CoinEx Institution | AAVE Investment Analysis: Is Decentralized Lending Protocol a New Area of Fierce Competition?

22 min readAug 14, 2021


On AAVE, an open money market protocol, lenders (liquidity providers) provide liquidity by depositing assets into Aave’s shared money pool, while borrowers can borrow assets from the pool freely through multiple methods, including over-collateralization or zero collateralization.

Key Metrics

Source: coingecko, July 29, 2021


Value capture: Compared with peer projects, Aave is equipped with a healthier economic model and the capacity to capture value.

Security: Focusing on the security of product strategies and risk control, Aave’s team has remained highly innovative.

Compliance: Aave obtained the *FCA license for crypto assets.

Growth potential: Aave has created a line of promising products, such as Flash Loans, Credit Delegation (CD), and institution services. Previously deployed on Ethernet, now Aave is also deployed on Polygon to provide lending services.


Liquidation risk: In extreme scenarios such as hacking, oracle failure, and sharp price swing, though funds from the Safety Module (SM) can backstop the risks, as the mechanism functions, Aave tokens are sold to account for the bad debts, which may further reduce its value. Additionally, the liquidable collateral in the SM now represents 30% of the total collateral, accounting for only 11% of the total deposits. The current backstop fund cannot offer 100% protection for all deposits.

Expansion risk: The market has overrated Aave’s compliance and its products like Credit Delegation and institution service, and its expansion within the short term may not match market expectations. Moreover, concerning community governance, although Aave has proposed quite a few system designs, none has been officially launched.

  • FCA refers to the Financial Conduct Authority of the UK.



Through the open money market protocol Aave, lenders (liquidity providers) provide liquidity by depositing assets into its shared money pool, while borrowers can borrow assets from the pool freely through multiple methods, including over-collateralization or zero collateralization. At the moment, products offered by Aave, such as lending with fixed and floating interest rates, Flash Loans, and institution-oriented lending, satisfy nearly all lending needs.

The Need for the Project

As a transfer station of funds, Aave expands conventional incremental assets: The scale of the crypto market is far smaller than that of the traditional financial market. As a receiver of funds, the lending market generates steady earnings on one hand and allows lenders to regain liquidity on the other. Furthermore, the market’s high yield is more appealing compared to traditional sectors. What the lending market needs at the moment is a sophisticated lending product to attract massive funds and great demand from the conventional financial sector.

Resistance to market cycles: The crypto market is highly cyclical and volatile. Products with fixed earnings help investors tap into stable interest rates while reducing the risk of bear market volatility. Apart from this, if such products can merge with traditional sectors such as real estate and financial securities, they may facilitate the improvement of asset stability.

Analysis of the Target Industry

The Scale of the Target Market and User Group

As of July 30, 2021, the lending market has a *TVL of $66.08 billion. Since the exponential DeFi growth in 2020, the lending sector has seen rapid TVL growth. Even after a long correction cycle, the TVL remains at a high level, and the market continues to retain considerable funds. In the future, the lending market will gradually absorb more conventional capital. Going from decentralization to compliance, from individuals to institutions, ultimately, the lending sector will achieve a great transition from quantitative increases to quality improvement.

  • TVL refers to Total Value Locked.

Overview of the Lending Market

During its short history of less than two years, the decentralized lending market has witnessed the creation of hundreds of lending projects. For the lending market, one of the challenges is to resolve the trust issue. Early lending projects such as Aave and Compound have adopted over-collateralization to replace credit reviews. However, as the crypto market is highly volatile, under extreme market conditions, large-scale liquidations are likely to occur. In later stages, the market saw the rise of under-collateralized lending provided as an institution-oriented service with semi-decentralized credit review. Additionally, there is another type of product that resembles credit loans offered by traditional institutions and taps into structured products to meet borrowing needs. The following paragraphs summarize the characteristics of different product types.


a.Interest Rate

i. Floating Interest Rate

1. The interest rate for borrowing is determined by demand, and the algorithm of different lending protocols varies.

a. Establish the optimal utilization rate: For example, Aave and Compound have established optimal utilization rates to adjust interest rate variations.

