Is Aave destined to remain the premier DeFi lending platform?

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

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

The most important lending platforms to have emerged are Aave, MakerDAO and Compound, they dominate the category in terms of TVL. However, with Compound being the big favorite, on May 19 Crypto Market Crash shuffled the rankings and Aave took the lead.

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

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

TVL of the 3 main loan protocols (Data source: Footprint Analytics)
TVL of the 3 main loan protocols (Data source: Footprint Analytics)

Data overview

Aave TVL in Different Chains (Data source: Footprint Analytics)
Aave TVL in Different Chains (Data source: Footprint Analytics)
The 3 main loan protocols during loan (data source: footprint analysis)
The 3 main loan protocols during loan (data source: footprint analysis)

When we look at the data, it becomes clear that Aave has several solid advantages that indicate that it will continue to be a leader in the DeFi lending market. Namely, it is highly secure, innovative, and recently launched Aave Pro, giving it a huge head start as mainstream finance begins to buy into crypto.

Context of the project

Aave, formerly known as ETHLend, launched on Ethereum in November 2017. The platform’s initial modus operandi was similar to P2P, with the online platform connecting borrowers and borrowers. lenders through smart contracts in a peer-to-peer fashion. But the development model was quickly adjusted. The reaction from the secondary market has been moderate.

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

Over the next few months, the platform took the following steps:

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

Economic model

Economic overview of the Aave (Data source: Aave Docs)
Economic overview of the Aave (Data source: Aave Docs)

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

  • Community Governance: Users holding AAVE platform token can participate in community governance, such as participating in platform ecosystem protection vote, platform module mechanism updates security, iterations of new features, etc. One AAVE token equals one vote.
  • Construction of the security module: users can pledge their symbolic AAVE assets in a security pool, which is used to protect against risky events such as risk of breach of contract, liquidity risk (liquidation risk resulting from insufficient warranty coverage) and prophecy machine risk (caused by network congestion or market crash and where the prophecy machine cannot update the price or the price is provided incorrectly).
  • Ecosystem rewards: Symbolic rewards given to borrowers and lenders, equivalent to extracting cash.

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

Flash loan

Flash loan amount borrowed (Data source: Footprint Analytics)
Flash loan amount borrowed (Data source: Footprint Analytics)

Aave also has a unique advantage over other lending platforms via Flash lending. The product has a certain threshold for users and is suitable for developers with programming skills. It is characterized by the ease with which users can get loans without the need of collateralizing any assets. They should simply 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 revoked without any 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 passed $ 9.8 billion in cumulative lending volume and is expected to exceed $ 10 billion by the end of October. Although the entire crypto industry is in a phase of recovery after the trading volume of the 519 Crypto Market Crash and Flash Loan declined, 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

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

The V1 and V2 versions support 31 types of assets in single token pledges, traditional cryptocurrencies, and emerging cryptocurrencies. On the other hand, the AMM version supports LP Token Pledges for Uniswap and Balancer, with 16 types of assets. 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 groundwork for realizing a shift.

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

Second, it is a pioneering interest rate swap that allows users to choose between a variable borrowing APY or a stable strategy borrowing APY. If they choose a higher rate, they can switch to a lower rate strategy, giving them access to lower cost financing 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 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 experienced explosive growth for over a year, but didn’t last as long as before.

OTC funds are more often pooled in the hands of institutional investors. As an FCA authorized e-money institution in the UK, Aave can provide fund safety in a more compliant and secure dimension to enable institutional investors to participate and promote the successful development of the entire ‘ecosystem.

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

Third, the participating investment institutions must pass Fireblocks KYC verification, assess the credit score using KYC information, and adopt different collateral rates based on different credit scores, which greatly reduces the safety of funds.

Summary

Aave took the lead in loans thanks to his team rather than chance. Not only dealing with a tightened control over security and compliance, the Aave team also continually researched breakthroughs and innovations in DeFi lending. With the launch of Aave Pro, in particular, Aave has gradually opened a gap with the best lending platforms and is expected 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 information discovery. It cleans and integrates on-chain data so that users of all experience levels can immediately start researching 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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