Recently, AAVE is about to break through its previous high. What’s interesting is that in the past, when AAVE and Uniswap did not rise for a long time, there were countless voices criticizing them, but when they rose, all the winds turned around.
However, when the market began to pay attention to a certain project, the price stopped rising. After AAVE rose to 143U on August 21, it immediately fell by 5%, killing a round of bulls.
AAVE old readers should know that we have already started to focus on AAVE before the summer of DeFi, when AAVE was still called Lend. The last time we mentioned AAVE was in June 23.
At that time, several leading DeFi projects were valued, including Uniswap, Aave, MakerDao and Curve. The ratings were: Uniswap is the most cost-effective target, MKR and AAVE are the most potential targets with low cost-effectiveness, and CRV is not worth participating.
After a year, it is basically the same as I judged at that time. CRV is not doing well, MKR started earlier, UNI is second, and AAVE started to gain momentum this year.
The problem here is that most people pay attention to a project because it is a "hotspot", and the moment a project becomes a hotspot, that is often when the risk factor is the highest.
All high returns come from early attention. Either you discover the potential of a project earlier than others, or you keep paying attention to a promising project and wait until you think it is cheap to build a position. Otherwise, it is impossible to get returns in the cottage market.
How can we find out earlier? I have previously sorted out a method called top-down. The logic is to first establish a general direction of the industry, then use this as a basis to find the key tracks that can solve the development of the industry, and finally find the leaders of these tracks.
In this way, there will be a trace to follow, and you won’t be flying around aimlessly. I have already written a special article on AAVE’s valuation in 2022, but it is not retained on the official account. Today, as AAVE has risen, I will talk to you about the long-term logic of AAVE and the lending track behind it, so that you don’t get too excited.
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AAVE Valuation
AAVE, formerly known as ETHLend, is a DeFi lending protocol, or more specifically, a P2P lending protocol. ETHLend was created by Stani while he was in school, and is an exploration of decentralization for traditional P2P lending platforms.
But it is meaningless for us to directly look at the various data of AAVE at this time, because before that, what we need to determine is the market of "P2P credit" and what significance it will have for P2P credit after the realization of decentralized P2P?
P2P is peer-to-peer lending, which is a very important business innovation in the financial system after the popularization of mobile Internet and the full entry into P2P socialization. In fact, there is no need to learn much professional financial knowledge, but it is something that can be understood based on common sense.
The core of finance is lending. The greatest social significance of P2P lending is that it increases capital efficiency and life efficiency. For example, when you need to borrow money in a short period of time for emergency, P2P can rely on the social credit system to provide you with a very convenient way to borrow money.
At the same time, for borrowers on the P2P platform, they can put their unused idle money on the P2P lending platform to obtain higher lending returns.
So from common sense, has the emergence of P2P platforms solved the cumbersome and complicated lending conditions in the past and made life more convenient? Yes. Then there must be a market demand for P2P platforms.
But what are the problems with traditional P2P platforms? From the outbreak to the collapse of domestic P2P platforms, there are two biggest problems.
The first is that the platform uses high returns to attract capital scale. At the same time, the lending interest of the platform cannot cover the deposit income promised by the platform. As a result, it becomes something like a "fund pool". The interest of the previous funds can only be covered by subsequent funds. Finally, when the funds entering the market become smaller or stop, the platform collapses.
The second is that the platform runs away. That is, after the platform gets the money, in order to cover the promised returns, it makes some risky investments, such as stock speculation and cryptocurrency speculation, which leads to large-scale losses and insolvency, and finally runs away; some P2P platforms even start with the purpose of running away with the money.
Therefore, the biggest problem in the traditional P2P lending track is actually how to prevent the platform from doing evil. From this perspective, decentralized P2P lending protocols can actually solve the biggest problem faced by traditional P2P. Therefore, decentralized lending protocols themselves have very strong and logically self-consistent imagination space.
After talking about the track, let's look at the development of AAVE. AAVE, which was originally Lend, actually had big problems. In the Lend protocol, borrowers and lenders can publish their own lending needs, customize interest rates, collateral types, and pledge asset liquidation ratios, and then look for matching orders on the platform.
Here comes the problem, because it is a matching transaction, and the fees and interest rates of borrowing and lending cannot be standardized. For example, if Akong has some spare money, I take out 50 ETH and set the interest rate to 15% per annum, but others may want to borrow more and can accept a lower interest rate. In this way, the matching efficiency is very low.