2. The closer the rate of fund utilization gets to 100%, the more likely there will be a run on the institution.

3. Users are not able to foresee future interest rates, and therefore, there is the potential risk of future uncertainty.

4. Highly sensitive to market cycles; large-scale liquidations will occur in the event of black swans.

ii. Fixed Interest Rate

1. Offering stable yields that are appealing and low-risk, lending with fixed interest rates attracts investors from a larger scope over longer periods.

2. Growth potential: During a bear market, as investors seek steady gains and wait for investment in the next bull market, more capital will pursue stable returns.

3. Lower expectations for fixed yields & high opportunity costs

4. Products cannot sustain high fixed yields, and external subsidies are often needed. For example, Anchor has recently raised $70 million to compensate for stable user returns, but such approaches do not last.

iii. Zero-coupon bonds: Many projects are experimenting with zero-coupon bonds, such as Notional. It is an attempt to allow on-chain assets to be loaned off-chain.

b. Flash Loans: Through Flash Loans, borrowers can complete the borrowing, transaction, and return of assets in one block without any collaterals. This function is primarily offered to professional developers for scenarios like arbitrage, self-liquidating, debt swap, etc.

2. Under-collateralized lending: Maple, Truefi, Goldfinch


a. The increased utilization rate of funds

b. Zero risks of forced liquidation & liquidation

c. Able to seek legal remedies in the event of breaches.

d. Lending and insurance can be mutually reinforcing


a. Should credit authentication be centralized or decentralized?

i. Voting-based resolution (e.g. Truefi) is a more decentralized approach.

ii. Represented by Maple, lending by agents remains a centralized solution.

iii. Conduct due diligence investigations of borrowers and execute legal instruments. For instance, on Maple, users can enter into binding legal instruments.

b. Most loans go to certified institutions, and the average user cannot get access to loans.

c. How do users maintain their legitimate rights in the event of a breach?

i. Users can start legal proceedings. For example, on Truefi and Maple, users can protect their rights at the court, yet the ultimate result is not clear.

d. Depositors may lose the liquidity of their assets, as the deposit cannot be withdrawn on demand.

3. Unsecured loans:, Wing

yborrow is a credit delegation product launched by Aave that allows depositors to delegate borrowing power (their unused aToken) to other users. With this authorization in place, other users can obtain loans without any collateral, and the credit is delegated to the smart contract with predefined functions.

As a cross-chain credit lending platform, Wing adopts the credit evaluation module to assess users, but KYC is required and borrowing limits are set on the platform.

Market Pain Points & Forecast

As stated above, though DeFi has achieved substantial TVL growth, its scale remains minimal compared to the traditional financial sector. Why is it taking so long for the hot money of the traditional financial sector to enter the DeFi market? There are several reasons:

High yields and high risks: In comparison with the traditional financial sector, decentralized lending comes with greater returns and higher risks.

High learning costs: DeFi like decentralized lending requires a level of know-how. Users need to be familiar with cryptocurrencies and crypto applications to adapt to the complicated operations.

Compliance and regulation: The traditional financial sector focuses more on the compliance of DeFi and the regulatory aspects that involve reviews.

Aave obtained the FCA license.

Security: To ensure asset security, the channels of market access are limited as most international investment institutions can only enter the DeFi market through Coinbase or agencies.

Compound has launched new products targeting companies and institutions, and Aave has introduced new screening measures such as anti-money laundry and anti-fraud mechanisms.

The capture of token value lacks diversity. Of the leading projects, except for Aave, many other tokens only feature the governance function. Over the long term, the governance right of the leading projects equals the right to set the price for the lending market. However, in the short run, governance right’s value is very limited.


Within the short term, secure, high-yield low-risk products with more diverse token applications will receive more market recognition.

Over the long haul, demands of the conventional market will be better met if centralized institutions like Cirle (if it goes public) and Coinbase manage to improve their compliance.


Product & Business Model


At the moment, Aave’s basic operations are centered on lending, which covers:

1,Lending with a floating interest rate: Aave has designed an interest rate algorithm for lending. The interest rate depends on the utilization of the borrowed asset: Higher lending rates of assets will generate higher interests. Variation curves of different assets also differ.

