In this article, we'll look at which blockchain has the best deposit rates on AAVE V3. Let's look at the best tokens to deposit, as well as look at the history of DAI deposits.
Traditionally, to get a loan, you'd need to go to a bank or other financial institution with lots of liquid cash. The bank will ask for collateral—in the case of a car loan, that would be the car title itself—in exchange for the loan. You then pay the principal to the bank every month, plus interest.
DeFi is different. There is no bank. Instead, smart contracts (which are computer codes that automate transactions, such as selling if a token price reaches a certain threshold) do the heavy lifting. DeFi removes the middlemen from asset-trading, futures contracts, and savings accounts.
Here's how that works: Users deposit digital assets into "liquidity pools." These become funds that the protocol can then lend out. Anyone who deposits their tokens into a pool and thereby "provides liquidity," receives new aTokens. (The "a" is for "Aave.") So, if you deposit DAI to the liquidity pool, you'll receive aDAI in return.
As an aToken holder, you'll get a cut of the platform's flash loans as well as interest on those aTokens. If you're depositing tokens to a pool that already has a lot of surplus liquidity, you won't earn much. But if you're depositing tokens the protocol is in desperate need of, you'll make more.
In March 2022, Aave launched v3 of the protocol, which includes a feature called Portal. Portal allows Aave to operate seamlessly across all blockchains. That means using Aave, you can now participate in lending or borrowing protocols on chains like Solana or Avalanche.
We will use tables from Dune Analytics for this analysis. Let's take several blockchains for analysis:
Ethereum (V2)
Polygon (V3)
Optimism (V3)
In this section, we present a liquidity and interest rate analysis for the Aave deposit markets. The total amount of blocked leverage for the largest Aave V2 and V3 markets is shown in the chart below.
https://dune.com/embeds/195391/367107/5a0c0296-5401-4e99-a7c7-7468fe820045?display=iframe
https://dune.com/embeds/585043/1093295/13169d32-7769-4509-9bb6-08b114f6cf82display=iframe
Let's look at specific tokens and take AAVE V3 on Polygon as an example
https://dune.com/embeds/675741/1253929/889b9128-9539-4003-930d-998be8344c76?display=iframe
https://dune.com/embeds/675741/1253693/665172b8-0d19-418a-a698-2e5c43e2953fdisplay=iframe
You can see that ETH and USDC account for most of the funds in AAVE V3. If we look at AAVE V2 - the situation is similar (historical chart below). So we will focus on these markets for an in-depth analysis. It is clear from Figure 1 that these three markets are very similar in terms of average deposit levels and utilization rates, especially for USDC and ETH.
https://dune.com/embeds/196617/367128/8dcff414-ef26-4dce-84dd-7e5d41ed4a17?display=iframe
The available liquidity for loanable funds for anasset is given by the difference between the total supply and totalborrows in the respective market. High liquidity allows actors toborrow funds at lower rates, while guaranteeing suppliers of fundsthat funds can be withdrawn at any point in time.
Periods of low liquidity have several implications for market participants. On one side, high utilization implies lucrative interest rates for suppliers of funds, there by attracting new liquidity. On the other hand, suppliers are faced with the risk of being unable to redeem their funds, for example, in the case of a ‘bank run’.
In the context of liquidity, we present a case study of the interest rate behavior of the DAI market on AAVE, focusing on the 90-day period to date and its interest token aDAI. The figure below shows that this market has been exposed to various levels of utilization during its existence, experiencing periods of relatively high liquidity, but also periods of illiquidity.
https://dune.com/embeds/1184728/2027820/75325c5d-9b54-48f0-be41-ed8cc31e7da4?display=iframe
https://dune.com/embeds/1184350/2027273/61de50db-df12-4bad-b601-48278f119491?display=iframe
As we can see there were two periods during this time that we will look at:
Early 2021 to May 2021.
August 2021 to November 2021
At the beginning of (1) of these periods, the interest rate parameters were changed to values ranging from a minimum of 1.65% to a maximum of 23%. Here we consider the behavior of supply rates, but the behavior of borrowing rates is broadly similar.
The figure below shows the market size or supply model (red line) as well as outstanding debt (blue line). Two things should be noted: (i) there seems to be a good growth of both supply and debt parameters during the first period and (ii) after April 2021 there was a sharp growth of all indicators by a factor of 10 (for example from 160M to 1.6B for the supply parameter).
https://dune.com/embeds/1184755/2027875/f0541626-19c3-4a51-9b5a-a3a7a84ef4d3?display=iframe
The second period also marked the growth of all indicators and with it the growth of interest rates on the DAI. However, this time the difference between supply and debt is significant - supply is 20% more than debt, unlike the first period where the difference was about 15%.
