Author: Greythorn
Introduction
Arthur of Defiance Capital and several other prominent figures are hinting at a potential recovery in DeFi. Recently, analyst @tradetheflow_ shared a powerful argument for why a DeFi 2.0 rally could be imminent. Here is a quick rundown of the main drivers he highlighted:
DeFi has evolved significantly, bringing better scalability, improved security, and innovative use cases such as RWA (real world asset) tokenization and on-chain credit products.
Total value locked (TVL) has almost tripled since October 2023, and trading volume on decentralized exchanges (DEXs) continues to grow compared to centralized exchanges.
Big players like BlackRock and PayPal are entering the market through tokenized funds and stablecoins, indicating increasing mainstream acceptance.
Recent interest rate cuts have boosted liquidity, making DeFi yields more attractive compared to traditional investments.
DeFi is now more mature, secure, and ready for the next wave of growth.
In the broader economic environment, Jerome Powell’s 50 basis point rate cut could mark a turning point. M2 supply is rising again, and Bitcoin is following the trend of past cycles, suggesting that a parabolic bull run could be starting.
Some warn that aggressive rate cuts often foreshadow a recession, and ongoing geopolitical tensions remain a concern. While these risks are real, we remain positive today. This rally feels different and appears to be setting the stage for a unique rise that may surprise many.
Given the prolonged bear market we have experienced, it is reasonable to assume that DeFi valuations are suppressed at this time, suggesting that this space may be undervalued. In this article, we will take a closer look at AAVE's position and assess its potential role in DeFi's strong recovery.
Aave: Ready to break out?
DeFi’s TVL has rebounded sharply from its 2022 lows, more than tripling to $77 billion. However, despite this recovery, the current TVL is still 50% below its 2021 peak of around $154 billion. This suggests that despite the growing interest in the space, DeFi valuations are still well below the peak of the last bull run.
Source: Bernstein
1. Market leadership and activities
Aave is one of the leaders in the DeFi space, allowing users to lend and borrow cryptocurrencies without an intermediary. Initially launched in 2017 as ETHLend and rebranded to Aave in 2018, the platform gained momentum during the 2020 DeFi boom and has captured more than 50% of the DeFi lending market over the past three years. Its success has been driven by continuous upgrades and new product launches, such as the GHO stablecoin, and the $400 million “Umbrella Security Module” for enhanced security. The “buy and distribute” program further supports long-term token growth by creating steady buying pressure.
Source: Token Terminal
Aave’s TVL reached $13 billion in 2024, indicating strong user adoption and growing confidence in the platform. The launch of the GHO stablecoin also increased its revenue stream, while the recent expansion to non-EVM chains such as Aptos broadened its market reach.
Source: DeFiLlama
Source: X
Aave's active loans have also increased recently. As of the latest update, Aave had $7.4 billion in active loans, a significant increase that solidifies its dominance in the DeFi lending market. This growth has been driven by recent adjustments to its token economics, reducing inflationary pressure on the AAVE token and redirecting revenue toward stablecoin stakers, making the protocol more attractive to lenders.
2. Underestimation and accumulation potential
Despite its dominance, Aave and other DeFi projects still appear undervalued. A few months ago, Michael Nadeau explained Aave's price-to-fee (P/F) ratio of 2.8x and annual revenue of $240 million. Given that 93% of its token supply is already in circulation, Aave may face less selling pressure than other projects and could see a rebound after a 2.5-year consolidation period. The recent breakout suggests that Aave may be in the early stages of a new uptrend, making it an attractive asset for long-term accumulation. This technical trend, coupled with its solid fundamentals, supports the argument for its potential price recovery, especially as DeFi projects gain attention again.
Source: @MichaelNadeau
Source: TradingView
3. Institutional interest
Institutional Interest Recently, institutional interest in Aave has been driven primarily by the launch of Aave Arc, a permissioned DeFi product designed for regulated financial institutions. Currently, the platform is accessible to over 30 whitelisted companies, including CoinShares, Wintermute, and Galaxy Digital. By providing a compliant environment for lending and borrowing digital assets, Aave Arc aims to bridge the gap between traditional finance and DeFi, providing high-yield opportunities while meeting regulatory standards.
In addition, Bernstein officially added Aave to its digital asset portfolio, replacing GMX and Synthetix. As potential US interest rate cuts approach, lower traditional interest rates will reduce the returns provided by US dollar money market funds, making DeFi's high returns more attractive by comparison, thereby increasing demand.
The launch of the ETH ETF this year could also bring a large inflow of funds to DeFi, and Aave is expected to become a major beneficiary due to its strong presence in the Ethereum lending market, attracting new capital from institutional investors.
4. Competitive Advantage
Compared to competitors such as Compound, Aave stands out for its multi-chain capabilities and wider asset support. Although Compound operates primarily on Ethereum, Aave also has a presence on networks such as Polygon, Avalanche, and Fantom, with wider coverage, lower fees, faster transactions, and more appeal to users.