2,Lending with a fixed interest rate: Borrowers may borrow assets at a fixed interest rate for steady returns.

3,AMM loan market: Users may deposit their market-making liquidity on Uniswap and Blancer to obtain credit and borrow mainstream assets such as stablecoin, WBTC, ETH, etc.

4,Flash Loans: Through Flash Loans, borrowers can complete the borrowing, transaction, and return of assets in one block without any collaterals. This function is primarily offered to professional developers for scenarios like arbitrage, self-liquidating, debt swap, etc.

5,Credit Delegation (CD): As a new collateral-free loan service of Aave, CD refers to the process where the depositor enters into agreements with third parties through Openlaw (a project that offers binding legal agreements for Ethereum smart contracts) and delegates his deposit-backed credit to a third party for borrowing from Aave. In this process, the depositor is essentially a guarantor for the third party, and therefore, the third party no longer needs to provide any collateral to borrow. Through CD, on the one hand, depositors can expect higher returns, and on the other hand, borrowers may obtain collateral-free loans. The mid-term target of CD, which is now mainly provided for institutions, is to allow circulating funds to enter the traditional financial market to diversify lenders’ sources of circulating funds. In other words, CD aims to engage traditional financial loans with DeFi funds.

6,Aave Pro for institutions: Aave’s founder tweeted that the team is developing a lending product for institutions.

Business Position

1,Aave’s liquidity is spread in four markets: Aave v1 ($339 million TVL), Aave v2 ($15,498 million TVL), the AMM market ($55 million TVL), and the recently launched Polygon Aave ($3,674 million TVL). The liquidity of the total deposit reached $12.35 billion, topping all other DeFi lending projects.

Source: Statistics by debank

2,Concerning revenue, in the past 90 days, after Uniswap, Sushiswap, Pancakeswap, and Axs, Aave ranked 5th among all leading DeFi projects. The revenue of Aave products is also rising fast, and the growth of Flash Loans is particularly rapid.

Source: Statistics by debank

3,User number: In July 2021, on average, Aave has 6,915 daily active users (DAUs), which is far greater than the 827 DAUs and 3,965 DAUs of Compound and MakerDAO.

Source: Statistics by deban

4.Product and compliance: Aave is pursuing innovation that focuses on compliance and integration with the traditional financial sector.

Through Credit Delegation, borrowers outside the crypto community can also obtain off-chain loans from Aave without any collateral. In addition, lenders and borrowers on Aave are not always crypto exchanges and market makers. There are also traditional companies and consumers such as money lenders, institutions, corporations, NGOs, and governments.

To provide mortgage loans for users other than members of the crypto community, Aave is also working with the real estate token platform RealT. Using RealT’s tokenized service, users may purchase partial ownership of a house with small-size funds. Once the ownership of the tokenized house has been purchased, users can use it as collateral and go to Aave to get a loan. Through this collaboration program envisaged by Aave and RealT, homeowners can tokenize their real estate for mortgage loans, and the stablecoins they obtain can be used for investments or consumption.

In light of compliance, Aave obtained the FCA license (*EMI) on July 7, 2020, which means that users are allowed to convert fiat money into stablecoins and other assets within the Aave ecosystem and make use of such assets on the Aave protocol. Before Aave, only two companies in the crypto sector obtained the FCA license: the giant Coinbase and the UK-based fintech bank Revolut.

This February, Aave also collaborated with Hex Trust to offer cooperation programs to institutions. This crypto asset portal has integrated Aave, stkAave (the certificate of Aave token deposits), and aToken (the lending certificate of other assets on Aave) into its institution-level custody platform Hex Safe. Thanks to such integration, institutional investors can hold tokens in the Hex Trust market securely. Hex Trust, fully compliant and protected, and is one of the most secure institution service platforms in the market. The platform has also integrated the Aave protocol in its new DeFi module, which allows institutions to borrow crypto assets directly from Hex Safe.

