The market value of banks
The calculation of the market value of commercial banks is often quite complex, but I found a method that, while not rigorous, is simple and effective:
Commercial banks with total deposits reaching 10 billion yuan can theoretically earn 1 billion yuan in profit each year. A company with a stable annual income of 1 billion yuan can be valued at least at 10 billion yuan. Therefore, the market value of commercial banks is approximately 10% of their customers' total deposits.
For example:
HSBC's total deposits are approximately $1.63 trillion, with a market value of $162.7 billion, and profits over the past 12 months amount to $16.3 billion. I also found some banks with deposit sizes of $30 billion, and they are basically similar.
Aave's market value
As an on-chain bank, Aave's valuation logic has become strikingly similar to that of commercial banks over the past year. Aave has a total of 16 million tokens, currently priced at $200. Its market value is $3.2 billion, while Aave's total deposits correspond to $32.8 billion. Interestingly, 12 months ago, Aave's total deposits were only $8 billion, when its market value repeatedly touched $800 million (token price $50). Over the past 12 months, Aave's performance quadrupled (from $8 billion to $32 billion), and its price also exactly quadrupled from the low (from $50 to $200).
The profitability of Aave
The v1 and v2 protocols do not take a cut, so they had basically no profitability before. Aave v3 launched in January 2023, marking the beginning of earning interest spreads. Currently, the daily interest spread income is $400,000. Annual income is approximately $146 million.
Every time there is a significant market pullback, it brings Aave between $2 million to $6 million in liquidation income. The annual income is approximately $30 million.
In the past three months, Aave has unlocked its B2B business. This includes providing a specialized market for Lido, which is a demonstration and has no fees. The collaborative market with MKR and ezETH takes a profit cut. The special market created for the 'World Liberty Financial' project received 7% of its total project tokens (valued at approximately $105 million) and a commitment to share 20% of future profits.
The GHO stablecoin business is growing rapidly, and at its current scale, it will generate $15 million in revenue annually.
Overall, Aave's profitability is completely comparable to that of similarly sized commercial banks.
Looking ahead to 2025
The current SEC chairman believes that all cryptocurrencies except BTC are securities and fall under its jurisdiction, being illegal products, including ETH, which has been investigated multiple times. Its regulatory approach 'firmly provides no guidance on rules,' only engages in lawsuits and accepts settlements, which has allowed the SEC's income to set numerous historical records. The result is that when people think of crypto and web3, they think of Singapore, Dubai, Hong Kong, and Europe, rather than the U.S. as a global financial center.
Trump claims he wants to make the U.S. the global 'crypto capital,' and the first step is to replace the SEC chairman. According to the official announcement, the current SEC chairman will leave office on January 20. This is truly a relief for many!
Although it is still uncertain who the new SEC chair will be, we can already foresee the three major initiatives from the new official. I personally expect that in the first quarter of 2025, the U.S. SEC will provide preliminary regulatory guidance for the crypto industry, clarifying the legal boundaries. At the same time, to allow U.S. crypto companies to compete with other global crypto companies, a 'regulatory sandbox' may be initiated, allowing U.S. companies to test some on-chain innovative products.
The entry of U.S. institutions will have a significant impact on the entire industry. In the second and third quarters of next year, we will welcome 'on-chain prosperity.' The vibrant scene of the 'Defi summer' of 2020 is still vivid in my mind, and I believe next summer will only be more exciting.
Under relaxed regulations, government bonds, real estate, securities, commodities, etc., will all welcome 'on-chain' and release liquidity on the global internet. Technically, this is a very simple operation; 'regulation' has always been its biggest obstacle. And the regulatory environment is about to change!
In the past 12 months, Aave's total deposits increased by $25 billion, and the next 12 months will be the 'Year of Crypto Capital,' with deposit sizes expected to see stronger growth. I personally estimate that by 2025, Aave's total deposits will reach $60 to $80 billion, which will inevitably push its market value to $6 to $8 billion (token price $400 to $500).
Premium
The price-to-earnings ratio of banks is around 10 times because banks are often large in scale, with stable profits, but relatively sluggish growth. In contrast, technology companies with high growth rates have a much higher valuation premium. For example, Tesla and NVIDIA have price-to-earnings ratios of 90 times and 50 times, respectively. Using the valuation method of commercial banks to value high-growth Aave is clearly unreasonable. Which commercial bank sees its total deposits quadruple in a year? Personally, I expect Aave's valuation premium to be 2 to 5 times that of traditional commercial banks. This corresponds to a future token price of 2 to 5 times $400 (i.e., $800 to $2000). Notably, during the peak of the last bull market, if using deposit size as a valuation standard, the premium reached a maximum of 3.4 times.
Next, I will continue to monitor the growth data of Aave's total deposits and its profitability. I will verify my judgments based on the numbers; when these two figures deviate from expectations, I will naturally reassess its market value.
