Is the DeFi revival wave about to arrive? Aave may lead a new round of rise in the industry.

Recently, several well-known industry figures have hinted that the DeFi industry may be on the verge of a revival. An analyst elaborated on the reasons why a DeFi 2.0 rebound may be imminent, mainly including the following points:

1. Decentralized Finance technology has made significant progress, with obvious improvements in scalability and security, while innovative applications such as RWA tokenization and on-chain credit have emerged.

2. The total value locked (TVL) has significantly risen since October last year, and the trading volume of decentralized exchanges (DEX) continues to increase.

3. Traditional financial giants are entering the market through tokenized funds and stablecoins, indicating a rise in mainstream acceptance.

4. The recent interest rate cuts have improved market liquidity, making DeFi yields more attractive compared to traditional investments.

5. The DeFi ecosystem is becoming increasingly mature and secure, preparing for the next round of rise.

At the macroeconomic level, the Federal Reserve may cut interest rates by 50 basis points, which could mark a turning point. The money supply is increasing again, and the price trend of Bitcoin is similar to historical cycles, suggesting that a new bull market may be on the horizon.

Despite the ongoing risks of economic recession and geopolitical uncertainty, the current market atmosphere is overall positive. After a prolonged bear market, the valuation of the DeFi sector may be underestimated, holding significant rise potential. Next, we will focus on analyzing Aave's potential role in this round of DeFi recovery.

Aave: The Leader in Decentralized Finance is Poised for a Rise

The TVL of DeFi has rebounded significantly from the low point in 2022, rising more than double to $77 billion. However, the current TVL is still 50% lower than the peak of $154 billion in 2021, indicating that the valuation of DeFi is still far below the highs of the last bull market, leaving significant room for growth.

1. Market leadership and activity

Aave is one of the leaders in the DeFi lending space, allowing users to lend and borrow cryptocurrencies directly without intermediaries. Since its launch in 2017, Aave has captured over 50% of the DeFi lending market in the past three years. Its success stems from continuous product upgrades and innovations, such as the introduction of the GHO stablecoin and the establishment of a $400 million security module. The "buy and distribute" mechanism further supports the long-term rise of the token by creating stable buying pressure.

In 2024, Aave's TVL reached $13 billion, demonstrating strong user adoption and platform confidence. The launch of the GHO stablecoin expanded revenue sources, while the expansion to non-EVM chains like Aptos broadened the market reach.

The active loan volume of Aave has recently seen a significant rise, reaching 7.4 billion USD, consolidating its dominant position in the DeFi lending market. This is attributed to its optimized token economics, which have reduced inflationary pressures and increased yield distribution for stakers, making the protocol more attractive to lenders.

2. Valuation Potential Analysis

Despite Aave's dominant position in the industry, its valuation still appears undervalued. Data from a few months ago showed that Aave's price-to-fee (P/F) ratio was only 2.8 times, with an annual revenue of $240 million. Considering that 93% of the tokens are already in circulation, the selling pressure Aave faces is relatively small. After 2.5 years of consolidation, Aave may be at the starting point of a new rise, making it an ideal target for long-term accumulation.

3. Institutional investors favor

The launch of Aave Arc has attracted the attention of institutional investors, which is a permissioned DeFi product designed for regulated financial institutions. Currently, over 30 well-known institutions have been granted permission to use it, including CoinShares, Wintermute, and Galaxy Digital. Aave Arc effectively connects traditional finance with the DeFi world by providing a compliant digital asset lending environment.

In addition, the renowned investment bank Bernstein has included Aave in its digital asset portfolio, replacing GMX and Synthetix. As the U.S. may lower interest rates and traditional money market fund yields decline, the high yields of DeFi will become more attractive.

The potential launch of ETH ETFs this year may also bring a significant influx of funds into DeFi, with Aave, as a major participant in the Ethereum lending market, expected to be a primary beneficiary.

4. Competitive Advantage Analysis

Compared to competitors like Compound, Aave's multi-chain deployment and broader asset support are its significant advantages. In addition to Ethereum, Aave also operates on networks such as Polygon, Avalanche, and Fantom, providing users with a lower-cost and faster trading experience.

Aave supports a more diverse range of collateral types, from mainstream cryptocurrencies to tokenized assets and staked derivatives. This diversification strategy, along with innovative features such as flash loans and the GHO stablecoin, helps Aave capture a larger market share in the Decentralized Finance space.

5. Future Development Catalyst

The Aave 2030 strategic proposal aims to expand the protocol beyond the Ethereum ecosystem and introduce new features in the coming years:

1. Multi-chain expansion: Support non-EVM chains to create a network-agnostic cross-chain Decentralized Finance platform, enhancing user experience and liquidity.

2. Aave V4 Upgrade: Integration of real-world assets, improved capital efficiency, and enhanced governance tools. By combining physical assets with the GHO stablecoin, Aave aims to diversify its collateral base and attract more users and institutions.

3. Active Capital Management: Propose a forward-looking budgeting model, with an initial budget including 15 million GHO and 25,000 stkAAVE for research and development and security auditing.

Aave's goal is to establish a sustainable, cross-chain, compliant Decentralized Finance ecosystem by 2030, meeting the needs of retail and institutional users.

Investment Risks and Opportunities Analysis

Positive factors:

• Leading market position: controlling 67% of the Decentralized Finance lending market, managing $7.4 billion in active loans.
• Multi-chain layout: Active across multiple mainstream blockchains, with plans for further expansion.
• Diversified income: The GHO stablecoin is rising rapidly, enhancing the stability of platform revenue.
• Institution-Friendly: Aave Arc attracts traditional financial institutions to participate in Decentralized Finance.
• Industry catalysts: The potential launch of ETH ETFs and the interest rate cut environment are conducive to the rise of Decentralized Finance.

Risk Factors:

• Concentration risk: Dominance means that any technical or regulatory issues could have a significant impact on the entire industry.
• Product risk: Factors such as GHO adoption slowing down or increased competition may affect revenue.
• Macroeconomic risks: A global economic recession may reduce Decentralized Finance platform activity.
• Geopolitical uncertainty: may increase market volatility and reduce investor participation willingness.
• Regulatory risks: Although there is no urgency at present, stricter Decentralized Finance regulations may be implemented in the future.

Overall, Aave, as a leader in the Decentralized Finance sector, has a unique advantage in the industry's recovery. However, investors still need to closely monitor market changes and potential risks to make prudent decisions.