  • EMI license is issued by central banks of EU members. Its full name is Electronic Money Institution License.

Technology Analysis

Aave features open source Github code and complete developer documentation. The core of Aave’s technology that sets it apart from other top lending platforms is the Safety Module. The module taps into the Aave and Aave+eth liquidity LP deposited in the module to act as a buyer of last resort for losses in the event of bad debts or contract or oracle failures, thereby protecting depositors’ assets as deposit insurance on the platform. Funds in this module are from deposits by Aave holders, and to draw more funds, the platform has provided appealing incentive measures, such as a certain amount of distribution Aave rewards and profit distribution from the Aave protocol.

Token Economy

Issuance Overview

Token Distribution

The total supply of Lend, Aave’s initial token, is 1.3 billion. In the previous token model, the project retrieved and burned Lend using the protocol revenue and achieved deflation.

On July 30, 2020, Aave released the AaveNOMICS proposal, which contains some key contents:

1. New Aave tokens to be adopted to replace Lend with the exchange ratio of 1:100, and 23.08% additional Aave tokens (3 million) to be issued, pumping up the total Aave supply to 16 million.

2.The additional 300 million Aave to be used on building the safety pool, offering lending ecosystem incentives, and recruiting partners, to name only a few.

3.Launch the safety pool model.

4.Initiate governance by community-based voting.

The goal of Aave’s new economic model is to locate a Schelling point (the equilibrium in game theory) at which the long-term growth, stability, and security of the Aave protocol shall take priority over the goals of individual stakeholders.

Unlock time: Of the 16 million tokens in total supply, 3 million tokens are reserved in the development fund, 100,000 are budgeted for team expenditure, 180,000 are spent on liquidity mining in 2021, with more than 2.7 million remaining. The platform is very close to the full unlocking of the rest Aave tokens (13 million).

Capture token value: Borrowing costs determined through governance; collaterals.

Competitive Analysis

On a product level:

Aave lending products should meet two basic user needs:

1,Hold and keep the bullish assets against funding needs;

2,Engage in leveraged investments.

The core capacity of a lending product is measured by how it increases the efficiency of funds as it meets the basic needs securely. On this front, Aave has implemented much more significant innovations than Compound or MakerDAO. Specifically, Aave has pursued innovation by introducing Flash Loans, LP deposits, and Credit Delegation to improve the utilization rate of funds. With Flash Loans, users can borrow sufficient funds through the smart contract of Aave in the specified time without any additional reviews when they need to. Users can deposit LP into Aave for funds they need, or delegate the deposited LP to others through Credit Delegation (CD) for extra returns other than AMM earnings. The credit obtained through any assets deposited into Aave may be delegated to those in need via CD. As the borrower acquires funds, the depositor receives an extra gain in addition to the interest rate. Right now, there is no technical method to eliminate the fraud risk of the delegatee, and hence, CD is primarily used among friends and acquaintances.

In terms of operation strategy:

1,In light of the increasingly more rigorous regulations around the world, compliance is a necessary process for a blockchain project to complete decentralization and achieve the goal of zero access limit and benefits to all. In this regard, Aave obtained the FCA license (EMI), making it a pioneer of decentralized lending projects.

2,As the blockchain sector remains in an early development stage with immature infrastructure and excessive learning costs of product use, compared to the Internet, the user group of blockchain projects is minimal. A key factor to the development potential of a project is how the team taps into off-line markets to gain the upper hand (mature markets). In this respect, Compound, working with Fireblocks and Circle, launched Compound Treasury, a product that serves institutional and corporate needs. The product allows institutions or companies that are big dollar holders to convert the dollar into USDC and enjoy 4% fixed interest. Aave is planning to bring more institutions to the world of DeFi in collaboration with Hex Trust. Moreover, to provide mortgage loans for users other than members of the crypto community, it is also cooperating with the real estate token platform RealT. According to a tweet from the team, Aave is also developing Aave Pro for institutions, a lending product targeting institutions.

