The momentum of the DeFi sector is strengthening, can Aave rise again?

Recently, the rebound trend of DeFi 2.0 has attracted widespread attention in the industry. Analysts have pointed out that the main factors driving this trend include:

• Significant advancements in the DeFi ecosystem, with noticeable improvements in scalability and security, as well as innovative applications such as the tokenization of real-world assets.
• The total locked value ( TVL ) has significantly increased since October last year, and the DEX trading volume has also continued to rise.
• Large institutions are entering the market through tokenized funds and stablecoins, reflecting the increasing mainstream recognition of Decentralized Finance.
• The recent interest rate cut environment makes DeFi yields more attractive compared to traditional investments.
• The overall DeFi is more mature and stable, ready for a new round of growth.

From a macro perspective, the central bank's 50 basis point rate cut may mark a turning point. The M2 supply has risen again, and the price trend of Bitcoin is aligning with past cycles, suggesting that a strong upward movement may be on the horizon.

However, there are also voices reminding that aggressive rate cuts often signal an economic recession, and the geopolitical situation remains tense. Despite these risks, the overall market sentiment is currently leaning towards optimism. This round of rebound seems to be brewing an unexpected upward trend.

Considering the impact of the long-term bear market, the valuation of the DeFi sector is generally under pressure, and there is a possibility of being underestimated. Next, we will focus on analyzing Aave's market position and assessing its potential opportunities in the strong recovery of DeFi.

Aave: Ready to Take Off?

The TVL of DeFi has rebounded significantly from the low point in 2022, growing over 100% to $77 billion. However, the current TVL is still about 50% lower than the peak of $154 billion in 2021. This indicates that despite the resurgence of interest in the sector, the valuation of DeFi remains far below the highs of the last bull market.

1. Market Leadership and Business Activity

Aave, as a leader in the Decentralized Finance space, offers cryptocurrency lending services without intermediaries. The platform was launched in 2017 under the name ETHLend, rebranded to Aave in 2018, and saw significant growth during the DeFi boom in 2020. Over the past three years, Aave has accounted for more than 50% of the DeFi lending market. Its key to success lies in continuous upgrades and the launch of new products, such as the GHO stablecoin and a $400 million security assurance module. The "buy and distribute" mechanism further supports the long-term appreciation of the tokens by creating stable buying pressure.

In 2024, Aave's TVL reached $13 billion, reflecting strong user adoption and increasing confidence in the platform. The launch of the GHO stablecoin broadened revenue sources, while the recent expansion to non-EVM chains like Aptos expanded market coverage.

The active loan size of Aave has also seen significant growth recently. Latest data shows that Aave's active loans have reached $7.4 billion, further consolidating its dominant position in the Decentralized Finance lending market. This growth is attributed to recent adjustments in token economics that reduced the inflation pressure on AAVE tokens and allocated earnings to stablecoin stakers, enhancing the protocol's appeal to lenders.

2. Underestimated Valuation and Accumulation Opportunities

Although Aave holds a leading market position, it still faces undervaluation like other DeFi projects. Analysis a few months ago pointed out that Aave's price-to-fee (P/F) ratio is 2.8 times, with an annual income of $240 million. Considering that 93% of the token supply is in circulation, Aave may face less selling pressure compared to other projects. After 2.5 years of consolidation, Aave may be poised for a rebound. Recent price breakthroughs suggest that Aave may be in the early stages of a new upward trend, making it an attractive long-term accumulation asset. This technical movement, combined with its solid fundamentals, supports the argument for its potential price recovery, especially as DeFi projects regain attention.

3. Institutional Investor Interest

Recently, institutional interest in Aave primarily stems from its launch of the Aave Arc product, which is a permissioned DeFi service designed specifically for regulated financial institutions. Currently, over 30 whitelist companies can use the platform. By providing a compliant digital asset lending environment, Aave Arc aims to bridge traditional finance and DeFi, offering high-yield opportunities while meeting regulatory requirements.

