The snapshot below is a brief analysis of the Aave ecosystem, product market fit, traction, market, governance and tokenomics. In this snapshot I articulate the positives and negatives of a potential investment in the $AAVE liquid token. Read on!

• Price: $107.9 | FDMC: $1,723,664,267 | 24H Volume: $294,162,561 | Contract Address | Whitepaper

Aave is a decentralized non-custodial liquidity protocol where users can participate as depositors or borrowers. Depositors provide liquidity to the market to earn a passive income, while borrowers are able to borrow in an overcollateralized (perpetually) or undercollateralized (one-block liquidity) fashion. - Aave Document Hub

• Value Proposition: Aave works as a two-sided platform, there are thus two value propositions (one for each stakeholder):

  • For Depositors: earn passive income by depositing funds (Lender)

  • For Borrowers: borrow assets to perform leveraged transactions.

  There is a third value proposition, which is designed for developers of protocols that need to integrate lending services into their offerings.

• Target User: Depositors, Borrowers and Developers of protocols in DeFi

• Product Description: Aave is an open-source liquidity protocol where users can earn interest, borrow assets and build applications. Currently, Aave has various product offerings

  • Stable Rate Loan (Borrowing): Aave allows borrowers to process overcollateralized loans at a fixed rate

  • Variable Rate Loan (Borrowing): Aave allows borrowers to process overcollateralized loans at variable interest.

  • Uncollateralized Flash Loans (Borrowing): Aave allows users to process undercollateralized loans in the form of a Flash Loan. First introduced in the Aave platform in 2020, flash loans are the first of its kind instant, unsecured loans that are coded on a smart contract.

  • Pool Lending (Lending): Users can provide liquidity in various digital assets at various APYs.

  • Staking (Lending): Users can help secure the Aave network by staking $AAVE tokens at a set APR.

  • Aave Pro: Aave user interface focused on onboarding institutional investors.

• Roadmap: The announcement of the decision to decentralize Aave’s governance is outlined in the Aavenomics section of their documentation. The roadmap below represents the steps to be followed as Aave decentralizes its governance.

  • LEND will migrate to AAVE, via a Genesis Governance vote, at a rate of 100 LEND per 1 AAVE.

  • Aave launched a Safety Module (SM) for staked AAVE to act as collateral of last resort with $362.23M locked as of Aug 10th 2022.

  • No other product offerings are planned in this roadmap.

• Total Value Locked: $12,208,394,527.38 (Aug 10, 2022)

• Backers: Crowd Venture Capital (Seed), Google (Seed), IBM (Seed), Samsung Electronics (Seed), ParaFi Capital (ICO), Framework Ventures (ICO), Blockchain.com Ventures (Venture Round), Standard Crypto (Venture Round), etc…

• Active Markets: Ethereum, Avalanche, Optimism, Fantom, Polygon, Arbitrum, Aave Arc, AMM, Harmony, Centrifuge RWA

• Top Projects integrated with: Zapper, DeFi Saver, Zerion, InstaDapp, DeBank, Curve, Convex, Pooltogether, StakeDAO, Balancer

• Twitter Followers: 484.6k

• Total Holders: 119,430

• DEX Trading Volume

• Total Users:

Size: The size of the DeFi Lending segment can be approximated by adding the Total Value Locked for the top 10 protocols. According to DeFi Llama (on-chain data analytics provider), the cumulative TVL for the top 10 DeFi lending protocols is: $16.199B. The average MoM growth for the top 10 protocols is approximately 20%. The following projections can be made by end of year:

• Optimistic Growth (20%): TVL is valued at $48B by January 2023

• Base Growth (10%): TVL is valued at $28B by January 2023

• Pessimistic Growth (5%): TVL is valued at $21B by January 2023

Please note this estimate comes during a bear market economic landscape, this is why the optimistic case is the MoM average for the top ten protocols.

Trends: institutional adoption of the crypto ecosystem, user growth in DeFi, decreased trust in banks and traditional financial products enter the DeFi landscape.

Competitors: The key competitors on the DeFi lending space are Compound, MakerDAO and IronBank:

As can be seen from the chart above, Compound and IronBank are losing market share while Aave and MakerDAO are solidifying their position as the top 2 automated lending protocols.