3,Due to the lack of scalability on Ethereum, users suffer from jammed network traffics and high gas fees. Therefore, the layer2 scaling solution and technology-driven innovative public chains that cover Polkadot, Cosmos, Solana, and Fantom, have become trending topics in the crypto market. Should a DeFi project attempt to take over the scaling market and gain the upper hand? Project teams’ ability to grasp the pulse of the market is tested as they try to make the right call during between Layer 2 and many other forceful public chains. There are now two approaches for multi-chain deployment. One is to pursue a multi-chain strategy where the different chains are run independently. Regarding Layer 2 solutions, Aave went for the trending Polygon: The Aave portion in the Polygon TVL accounts for 20% of its total TVL. Compound has chosen the optimistic solution (yet to be launched officially) of the Optimistim team. The second approach features the general cross-chain solution based on relay chains. For instance, Compound has been working with Polynetwork to launch a multi-chain & cross-chain lending solution.

The below table offers a comparison among three leading Ethereum lending solutions: Aave, Compound, and MakerDAO.

Source: Statistics by Coinmarketcap

02 Team


Headquartered in London, Aave’s team consists of 18 innovative industry pioneers. In the beginning, the team was building a P2P lending platform called ETHLend, which was remodeled into the non-custodial and money pool-based money market protocol Aave. According to data from Linkedin, the team now has 53 members.

Team Background

Stani Kulechov-CEO: A graduate of Faculty of Law at the University of Helsinki. Before creating the ongoing Aave business, he pursued a career as a legal consultant. Recently, Stani Kulechov has invested in the collateral provider Lido, which may become a partner of Aave.

Jordan Lazaro Gustave-COO: After graduating from the Faculty of Risk Management of Universite Paris X Nanterr, he first engaged in risk management in the traditional financial sector. Having gained the experience of running a community, Jordan then joined Aave.

Peter Kerr-CFO: After Peter graduated from the University of New Zealand and Oxford Business School, he worked in the traditional financial sector. Peter’s former employers include HSBC, Deutsche Bank, Sonali Bank, etc. Peter joined Aave in 2021 as the CFO.

Investors and Consultants

In October 2020, Aave raised $25 million in a new round of fundraising from investors such as Blockchain Capital, Standard Crypto, Ventures, etc. In 2017, Aave’s predecessor, ETHLend raised $16.2 million in the ICO fundraising.

Two well-known institutions, Framework Ventures and Three Arrows, have invested in Aave in the secondary market. In addition, they are also deeply involved with the ecosystem building of the Aave protocol’s four modules, covering:

A new economic model: The two investors offered much feedback to Aave’s new economic model. Switching from Lend to Aave, the new model ought to account for many mechanisms, including token collateral, rewards for providing liquidity, new smart contracts, etc.

Protocol governance: Both investors contributed to the governance of the Aave protocol. They are mainly involved in the submission of AIPs (Aave Improvement Proposals) based on protocol risks and specific market policies and the voting sessions that follow.

Market access and depth: Framework Ventures and Three Arrows have gradually shifted from the OTC lending model to lending with Aave, which facilitates the growth of Aave assets and improves asset liquidity. Additionally, the use of Aave by these two institutions paves the way for other institution users. Moreover, Framework Ventures and Three Arrows also contributed to the Credit Delegation service.

Safety Module deposit: Both investors deposited their Aave holdings into the Safety Module to improve the protocol’s anti-risk capability.

DeFi consultants, such as Gauntlet Networks and DeLPhi Digital, are also Aave’s important partners. The former offered Aave with numerous suggestions on the economic model and regular reports (most recently in April) on risk tests of Aave’s lending market. DeLPhi Digital provided suggestions on a new token architecture in light of Aave’s lending pool strategy. The DeFi consultant suggested that Aave should replace its single safety pool with tranched safety pools to segregate the risks involved with the single token market. The long-term cooperation and exchanges with the two DeFi consultants minimize the probability of systemic risk occurrence on Aave.

03 Community Operation

Scale and Popularity

Partner Institutions/Communities

-Aave collaborates with institutions through Hex Trust, a crypto asset portal. HT has integrated Aave and AToken into the custodial platform Hex Safe, allowing institution clients to borrow crypto assets directly from the platform.