We saw that, especially for the DAI, there were several periods of illiquidity, and that they were often distributed between the two versions of the protocol (since January 2022, liquidity on V2 fell, while liquidity on V3, such as Polygon (Figure 1), rose substantially). Finally, we analyzed the behavior of DAI interest rates on AAVE and showed that in all observation periods, interest rates were clustered around liquidity growth and the difference between supply and borrowing.
In this section, we look at the efficiency of capital investment for the AAVE protocol. Thus:
First, we will compare the interest rates on all versions and blockchains
Then we will choose the best rate in terms of the rate itself, as well as the risks.
Look at the history of this rate over time
For this we will use the website: https://aavescan.com
Figure 2 shows that the highest paying tokens are several, including AMPL, USD, SUSD and SNX. I have been following this AMPL market closely because of the strange behavior. It seems that the economics of this credit market are completely disrupted by the individual realization of the AMPL token and the corresponding debt token by the AMPL team. The realization does not relocate the debt token, leaving a very tempting opportunity for arbitrage against lenders who deposit AMPL in AAVE. The borrower can simply borrow the AMPL, watch its balance grow in positive overbalance, and repay the unreasonable debt pocketing the difference. Note that the borrower doesn't even need to sell the AMPL to benefit, so it's not even a short position. The borrower profits simply from the fact that the borrowed asset is actually accounted for as an asset other than the borrowed asset. As long as the borrower repays to negative overbase, he is guaranteed a very substantial profit at the expense of the lenders.
Therefore, I believe that we will exclude such high bets and leave only bets that start with BAL.
To provide the data for V3, let's go back to Dune analytics and do some simple queries.
https://dune.com/embeds/1184390/2027286/d20a2fb8-5798-4165-854b-7bc4fab29e1c?display=iframe
https://dune.com/embeds/1184390/2027384/da8b7023-0a08-46d6-bca0-3038ecf5afc5?display=iframe
https://dune.com/embeds/1184448/2027398/70d54f83-33f0-402b-b1bd-d82e788360f1?display=iframe
For example, let's look at Polygon: the following will be updated data, so the exact numbers may change, but the trends are likely to remain the same for the not-too-distant future. So, comparing for example the BAL rate - at the time of writing this article: Polygon has ~6% and Ethereum 40%. Capital dominance is clearly visible (29k and 14k on polygon VS 450k and 257k on Ethereum by Supply and Borrow, respectively). Comparing for example DAI, which is on all blockchains we get the following picture:
ETH: 0.95%
Arbitrum: 1.5%
Avax: 1.6%
Optimism: 3.3%
Polygon: 0.86%
From this we can conclude that Optimism is the best blockchain for deposits and Ethereum is not the best. However, these are myths - we can go to Optimism right now and make a deposit of our DAI, will come as our friends and their friends, etc., and thus the rate will fall and can reach the same Avalance or Arbitrum. This is called deposit arbitrage.
Crypto arbitrage is when you buy an asset at one place and then sell it at another where it costs more. This is a relatively low-risk way to profit from crypto, and that’s why it’s preferred by many.
With the inception of the blockchain-based loan industry, crypto lending arbitrage opportunity has also emerged. This one refers to taking out a cryptocurrency loan at one service and then lending it at another one at a higher interest rate.
If we talk about the situation here and now, it is worth noting the CRV, which has a pretty good percentage on all platforms. And if, for example, to build a graph for the entire period of time for version 3 of AAVE, we get the following: there was a lot of volatility, but then the interest rate fixed a plateau at 2%.
https://dune.com/embeds/1184918/2028199/a91325c3-2070-4ef2-b628-d98b27863c95?display=iframe
Thus, we can assume that in general the markets within AAVE V2 and V3 may not currently be fully efficient - it is impossible to say exactly which token is better to deposit as well as on which blockchain, and it seems quite plausible that these results are not only true for AAVE. Overall, we find evidence of cointegration between the different markets. In turn, this suggests that to some extent, interest rate changes in one blockchain/version are related to interest rate changes in another, which perhaps in turn suggests that agents are interested in changing protocol because of the rates they observe.
In this article we present the relevant work on interest rates in the AAVE project. We analyze the three largest blockchains in terms of market liquidity, activity and popularity.
From the point of view of market liquidity, we found that individual interest rate fluctuations often work during periods of high growth, and, moreover, often these periods of high growth are common to all versions and blockchains.
From the point of view of market efficiency, we consider whether the parity of certain interest rates is observed. In general, we believe that this is not the case, assuming that token markets are currently relatively inefficient.
AAVE
AAVE scan
AAVE Mega Dashboard
https://dune.com/KARTOD/AAVE-Mega-Dashboard
a) Polygon
https://dune.com/KARTOD/AAVE-Polygon
b) Optimism