As can be seen from the chart above, Aave is crushing the competition with regard to unique borrowers

Number of Aave Proposals: 92 | Average Total Voters: 64 | Average Voting Power per user: 8,992 $AAVE (Source - Dune Analytics)

Aave is commited to decentralizing its governance and improving its protocol security. With the introduction of Aavenomics, the following changes are being implemented.

• Aavenomics introduces Aave Improvement Proposals (AIPs) that define core protocol specifications, client APIs, and contract standards.

• Governance defines a set of Policies by which the Aave Protocol and Money Markets abide by.

  “Protocol Policies…regulate specific aspects of the protocol related to safety, economics and expansion.

  Market Policies…defined in the context of each market and, for markets belonging to the Aave ecosystem…” - Aave

Maximum Total Supply: 16,000,000 $AAVE | Circulating Supply: 13,984,783 $AAVE | Mint: None | Burn: None

Staking Method: Users can help secure the Aave network by staking $AAVE tokens at a set APR. Currently, up to 30% of your staked AAVE can be taken by the protocol and sold off if there is not enough liquidity to close a position. The protocol rewards 550 $AAVE tokens to stakers.

Current Token Distribution: Current token distribution is shown below. Top wallets involve aAave Token contract, Staking contract, ecosystem reserve and bridges. This widely affects the perceived centralization of token ownership.

Token Release Schedule: There is no planned lockup/release schedule. At the time of announcing the Aavenomics upgrade:

Utility:

1. Governance: holding the Aave token allows users to vote on key proposals such as market rates, risk management parameters and miuch more.

2. Ownership of DAO Treasury: Aave holders can vote on the use of the protocol treasury

3. Staking: Aave token can be staked to secure the protocol (volunteer your Aave as deposit insurance).

Revenue Sources: Origination Fees: Each loan pays 0.0000001% fee | Flash Loan Fees: 0.09% from total flash loan volume, 30% goes to reserve | Reserve Factor: Varies from 10-35% and is applied on the most traded assets.

I believe the Aave Ecosystem will maintain its position as one of the top DeFi protocols for open-sourced automated lending. The size and breadth of their ecosystem, product roadmap, traction to date, user gorwth rate and tokenomics all point to this. However, there exist significant risks that need to be addressed as the protocol moves forward (turnout, distribution and achieving a SCA). More below:

• Product - Roadmap: I believe this protocol is a winner in the long term because of its implementation of the staking-powered Security Module, where users stake to provide deposit insurance. In a space plagues by lending protocol meltdowns (aka Celsius Protocol), deposit insurance is a big step in ensuring long term ecosystem growth. In addition to this, aggresive innovation in the flash loans space has made Aave one of the top protocols in the DeFi space.

• Traction: Strong traction with multiple VC backers, multiple integrated markets and apps. Aave has shown a consistent level of DEX transactions and a consistent growth in user base even in the current economic landscape. This speaks to the strength of this protocol’s value proposition.

• Market - Key Contender: Aave dominates daily unique borrows, and is a key contender in both deposits and loans outstanding. This again is due to its aggresive innovation, multi-chain approach and fast-paced ecosystem growth.

• Governance - Decentralized: the introduction of Aavenomics as a governance model comes at a good time for the protocol, as it has established itself in the top DeFi protocols and is now looking to open its governance.

• Tokenomics - Utility: The Aave token has direct utility, being used in governance, DAO treasury management and staking (providing insurance to depositors).

• Governance - Voter Turnout: For a protocol with nearly 120k holders, an average voter number of 64 voters per proposal is a very low turnout rate. This problem causes governance to be much more centralized than Aave would hope for, and it introduces the risk of bad actors altering key protocol and market policies for the detriment of the Aave ecosystem. This problem could be addressed by the implementation of a vote delegation mechanism (like that of the $COMP token).

• Tokenomics - Distribution: Even after removing the top reserve and bridge wallets, ownership distribution of the $AAVE token is widely unequal, with the top 100 wallets collectively owning 85.68% of the token supply.

• Market - Sustainable Competitive Advantage (SCA): Implementation of flash loans is not a sustainable competitive advantage for the Aave protocol, although flash loan fees account for a significant share of total revenue for the protocol. Other protocols have been quick to implement flash loan offerings at lower fees. Given that the typical flash loan user is very tech savvy, it is likely these users will be quick to recognize lower fee opportunities for unsecured flashloans on different platforms. This could reduce the protocol’s revenue and in turn the price of the AAVE token.

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