-Aave has obtained FCA-issued Electronic Money Institution License.

- To provide mortgage loans for non-crypto users, it is also cooperating with the real estate token platform RealT. More specifically, Aave allows users to purchase partial ownership of a house using RealT’s tokenized service and use it as collateral for loaning on the platform.

Recent Trending Events

In July 2020, Aave announced its new economic proposal (Aavenomics), which covers many updates: Replacing Lend with Aave, issuing 23.08% additional Aave tokens, a new economic model of the token, Safety Module, voting-based governance, lending incentives, etc. The proposal also envisaged the Aave V2 update.

In February 2021, Aave V2 was launched, and the liquidity and lending of V1 gradually transferred to V2.

In April 2021, the Aave community passed a liquidity mining proposal that initiated a liquidity mining period of three months, during which token incentives were offered to depositors and borrowers.

In May 2021, the Aave protocol was deployed onto Polygon, and Aave will receive $200 million of Matic lending-based mining rewards from Polygon in one year.

“Aave Pro for institutions” under development: On May 18, Aave’s founder Stani Kulechov tweeted a screenshot of a code page and posted “Aave Pro for institutions”. This unfinished product is likely to be offered to institutions.

In the future, Aave will allow everyone to set their lending parameters and create lending pools on Aave, eventually transforming the platform into a rich multi-pool system.

04 Fundraising

Previous Fundraisings

05 Investment Opinions


In light of its fundamentals, Aave has mapped out proactive plans for multiple DeFi lending products, and it has become an absolute leader among peers with regards to TVL or revenue. Further, Aave obtained the FCA compliance license and engaged in cooperation with external compliance institutions. As a leading blue chip in DeFi, Aave managed to plan for the more extensive non-crypto markets and make early preparation for compliance as it achieves rapid DeFi growth. All this makes its products and services more promising than its peers.

Since its birth, Aave, backed by a strong team, has yet to suffer from any major risks. As it grows bigger, the team has recruited more senior financial and management professionals, demonstrating its resolve and strength to draw institutions from non-crypto markets. Additionally, the platform’s CEO, the visionary behind Aave, has made far-reaching plans in compliance and cooperation with other emerging projects. Investment institutions have not only invested in Aave in the secondary market but are also deeply involved in the development and ecosystem building of the project, a fact that has major implications for its long-term growth.

Aave’s token economy, after revamping, ensures the long-term stability and security of the protocol and offers deposit insurance on lending LPs. Such a design adds a safety layer to the protocol while making Aave holders or platform users feel the need of being more responsible. The design tries to offer users rights and benefits in proportion to their contribution to the protocol.


To evaluate Aave, the present report adopts relative valuation, which covers vertical comparisons with past valuations and horizontal comparisons with leading peers. The horizontal analysis applied Internet project valuation and the NVTS bubble index to compare Aave bubbles with its peers through predefined indicators, thereby obtaining the relative position of Aave valuation.

Analysis Through Historical Valuations

Here, two common indicators, P/S and P/E, were adopted to compare Aave’s current market cap to its historical market caps. The higher the P/S (price-to-sales) ratio, the more a project is overvalued. The below figure reflects Aave’s historical P/S trend.

Source: Token Terminal

It is clear that except for the fluctuating P/S section as a result of a small user base and low project revenue when the project was first launched, the total market cap of Aave has been rising, but in the right half of the graph, the growth rate of market cap is outpaced by that of revenue due to increasing market shares. Overall, Aave’s P/S shows a downward trend. The P/S ratio peaked in July 2020, reaching 185.97, whereas the current (July 2021) P/S ratio stands at 14.89, which has rebounded since the lowest point (10.73) in June 2021.

Source: Token Terminal

In terms of P/E ratios (price-to-earnings, the higher the P/E ratio, the more a project is overvalued), Aave’s P/E ratio far exceeds that of the Internet, a sector with high P/E ratios. In recent periods, the ratio peaked at 3,333x on February 6, 2021, and went down to 73x on June 27, 2021. As the market rebounds, Aave’s P/E ratio is also rising, now standing at 155x (July 28, 2021).