In addition, well-known investment institutions have included Aave in their digital asset portfolios, replacing GMX and Synthetix. With the possibility of interest rate cuts in the United States, the decline in traditional interest rates will lower the yields of dollar money market funds, making the high yields of DeFi comparatively more attractive, thus increasing demand.

The launch of the ETH ETF this year may also bring a significant influx of funds to Decentralized Finance (DeFi). Aave, with its strong position in the Ethereum lending market, is expected to be a major beneficiary, attracting new capital from institutional investors.

4. Competitive Advantage

Compared to competitors like Compound, Aave stands out with its multi-chain capabilities and broader asset support. While Compound primarily operates on Ethereum, Aave has a presence on networks like Polygon, Avalanche, and Fantom, offering wider coverage, lower fees, faster transaction speeds, and greater appeal to users.

In addition, Aave supports a more diverse range of collateral types, from traditional cryptocurrencies to tokenized assets and staked derivatives. This diversified product portfolio, along with features like flash loans and the GHO stablecoin, helps Aave capture a larger share of the DeFi market and maintain its leading position in the lending space.

5. Catalysts for Future Development

Aave 2030 is a strategic plan proposed by Aave Labs, aimed at expanding the protocol beyond Ethereum and introducing new features in the coming years. The main goals include:

1. Multi-Chain Expansion: Aave plans to support non-EVM chains and expand its business scope, building a cross-chain Decentralized Finance platform. This will enable users to utilize Aave services across different blockchain ecosystems, increasing liquidity and user adoption.

2. Aave V4 Upgrade: Introduction of real-world asset integration, improved capital efficiency, and enhanced governance tools. By combining real-world assets with the GHO stablecoin, Aave aims to diversify its collateral base and provide more stable support for lending services. This initiative is expected to attract more users and institutions, especially those looking for safer, asset-backed financial products.

3. Active Funding Model: Aave has proposed an active budgeting model for its 2030 plan, setting clear funding allocations and goals in advance. The initial budget includes 15 million GHO and 25,000 stkAAVE for research, development, and security audits.

Aave's overall goal is to establish a sustainable, cross-chain, compliant Decentralized Finance ecosystem by 2030, capable of adapting to market changes and providing core infrastructure services for both retail and institutional users.

Positive Factors

• Aave occupies 67% of the share in the Decentralized Finance lending market, managing $7.4 billion in active loans, placing it in a favorable position for growth in DeFi lending.
• Aave is expanding across multiple blockchains and plans to extend to emerging public chains such as Aptos, which is expected to attract more users and liquidity.
• The GHO stablecoin is gaining market recognition, increasing the platform's revenue sources and making its income structure more diverse and stable.
• Aave Arc is specifically designed for institutional investors, allowing them to participate in Decentralized Finance in a compliant manner, which helps attract traditional financial capital.
• The potential launch of ETH ETF and a declining interest rate environment may attract more capital into Decentralized Finance, providing Aave with significant opportunities to enhance its TVL.

Risk Factors

• Aave has a high market share in the Decentralized Finance lending market, and this high concentration may cause any technical issues, smart contract vulnerabilities, or targeted regulatory actions to have a significant impact on the entire industry.
• If the adoption rate of GHO slows down or competing stablecoins rise, it may affect Aave's revenue growth and weaken its competitive advantage in the Decentralized Finance sector.
• A global economic recession may reduce the influx of funds into risk assets, limiting lending activities on DeFi platforms, thereby affecting platform revenue and TVL.
• Escalating geopolitical risks may increase market uncertainty and volatility, reducing investors' willingness to participate in Decentralized Finance.
• Although regulatory pressure seems to have eased at the moment, unfriendly crypto policies globally could still pose a threat to industry development. Strict regulations on stablecoins, lending protocols, or Decentralized Finance activities may undermine market confidence and reduce activity on platforms like Aave, especially in key markets such as the United States and the European Union. Closely monitoring the upcoming elections and policy trends is crucial for assessing this risk.