds. When necessary, funds are raised by auctioning AAVE and ETH to ensure market stability.

Users participating in staking receive stkAAVE tokens, which are ERC-20 tokens serving as proof of staking. Holders of stkAAVE tokens can exercise voting rights and enjoy discounts when obtaining GHO through staking.

Figure 26: Staking mechanism

8. Operation

8.1 TVL

As of May 15, the Aave protocol on Ethereum shows a strong TVL, reaching $10.252 billion. In the ranking of DeFi lending protocols, Aave tops the list, followed by Compound, Venus and Radiant. The total TVL value of these four major protocols is US$15.408 billion.

Figure 27: Aave V3 & V2 TVL comparison

Since the launch of Aave V3, the TVL (Total Locked Value) of Aave V2 has experienced a gradual downward trend. The TVL of Aave V3 entered a stable growth stage after about half a year of fluctuations, and successfully surpassed the TVL of V2 in September 2023.

The overall Market Capitalization to Total Value Locked (MCap/TVL) ratio of the Aave protocol has consistently remained at relatively low levels, which is often seen as a positive signal. A lower MCap/TVL ratio indicates that the protocol’s market capitalization is relatively reasonable compared to the value locked in its platform, implying fewer market bubbles and higher intrinsic value.

8.2 Users

Figure 28: Comparison of users in the lending market

Since 2021, the user base of the Aave platform has experienced two rounds of significant growth, mainly driven by the launch of the Aave V3 version and the positive impact of the market recovery in late 2023 and the launch of Aave’s native stablecoin GHO. As of May 15, 2024, Aave V2 recorded 186 users, while Aave V3 had a whopping 14,752 users, a data that clearly shows the popularity of the V3 version among users.

In the current user base of Aave V3, a significant proportion consists of users providing liquidity and conducting deposit and withdrawal operations. This could be attributed to the enhanced capital efficiency and diversified features of the V3 version. In contrast, among users of Aave V2, there is a higher proportion of users conducting withdrawal operations and completing single transactions, which may reflect a tendency among V2 users to use that version for one-off or simpler lending activities.

8.3 Trading volume

Figure 29: Lending market transaction volume comparison

Aave’s trading volume reached $26.588 billion in April 2024, a figure that increased 16.9% from March, showing that Aave not only has the highest trading volume in the field of DeFi lending, but also has the fastest recent growth rate. This significant growth trend reflects the high level of investor trust and preference for the Aave platform during the market recovery.

8.4 Fund utilization rate

Figure 30: Lending market utilization comparison

Aave V3 significantly improves asset utilization through its efficient mode (E-Mode). This feature gives Aave V3 an advantage in overall asset utilization among similar DeFi lending protocols. Specific to the utilization rate of individual assets, on the Radiant platform, the utilization rates of WBTC and WETH are particularly high. Aave V2 performs similarly to Radiant in terms of stablecoins, but Aave V3 significantly outperforms other protocols in terms of utilization.

9. Risk

9.1 Cross-chain Lending Risk

Currently, protocols such as Radiant have taken the lead in the cross-chain lending market. Although product stability in the cross-chain lending field needs to be strengthened, its potential market space is huge. The launch of Aave V3 is slightly slower than its competitors, which may affect its competitiveness in this field.

9.2 Competitive Risk

Aave has maintained a leading position in the lending market, but faces increasing competition from protocols offering innovative lending solutions such as flash loans and cross-chain lending. These innovations may pose challenges to Aave’s user growth and market share. Therefore, Aave needs to provide unique value propositions to attract and retain users, maintaining its market leadership.

9.3 Stablecoin Risk

Since its launch, the stablecoin GHO in the Aave ecosystem has experienced slight de-pegging, although it has recently stabilized. However, at present, GHO is not closely integrated with Aave’s lending functionality, and its role in the Aave ecosystem has not been fully realized.

Summary

As a leader in the decentralized finance (DeFi) lending sector, Aave significantly outpaces its competitors in asset utilization, market share, and trading volume, playing a critical role. However, Aave’s leading position is not unassailable. Protocols like Radiant and Compound have demonstrated strong growth potential and have launched promising new versions. To solidify its market position, Aave can adopt the following strategies: strengthen its core lending business, drive further development of GHO and fully integrate it with Aave, establish the Aave Network designed in V4, and expand its ecosystem beyond lending activities.

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1. This article originally titled “从 ETHLend 到 Aave V4 : 借贷龙头的生态建成计划” is reproduced from [Gryphsis Academy]. All copyrights belong to the original author [@Elias201179]. If you have any objection to the reprint, please contact the Gate Learn team, the team will handle it as soon as possible.

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