The Evolution of Decentralized Lending: From ETHLend to Aave V4

Aave is a leading project in the DeFi lending space, with its core business being the implementation of peer-to-peer lending of crypto assets through a dynamic interest rate model and liquidity pools. Currently, Aave ranks third in total locked value among DeFi projects and holds a leadership position in the lending category. Aave's parent company, Avara, is gradually expanding its business into new areas such as cross-chain lending, stablecoins, open social protocols, and institutional lending platforms.

The total supply of AAVE tokens is 16 million, of which 13 million are allocated to token holders and 3 million are injected into the Aave ecosystem reserves. Currently, approximately 14.8 million AAVE tokens are in circulation in the market.

With the continuous expansion and maturation of Aave's business, both the TVL and price of AAVE have seen improvements against the backdrop of a market recovery in 2024. Avara announced the upgrade plan for Aave V4 in May, focusing on further enhancing Aave's liquidity and asset utilization.

The Aave V3 version has basically replaced the V2 version, and the gradual stabilization of its business model and user base has enabled Aave to far outpace other lending protocols in terms of TVL, trading volume, and the number of supported chains.

Avara has encountered some challenges in expanding its business. Currently, its main revenue still relies on traditional lending operations. The stablecoin GHO has recently restored its peg after experiencing a period of decoupling. The TVL of the institutional lending platform Aave Arc has been at a relatively low level after experiencing a sharp decline.

For the future development of Aave, it is recommended to further optimize its cross-chain lending solutions, strengthen the stablecoin business and deeply integrate it with the Aave platform, incorporate Aave's DeFi capabilities into emerging businesses such as social platforms, and consolidate the currently relatively independent business segments into a comprehensive ecosystem.

The Development History of Aave

In May 2017, Stani Kulechov founded the ETHLend project. Initially, ETHLend faced severe liquidity challenges during its operations. At the end of 2018, ETHLend underwent a strategic transformation, shifting from a P2P model to a P2C model, introducing a liquidity funding pool model, and officially rebranding as Aave. This transformation marked the official launch of Aave in 2020.

In November 2023, Aave Companies announced a rebranding to Avara. Avara has gradually launched new businesses including the stablecoin GHO, the social networking protocol Lens, and the institutional lending platform Aave Arc, and has begun strategic deployments in various fields such as cryptocurrency wallets and gaming.

The current Aave V3 version is now stably in use, and its services have expanded to 12 different blockchains. At the same time, Aave Labs is further attempting to upgrade the lending platform, announcing the upgrade proposal for version V4 in May 2024.

According to Defillama data, as of May 15, 2024, AAVE ranks third in the DeFi sector with a total locked value of $1.0694 billion.

Aave's Business Model and Core Functions

Aave's core business model is Decentralization lending, the main features include:

1. Lending Pool: Users can deposit assets to earn interest or collateralize assets to borrow other assets.

2. aToken: The interest-bearing token representing the deposits earned by deposit users.

3. Dynamic Interest Rate: Adjusts borrowing rates dynamically based on the utilization rate of the fund pool.

4. Flash Loan: Uncollateralized borrowing within a single block.

5. Credit Delegation: Allows users to delegate unused credit limits to other users.

The Aave V3 version introduces three innovative features: Efficient Mode ( E-mode ), Isolation Mode ( Isolation Mode ), and Portal ( Portal ).

In May 2024, Aave proposed the V4 version proposal, planning to adopt a new architecture, introducing a unified liquidity layer, fuzzy control interest rates, GHO native integration, Aave Network, and other designs.

Aave's Ecosystem Expansion

1. GHO Stablecoin: A decentralized stablecoin launched by Aave, currently working to enhance its pegging stability and deepen its integration with the Aave platform.

2. Lens Protocol: An open social protocol based on blockchain, designed to give users complete control over their content and social relationships.

3. Aave Arc: A private liquidity pool solution for institutional investors, implementing strict KYC procedures and a "whitelist" mechanism.

Aave's Financial Performance

According to Tokenterminal data, as of May 15, 2024, the Aave V3 protocol has generated a total borrowing fee of up to $146.6 million. Between 2023 and 2024, the annual protocol revenue for Aave V2 and V3 was $20.2646 million, which is a slight decrease compared to the previous year.

Aave's main sources of income include: borrowing income, flash loan fees, other service fees, and GHO minting fees. Since December 2022, the income of the Aave protocol has been sufficient to cover token incentive expenditures, achieving a surplus.

The Position of Aave in the DeFi Lending Market

Aave occupies a leading position in the DeFi lending space, with a TVL of $1.025 billion, significantly ahead of other lending protocols. Aave has successfully launched on 12 different blockchain networks, being the largest lending protocol on Ethereum, Arbitrum, Avalanche, Polygon, and Optimism.

In the flash loan market, Aave and Balancer are tied for the top two positions, with a market share of about 40%. In the cross-chain lending field, although Aave started later, it shows great potential due to its huge TVL advantage.

Challenges Faced by Aave and Development Suggestions

1. Cross-chain lending competition: The launch of version V4 needs to be accelerated to optimize cross-chain lending solutions.

2. Market innovation pressure: In the face of competitors' innovative initiatives, Aave needs to provide a unique value proposition to maintain its market leadership.

3. Development of GHO stablecoin: Further integration of GHO with Aave's lending functions is needed to fully leverage its role in the ecosystem.

4. Business Diversification: It is recommended to integrate the currently relatively independent business segments into a comprehensive ecosystem, incorporating Aave's DeFi capabilities in emerging businesses such as social platforms.

5. Aave Network Construction: Promote the construction of Aave Network with the design of version V4, strengthening Aave's core position in the DeFi ecosystem.

Overall, Aave, as a leader in the DeFi lending space, significantly outpaces its competitors in terms of asset utilization, market share, and trading volume. However, to solidify its market position, Aave needs to continue innovating, strengthen its core lending business, promote the development of GHO, establish the Aave Network, and expand its non-lending business ecosystem.