At that time, Lend had a very low actual lending transaction volume because of its low matching efficiency. This was a product flaw and the key factor limiting the development of Lend. But after the Stani project was renamed AAVE, it made a key adjustment.
During the "AAVE" period, the most important improvement made by the project team was the establishment of a capital pool. Lenders can earn interest income by depositing liquidity without waiting for successful matching; borrowers can also borrow directly through collateral and repay at any time. Both parties do not have to wait for order matching, which greatly improves efficiency.
From this perspective, we can see that the AAVE team is capable of discovering and solving problems, and it is a project that has the potential to become a giant. It must be said that the AAVE team has a very strategic vision in the market and strategy, not only in the solution to the core problems of the product, but also in flash loans, institutional pools, and even the current deployment of Lens. The team's strategic vision can be seen.
But being worthy of investment is one thing, and “what will it eventually develop into” is what an investor should consider. (The data cited at that time was from July 22, and now it is 24 years, and AAVE is still in the leading position, so I will not take the data again and continue to use it).
Currently, in the ETH borrowing market, AAVE (V2) is 364.05K, which is 10 times the sum of the other three in the top five (including AAVEV3); in the USDC borrowing market, the top five AAVEV3, AAVEV2, and AAVEV3arb account for more than 1.2 billion, which is almost 3 times that of the other two.
Only in the USDT borrowing market do AAVE and Compound dominate the market, accounting for 90% of the market share.
Currently, the total TVL of the entire DeFi lending market (minus MakerDAO) is $14.2 billion, AAVE is $4.7 billion, and the market share is 33%. The total annual protocol revenue of AAVE is about $333 million, with protocol revenue accounting for 10% and the supply side accounting for 90%.
If we follow the traditional P2P lending platform, we actually only need to consider the income generated by the protocol, because the money earned by the platform corresponds to the net earnings per share of the stock. But in fact, for DeFi projects, what we need to consider is the total revenue.
So at this moment, when AAVE's total revenue is 300 million US dollars, according to ten times PE, its reasonable valuation should be 3 billion US dollars; the current AAVE coin price is 94.3U, the market value is about 1.3 billion US dollars, and the fully diluted market value is 1.5 billion US dollars.
Under this valuation method, 668U at the peak of the AAVE bull market is obviously overvalued. However, one question we need to consider is whether AAVE still has room for growth in the future. In fact, there is.
In terms of market share, 30% is actually very high, and we cannot give it a higher space. But the entire DeFi credit market is more than that, and there will be two growths:
1. Market expansion of DeFi credit
2. Crypto’s overall market expansion
Let's consider the second one directly. In 2020, the global Internet micro-loan market size is 573.1 billion US dollars, with a compound growth rate of 12.77%, which means it will reach 1325.7 billion US dollars in 2027. If Crypto is a big success, then DeFi lending will inevitably replace traditional Internet micro-credit.
We no longer consider the long-term market growth. If the DeFI lending market reaches one trillion US dollars, AAVE will occupy 300 billion US dollars, with an annual total protocol revenue of about 21 billion US dollars and a valuation of 210 billion US dollars. This is more than a hundred times the current 1.3 billion US dollars.
However, it would be unreasonable to say that there will definitely be a 100-fold return, because there are still many problems to be solved in the development of DeFi as a whole.
The biggest problem is the limited user demand caused by over-collateralization.
The core of P2P credit is "P2P" and "credit". However, DeFi only has P2P but no credit. Without credit, it will inevitably require over-collateralization, which will also reduce user demand.
I came to borrow money because I have no money, but you want me to over-collateralize?
In 2022, Vitalik wrote an article titled "Searching for the Soul of Web3.0" and mentioned the "crypto society", which is actually the core point for solving DeFi credit.
That is, we need to establish a complete credit system and judicial arbitration system in the crypto world. Only in this way can we make the cost of doing evil greater than the cost of benefit when providing credit, thus achieving the state of unsecured borrowing.
It is worth mentioning that the core of the crypto society is DID and NFT, so they are also investment opportunities.
To sum up, in the next 5 to 10 years, if the crypto world establishes a credit society, the scale of the crypto lending market can reach more than 1 trillion US dollars, AAVE's TVL can reach 300 billion US dollars, the total revenue of the protocol can reach 21 billion US dollars, and the expected valuation is 210 billion US dollars.
But imagination is beautiful, reality is difficult. DeFi is an inevitable trend, but can AAVE always maintain its leading position? Even after the full opening of credit loans, will there be mistakes made by centralized financial institutions that lead to the bankruptcy of the project? It is hard to say.
