Opening Remarks

Arthur from Defiance Capital and several other notable voices are suggesting a potential comeback for DeFi. Recently, analyst @tradetheflow_ shared a solid thesis on why a DeFi 2.0 rally might be on the horizon. Here’s a quick breakdown of the main drivers he highlights:

• DeFi has evolved significantly, bringing better scalability, improved security, and innovative use cases like RWA tokenization and on-chain credit products.
• Total Value Locked has nearly tripled since October 2023, with DEXes seeing steady growth in volume compared to centralized exchanges.
• Big players like BlackRock and PayPal are stepping in with tokenized funds and stablecoins, signaling increasing mainstream acceptance.
• Recent rate cuts are boosting liquidity, making DeFi yields more attractive relative to traditional investments.
• DeFi is now more mature, secure, and ready to support the next wave of growth.

On the broader economic front, Jerome Powell’s 50 basis point rate cut could mark a turning point. M2 money supply is rising again, and Bitcoin is closely following past cycle trends, hinting at the start of a potential parabolic bull run.

Some caution that aggressive rate cuts have often preceded recessions, and ongoing geopolitical tensions remain a concern. While these risks are real, we’re keeping an positive outlook today. This rally feels different, setting up for a unique run that could surprise many.

Given the prolonged bear market we’ve faced, it’s fair to suggest that DeFi valuations are currently suppressed, hinting at a potentially undervalued sector. In this article, we’ll take a closer look at AAVE’s position and evaluate its potential role if DeFi is set for a strong comeback.

Aave: Ready for a Breakout?

DeFi’s TVL has rebounded sharply from its 2022 lows, more than doubling to $77 billion. However, despite this recovery, the current TVL is still down by 50% compared to its 2021 peak of around $154 billion. This signals that while interest in the sector is growing, DeFi valuations remain significantly lower than at the height of the previous bull market.

Source: Bernstein

1. Market Leadership & Activity

Aave is a leading player in the DeFi space, enabling users to lend and borrow cryptocurrencies without intermediaries. Initially launched as ETHLend in 2017 and rebranded as Aave in 2018, the platform gained momentum during the 2020 DeFi boom and has commanded more than 50% of the DeFi lending market for the past three years. Its success is driven by continuous upgrades and new offerings like the GHO stablecoin, alongside a $400 million Umbrella Safety Module that enhances security. The Buy & Distribute program further supports long-term token growth by creating steady buy pressure.

Source: Token Terminal

In 2024, Aave’s Total Value Locked reached $13 billion, indicating strong user adoption and expanding confidence in the platform. The launch of the GHO stablecoin has also increased its revenue streams, while its recent expansion to non-EVM chains like Aptos approval has broadened its market reach.

Source: DeFiLlama

Source: X

Aave’s active loans have been increasing recently. As of the latest updates, Aave has $7.4 billion in active loans, representing a notable increase and solidifying its dominance of the DeFi lending market. This growth is supported by recent changes in its tokenomics, which have reduced the inflationary pressure on AAVE tokens and redirected revenue to stablecoin stakers, making the protocol more attractive to lenders​.

2. Undervalued & Accumulation Potential

Despite its dominance, Aave and other DeFi projects still appear undervalued. Couple of months ago, Michael Nadeau explained how Aave has a Price-to-Fees (P/F) ratio of 2.8x and generates $240 million in annual revenue. With 93% of its token supply already in circulation, Aave could face less selling pressure compared to other projects, positioning it for a potential rally after a 2.5-year period of consolidation. The recent breakout hints that Aave could be entering the early stages of a new upward trend, making it an attractive asset for long-term accumulation. This technical movement, combined with its solid fundamentals, supports the case for a potential price recovery, especially if DeFi projects start gaining traction again.

Source: @MichaelNadeau

Source: TradingView

3. Institutional Interest

Recent institutional interest in Aave has largely been driven by its launch of Aave Arc, a permissioned DeFi product specifically designed for regulated financial institutions. The platform is currently accessible to over 30 whitelisted firms, including CoinShares, Wintermute, and Galaxy Digital. By offering a compliant environment for borrowing and lending digital assets, Aave Arc aims to bridge the gap between traditional finance and DeFi, opening up high-yield opportunities while meeting regulatory standards.

