Is Aave destined to remain the best DeFi lending platform?


According to Footprint, the number of platforms in the DeFi lending category increased by 263% to 69 since December 2020, setting a record TVL of $48.44 billion, representing 21.04% of the whole. TVLs from all DeFi platforms and networks.

TVL of different categories (data source: Footprint Analytics)
TVL of different categories (data source: Footprint Analytics)

The most prominent lending platforms to have emerged are Aave, MakerDAO and Compound, they lead the category in terms of TVL. However, while Compound was the heavy favorite, the May 19 Crypto Market Crash reshuffled the rankings and Aave took the lead.

As shown in the chart below, MakerDAO and Compound have performed poorly in recent months.

Therefore, many people wonder if Aave is on top because it is a particularly solid platform or because its competitors have temporarily fallen behind. The answer determines your assessment of locking Aave into your long-term tokens, and also who to watch for information on the future of crypto lending.

TVL of top 3 lending protocols (data source: Footprint Analytics)
TVL of top 3 lending protocols (data source: Footprint Analytics)

Data overview

Aave TVL in different channels (data source: Footprint Analytics)
Aave TVL in different channels (data source: Footprint Analytics)
Top 3 Lending On-Lending Protocols (data source: Footprint Analytics)
Top 3 Lending On-Lending Protocols (data source: Footprint Analytics)

When we examine the data, it becomes clear that Aave has several important advantages that indicate that it will continue to be a leader in the DeFi lending market. Namely, it’s highly secure, innovative, and recently launched Aave Pro, giving it a huge head start as traditional finance starts buying crypto.

Context of the project

Aave, formerly known as ETHLend, was launched on Ethereum in November 2017. The initial mode of operation of the platform was similar to that of P2P, the online platform matching borrowers and lenders via smart contracts in a peer-to-peer manner. But the development model was quickly adjusted after-sales, the market reaction was subdued.

In 2019, the project completed a brand upgrade and was renamed Aave (or “ghost” in Finnish), and went live in January 2020. This release provides liquidity by establishing a fund pool and focuses on solving the problem of inefficient aggregation of loan needs. Users deposit collateral assets and then borrow assets within the collateral rate without the need for counterparty.

Over the following months, the platform went through the following milestones:

  • July 2020: Received $4.5 million from ParaFi and $3 million in strategic funding with participation from Framework Ventures and Three Arrows Capital. He also released his economic proposal, Aavenomics, which included converting the original Lend token to AAVE and issuing 3 million more tokens, security module, lending incentive, among others.
  • October 2020: secured $25 million in funding led by Blockchain Capital and Standard Crypto, in addition to receiving US SEC approval to register as an Ether Trust.
  • February 2021: Completed its V2 upgrade and then launched the AMM market the following month, allowing liquidity providers to pledge LP tokens from Uniswap and Balancer for loans
  • April 2021: Offers token incentives to borrowers and lenders as part of its liquidity mining program
  • May 2021: deployment and launch of the Polygon channel
  • July 2021: launch of a new product for institutional clients Aave Pro
  • October 2021: deployment and launch of Avalanche.

Economic model

Aave Economic Overview (data source: Aave Docs)
Aave Economic Overview (data source: Aave Docs)

The Aave business model, which went live in July 2020, has three primary uses for the AAVE token, namely community governance, building security modules, and ecosystem rewards.

  • Community governance: Users holding the AAVE platform token can participate in community governance, such as participating in voting on platform ecosystem protection, security module mechanism updates, new iterations of features, etc. One AAVE token equals one vote.
  • Security module construction: Users can pledge their AAVE token holdings in a security pool, which is used to protect against risky events such as breach of contract risk, liquidity risk (risk of liquidation resulting from insufficient collateral coverage) and prophecy machine risk (caused by network congestion or market collapse and when the prophecy machine cannot update the price or the price is provided incorrectly ).
  • Ecosystem Rewards: Token rewards given to borrowers and lenders, equivalent to mining liquidity.