Source: Token Terminal

The P/S ratio is determined using circulating market caps. Right now, the circulating proportion of the total market cap of Aava, Compound, and MakerDAO are 81%, 54%, and 100%, and their P/S ratios are 17.28x, 19.41x, and 47.31x. MakerDAO adopts the minting model under which the mint tax (interest rate) belongs to the protocol instead of the borrower. Therefore, the profit of MakerDAO is more authentic than Compound and Aave, which justifies its high valuation. Compared to Compound, Aave demonstrates lower P/S ratios with higher circulating market caps.

Source: Token Terminal

To illustrate project bubbles, the number of users is taken as a key indicator with reference to Internet-based projects. This indicator is then integrated with the NVTS bubble index to determine bubble levels (MA30 for smoothed data) through the formula: market cap (the square root of the 24-hour trade volume MA30 * the number of users). The lower the value, the fewer bubbles there are. From the below table, it is clear that Aave is far less bubbly than Compound and MakerDAO.

Source: glassnode


Overall Crypto Market Trends

The market is correcting itself after the surge (some believe the market is weakening), and it takes time for it to absorb the initial rise. During the last market cycle, BTC shot up from the low point of $1,000 in March 2017 to the peak of $20,000 in December 2017, a surge of approximately 2,000%. The current bull has seen BTC growing from the most rent low ($5,200 in March 2020) and peaking at $64,500, an increase of 1,200%, which is a lot lower than the previous bull. However, the higher the market cap, the lower the rise might be compared to the last cycle.

Source: coinmarketcap

The TVL of DeFi projects is another indicator that conforms to the overall BTC trend. Additionally, during sharp falls of the whole market, the panic and the transmission mechanism of price will spread things from multiple channels as most DeFi protocols are leveraged, creating a vicious circle that brings an unavoidable decline of the entire ecosystem (as shown below).

Source: Guosheng Securities

Going back to the real world, the May 19 market crash led to bigger falls of DeFi TVL, but now that it has been deleveraged after the massive liquidation, DeFi TVL has rebounded. This might be a sign that when the market is sluggish, some investors will go for steady DeFi deposits instead of highly leveraged trades offered by exchanges. Considering the recent BTC momentum, the market confidence and heat for BTC going back to 40,000 might be a silver bullet for the DeFi sector.

Source: Guosheng Securities

Policy-wise, there remain many uncertainties in the DeFi sector. A wide range of regulatory policies is involved in the operation of cryptocurrencies and DeFi. At the moment, countries are still exploring the corresponding policies, and a sound regulatory model is yet to arrive. This places the sector at the risk of uncertain regulatory policies.

Macrotrends of the Real Economy

In a global economy afflicted by COVID-19, the United States is still practicing quantitative easing, and the LIBOR Rate is at a 10-year low. The market showed sharp falls when the U.S. announced possible policy changes. Quantitative easing is expected to last until mid-2022. The market is optimistic, and the SP is at a historical high, smashing its own records once and again. Against the low or even minus interest rates and low bond yields, some capitals need investment opportunities other than those from the traditional financial market. The volatile crypto market is not suited for investors seeking passive income and more stable and safer investment channels. Aave’s fixed interest rate market, on the other hand, provides low-risk high-yield opportunities, and investors with strong business acumen will invest part of their capital on Aave to diversify the risk.



Through relative valuation, whether in terms of P/S or P/E, Aave’s current market cap is at a historical low. In the horizontal analysis, its valuation is lower than other market leaders, and it is also less bubbly.

In light of the crypto macrotrend (BTC), the market trend has stabilized after a round of radical reshuffling. The markets indexes have resumed stability, and a substantial rebound is expected in the short term. Moreover, after the large-scale liquidation on May 19, most highly leveraged positions were liquidated, and investors no longer resort to radical moves under the current circumstances. This could mean a healthier growth environment for the DeFi ecosystem. In the long run, the low interest rate of fiat money may speed up traditional institution’s shift towards crypto lending, thereby accelerating the market cap growth of lending platform leaders like AAVE.