In addition, Aave supports a wider range of collateral types, from traditional cryptocurrencies to tokenized assets and collateralized derivatives. This diverse offering, coupled with features such as flash loans and GHO stablecoins, has helped Aave capture a larger share of the DeFi market and maintain its dominance in the lending space.
5. Upcoming Catalysts
The upcoming catalyst, Aave 2030, is Aave Labs’ strategic proposal to expand the protocol beyond Ethereum and introduce new features in the coming years. Key goals include:
Multi-chain expansion: Aave aims to support non-EVM chains and expand its presence, building a network-agnostic cross-chain DeFi platform. This will allow users to access Aave's services in different blockchain ecosystems, enhance liquidity and increase user adoption.
Aave V4 upgrade: Introducing real-world asset integration, higher capital efficiency, and improved governance tools. By integrating real-world assets with its native stablecoin GHO, Aave aims to diversify its collateral base and provide more stability for its lending services. This move is likely to attract more users and institutions, especially those looking for safer, real-world-based financial products.
Active funding model: Unlike previous retrospective funding models, Aave proposed an active budget model for its 2030 plan, setting clear allocations and goals in advance. The initial budget includes 15 million GHO and 25,000 stkAAVE for research, development, and security audits.
Source: AAVE
Aave's overall goal is to build a sustainable, cross-chain, and compliant DeFi ecosystem by 2030 that can adapt to market dynamics and serve as core infrastructure for retail and institutional users.
Bullish fundamentals
Aave controls 67% of the DeFi lending market and manages $7.4 billion in active loans, putting it in a good position to capitalize on the growth of DeFi lending.
Aave is active on multiple blockchains (Arbitrum, Avalanche, Base, BNB Chain, Fantom, Optimism, and Polygon) and plans to expand to chains such as Aptos to attract more users and liquidity.
Aave’s GHO stablecoin is gaining traction, increasing the platform’s revenue, making its income more diversified and stable.
Aave Arc is designed for institutional investors, allowing them to participate in DeFi in a compliant manner, helping Aave attract large amounts of traditional financial inflows.
The potential launch of an ETH ETF and lower interest rates could attract more capital into DeFi, giving Aave the opportunity to significantly increase its TVL.
Bearish fundamentals
Aave has a large share of the DeFi lending market, but this high concentration means that any technical issues, smart contract vulnerabilities, or regulatory actions against Aave could have a disproportionately large impact on the entire industry.
While GHO’s growth is encouraging, if its adoption slows or rival stablecoins gain traction, this could hurt Aave’s revenue and weaken its competitive advantage in the DeFi space.
A global recession would reduce inflows into risky assets such as cryptocurrencies and limit lending activities on DeFi platforms, reducing platform revenue and TVL.
Escalating geopolitical risks could increase uncertainty and market volatility, making investors reluctant to participate in DeFi.
While the threat of restrictive regulations seems less pressing at this point, it remains a potential concern if less crypto-friendly governments or candidates come to power around the world. Tighter regulations on stablecoins, lending protocols, or DeFi activities could erode confidence and reduce activity on platforms like Aave, especially in key markets like the U.S. and the EU. Keeping an eye on upcoming elections and policy shifts will be critical to assessing this risk.
Disclaimer
This presentation has been prepared by Greythorn Asset Management Pty Ltd (ABN 96 621 995 659) (Greythorn). The information in this presentation should be regarded as general information only rather than investment advice and financial advice. It is not an advertisement nor is it a solicitation or an offer to buy or sell any financial instruments or to participate in any particular trading strategy. In preparing this document Greythorn did not take into account the investment objectives, financial circumstance or particular needs of any recipient who receives or reads it. Before making any investment decisions, recipients of this presentation should consider their own personal circumstances and seek professional advice from their accountant, lawyer or other professional adviser. This presentation contains statements, opinions, projections, forecasts and other material (forward looking statements), based on various assumptions. Greythorn is not obliged to update the information. Those assumptions may or may not prove to be correct. None of Greythorn, its officers, employees, agents, advisers or any other person named in this presentation makes any representation as to the accuracy or likelihood of fulfilment of any forward looking statements or any of the assumptions upon which they are based. Greythorn and its officers, employees, agents and advisers give no warranty, representation or guarantee as to the accuracy, completeness or reliability of the information contained in this presentation. None of Greythorn and its officers, employees, agents and advisers accept, to the extent permitted by law, responsibility for any loss, claim, damages, costs or expenses arising out of, or in connection with, the information contained in this presentation. This presentation is the property of Greythorn. By receiving this presentation, the recipient agrees to keep its content confidential and agrees not to copy, supply, disseminate or disclose any information in relation to its content without written consent.