Aave has put a lot of effort and innovation into safety, not only incorporating a safety module as part of the ecology and thus providing a cushion for risky events, but also rewarding those who find security vulnerabilities. These proactive initiatives continue to support Aave’s groundbreaking development.

Flash loan

Amount borrowed by the flash loan (data source: Footprint Analytics)
Amount borrowed by the flash loan (data source: Footprint Analytics)

Aave also has a one-of-a-kind advantage over other lending platforms with Flash Loan. The product has a certain threshold for users and is suitable for developers with certain programming skills. It is characterized by the ease with which users can obtain loans without having to pledge any assets. They should just return the borrowed funds in the same block (about 15 seconds). If they are unable to repay the loan in the same block, the transaction is reversed with no impact on the user. But, if the loan is successful, they are charged a fee of 0.09%.

As of this writing, Flash Loan has surpassed $9.8 billion in cumulative loan volume and is expected to exceed $10 billion by the end of October. Although the entire crypto industry is in a recovery phase after the decline in trading volume of the 519 Crypto Market Crash and Flash Loan, there is no denying the explosive growth of the product, creating strong momentum for help Aave overtake Compound and MakerDAO.

Asset classes and interest rates

Aave APY deposit and APY loan (Data source: Aave website)
Aave APY deposit and APY loan (Data source: Aave website)

Versions V1 and V2 support 31 asset types in single token pledges, mainstream cryptocurrencies, and emerging cryptocurrencies. On the other hand, the AMM version supports LP token pledges for Uniswap and Balancer, with 16 asset types. This differentiated strategy meets the lending needs of multiple groups, attracts more users to participate and retain, and also accelerates the platform’s expansion and influence, laying the foundation for achieving a shift in the road.

The strength of the asset mix has allowed Aave to broaden its pool of funds and given it more leeway to create unique interest rate advantages. First, the overall borrowing APY is lower than other platforms (using capital in the same dimension), with a liquidity subsidy for depositors and borrowers (although not a an initiative of the Aave).

Second, it is a pioneering interest rate swap that allows users to choose between variable borrowing APY or stable strategy borrowing APY. If they choose a higher rate, they can switch to a lower rate strategy, giving them access to lower cost funding in a more volatile and decentralized market.

Aave Pro

The success of Aave’s V2 trial of the credit delegation model where loans can be obtained without collateral has opened the launch of the Aave Pro project, which integrates DeFi with traditional finance and provides a new gateway to DeFi for institutions. offline investment.

It is aimed at individual investors who have very limited funds compared to institutional investors. On top of that, DeFi has seen explosive growth for over a year, but hasn’t lasted as long as before.

OTC funds are most often pooled in the hands of institutional investors. As an FCA-licensed e-money institution in the UK, Aave can provide security of funds in a more compliant and secure dimension to enable institutional investors to participate and promote the proper development of the whole industry. ‘ecosystem.

Aave Pro is different from original V1, V2 and even AMM. For one thing, Aave Pro is solely developed for OTC institutional investors, with only four assets launched – USDC, BTC, ETH, and AAVE. Second, Aave Pro is a private pool, which is completely separate from the Aave protocol pool, so the risks are completed independently.

Third, participating investment institutions must pass Fireblocks KYC verification, assess credit rating through KYC information, and adopt different collateral rates according to different credit ratings, which greatly reduces the safety of funds.

Summary

Aave has taken the lead in the loan business thanks to his team rather than a coincidence. Not only dealing with enhanced control over security and compliance, the Aave team has also continuously sought out breakthroughs and innovations in DeFi lending. With the launch of Aave Pro, in particular, Aave has gradually opened up a moat with major lending platforms and is poised to usher in a new development cycle for DeFi in a new direction.

What is the imprint

Footprint is an all-in-one analytics platform for blockchain data visualization and insight discovery. It cleans and integrates on-chain data so that users of all experience levels can immediately start searching for tokens, projects, and protocols. With over a thousand dashboard templates and a drag-and-drop interface, anyone can create custom charts in minutes. Discover blockchain data and invest smarter with Footprint.

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