Additionally, Bernstein officially added Aave to its digital assets portfolio, replacing GMX and Synthetix. With potential U.S. rate cuts on the horizon, lower traditional interest rates would reduce the yields offered by U.S. dollar money market funds, making DeFi’s higher returns more appealing by comparison and boosting demand.

The launch of ETH ETFs this year could also drive significant inflows into DeFi, with Aave positioned as a key beneficiary due to its strong presence in Ethereum’s lending market, potentially attracting new capital from institutional investors.

4. Competitive Edge

Compared to competitors like Compound, Aave stands out with its multi-chain capabilities and broader asset support. While Compound mainly operates on Ethereum, Aave’s presence on networks like Polygon, Avalanche, and Fantom gives it a wider reach, lower fees, and faster transactions, making it more attractive for users.

Additionally, Aave supports a wider range of collateral types, from traditional cryptocurrencies to tokenized assets and staked derivatives. This diverse offering, along with features like flash loans and the GHO stablecoin, has helped Aave capture a larger share of the DeFi market and maintain its dominance in the lending space.

5. Upcoming Catalysts

Aave 2030 is a strategic proposal by Aave Labs to expand the protocol beyond Ethereum and introduce new features over the next few years. The key goals include:

1. Multi-Chain Expansion: Aave aims to support non-EVM chains and expand its presence beyond Ethereum to build a network-agnostic, cross-chain DeFi platform. This will allow users to access Aave’s services across diverse blockchain ecosystems, enhancing liquidity and user adoption.
2. Aave V4 Upgrades: Introducing real-world asset integration, better capital efficiency, and improved governance tools. By integrating RWAs with its native stablecoin GHO, Aave is aiming to diversify its collateral base and offer more stability to its lending and borrowing services. This move could open new use cases and attract a broader range of users and institutions looking for more secure, real-world-backed financial products.
3. Proactive Funding Model: Unlike previous retroactive funding approaches, Aave has proposed a proactive budget model for its 2030 plan, with clear allocations and objectives set out in advance. The initial budget includes 15 million GHO and 25,000 stkAAVE, to be used for research, development, and security audits.

Source: AAVE

The overall goal is to build a sustainable, cross-chain, and compliant DeFi ecosystem by 2030 that can adapt to changing market dynamics and serve as a core infrastructure for both retail and institutional users.

Bullish Fundamental Factors

• Aave controls 67% of the DeFi lending market, managing $7.4 billion in active loans, which puts it in a strong position to benefit from any growth in DeFi lending.
• Aave is active on multiple blockchains (Arbitrum, Avalanche, Base, BNB Chain, Fantom, Optimism, and Polygon) and has plans to expand to Aptos and other chains bringing in more users and liquidity.
• Aave’s GHO stablecoin is gaining traction, adding to the platform’s revenue and making its income more diverse and stable.
• Aave Arc is specifically designed for institutional investors, allowing them to engage with DeFi in a compliant way and positioning Aave to pull in large traditional finance inflows.
• The potential launch of an ETH ETF and lower interest rates could attract more capital into DeFi, giving Aave a chance to significantly boost its TVL.

Bearish Fundamental Factors

• Aave holds a large share of the DeFi lending market, but this high concentration means any technical issues, smart contract vulnerabilities, or regulatory actions specifically targeting Aave could have a disproportionately large impact on the entire sector.
• While GHO’s growth has been promising, if adoption slows or a competing stablecoin gains traction, it could hurt Aave’s revenue and reduce its competitive edge in the DeFi space.
• A global recession would reduce the amount of capital flowing into risk assets like crypto and limit borrowing and lending activities on DeFi platforms like Aave, reducing platform revenues and TVL.
• Escalating geopolitical risks could also increase uncertainty and market volatility, making investors less willing to participate in DeFi.
• While the threat of restrictive regulations seems less imminent now, it remains a concern if less crypto-friendly governments or candidates gain power globally. Tighter rules on stablecoins, lending protocols, or DeFi activities could undermine confidence and reduce activity on platforms like Aave, particularly in key markets like the US and EU. Keeping a close eye on upcoming elections and policy shifts will be crucial for assessing this risk.

Disclaimer

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