Written by: Revc
AAVE in recovery
According to data compiled by Golden Finance, among DeFi protocols with a circulating market value of more than US$2 billion, AAVE recorded a nearly 30% increase in 7 days, performing well in the recent volatile market. The author summarizes the following reasons for the recovery:
1. Market leadership: Aave is the largest lending protocol, with active loan volume far exceeding its competitors and a solid market share. In the volatile market at the end of July, Aave not only withstood the impact of extreme market conditions, but also had a market share of over 90% in a single day.
2. Strong growth numbers: Despite market volatility, Aave revenue and TVL rebounded after the bear market, showing significant growth potential. Average revenue accounted for 55% of lending market revenue over the past 30 days.
3. Security and governance advantages: Aave excels in security management, bilateral lending network effects, and DAO governance.
4. Multi-chain deployment and token economics improvements: Aave has further improved its competitiveness in the market through multi-chain expansion and token economics upgrades.
Aave Chan (the main representative of Aave DAO) has put forward a proposal to enhance the utility of its token by completely overhauling AAVE's token economics. Key changes include eliminating the risk of slashing AAVE when mobilizing the security module, adopting a new Umbrella security module to replace existing assets, optimizing the alignment of interests between stakers and borrowers, and introducing anti-GHO tokens to strengthen the revenue sharing mechanism. This move will increase the demand for AAVE tokens and further drive long-term growth and value accumulation of the protocol.
In addition, according to data from Token Terminal, the Aave protocol also provides a lot of incentives for investors, consolidating its position as the largest lending protocol.
Does Aave’s strong recovery indicate that the DeFi sector will explode?
Recently, despite poor price performance, the tokens of DeFi protocols have shown resilience in market fluctuations. The decline in token prices, total locked value (TVL) and lending volume reflects the impact of weak demand, oversupply and the lifting of restrictions. However, leading projects such as Aave and EigenLayer have demonstrated strong profitability and market share, indicating that DeFi still has growth potential. With the increase in institutional investment and clear regulation, DeFi may become a major investment area in the future. The current lock-up volume of the entire DeFi has recovered to 60% of the peak in 2021. The TVL of major DeFi protocols for liquidity staking, re-staking and lending has rebounded to varying degrees in the past 7 days.
By comparing Aave, we can sort out several conditions for the outbreak of DeFi protocols. First, there must be stable fundamentals and long-term market leadership. Second, there needs to be stable income and token economics upgrades to maintain the vitality of the protocol.
Taking Uniswap as an example, its revenue has increased significantly since March, and the number of daily active users has fluctuated between 30,000 and 100,000 due to changes in market heat (Figure 1 below). However, Uniswap's dominance has been challenged by Aerodrome (Figure 2 below).
Uniswap has not made any major updates to its token economics recently, but plans to launch a V4 update later this year. Uniswap V4 introduces "hooks" and "singleton" architectures to make liquidity pools more customized and efficient. Advantages include:
Hooks: Allow developers to insert custom logic at key points in the pool lifecycle, supporting new features such as dynamic fees and limit orders.
singleton: By merging all pools into one contract, gas fees are significantly reduced and it is expected to reduce pool creation costs by 99%.
V4 will promote more flexible AMM innovations, improve the efficiency of on-chain transactions, and further consolidate Uniswap's leading position in DeFi. However, UNI may not have the conditions for an explosion in the short term and still depends on the development of the Ethereum ecosystem, especially the performance of assets such as ETH, which is affected by the macro-financial market.
Let's take a look at Lido, the leader in the liquidity staking track. Its performance is closely related to Ethereum. Lido allows users to stake ETH without locking assets and obtain stETH as a liquidity token. Its key features include ensuring network security and stability through a decentralized network of node operators, but its high market share has sparked controversy over centralization. Although Lido has performed well in technology and security, it will need to introduce more node operators in the future to reduce centralization risks. Lido also faces competition from other staking services, especially the challenge of staking on centralized exchanges.
The latest data shows that Lido currently occupies nearly 70% of the liquidity staking track (Figure 1 below). In terms of revenue, Lido accounts for nearly 80% of the track revenue (Figure 2 below). Lido relies on its first-mover advantage to maintain its leading position, but due to its high correlation with ETH, the coin price has still fallen back by 31.2% compared with the same period last year. The overall performance of DeFi is highly bound to ETH.
The revenue of the Lido protocol (Figure 1 below) has been affected by highly homogeneous competition and has remained at a low level for a long time. Lido and the entire liquidity staking track have not shown explosive potential in the short term.
Summary
To sum up, from the leading DeFi protocols, we can see that DEX and liquidity staking tracks are relatively mature and are unlikely to explode in the short term. However, decentralized governance and token economics upgrades similar to AAVE in the lending track may be more likely to attract investors' favor and attention.
In addition to the innovation and upgrade of the protocol itself, the outbreak of the DeFi track also requires a good macro-financial environment to give Ethereum room to perform well. More importantly, the DeFi protocol must strengthen its integration with the issuance of assets such as MEME. Whether it is Solana or the recently emerging Tron, the on-chain liquidity has become abundant due to the outbreak of MEME users. The figure below shows that Raydium has benefited from PumpFun to consolidate and strengthen its market share.
