Is a DeFi 2.0 Rebound Imminent? AAVE May Lead the Industry Revival

Recently, several prominent figures in the DeFi field have hinted that the industry may be on the verge of a rebound. An analyst recently published a discussion outlining the reasons why a DeFi 2.0 rebound may be imminent. Here are some of the main driving factors:

• The DeFi technology has significantly evolved, bringing higher scalability, stronger security, and innovative applications such as tokenization of real-world assets and on-chain credit.
• The total value locked (TVL) has nearly tripled since last October, with continuous growth in trading volume on decentralized exchanges.
• Many large financial institutions are entering the market through tokenized funds and stablecoins, indicating an increase in mainstream acceptance.
• Recent interest rate cuts have increased liquidity, making DeFi yields more attractive.
• The DeFi industry is more mature and secure, and is ready for a new round of growth.

From a broader economic perspective, a 50 basis point rate cut may signify a turning point. The M2 money supply is rising again, and Bitcoin's trend is similar to past cycles, suggesting that a new bull market may be on the horizon.

Despite warnings that aggressive rate cuts could signal an economic recession and ongoing geopolitical tensions, the overall market atmosphere remains positive. This rebound seems different and may lead to gains beyond expectations.

Considering the long bear market, the current DeFi valuation may be underestimated. This article will focus on analyzing AAVE's market position and assessing its potential role in the DeFi rebound.

AAVE: Ready to Take Off?

The TVL of DeFi has rebounded significantly from the low point in 2022, growing more than twofold to $77 billion. However, the current TVL is still 50% lower than the peak of $154 billion in 2021. This indicates that despite increased interest in the industry, the valuation of DeFi is still far below the highs of the last bull market.

1. Market Leadership and Activity

AAVE is one of the leaders in the DeFi space, providing users with cryptocurrency lending services without intermediaries. The platform was launched in 2017 under the name ETHLend, rebranded to AAVE in 2018, and achieved significant growth during the DeFi boom in 2020, capturing over 50% of the DeFi lending market in the past three years. Its success stems from continuous upgrades and the launch of new products, such as the GHO stablecoin, and safety measures like the $400 million "safety umbrella." The "buy and distribute" plan supports long-term token growth by creating sustained buying pressure.

In 2024, AAVE's TVL reached $13 billion, demonstrating strong user adoption and increased platform confidence. The launch of the GHO stablecoin has added revenue sources, and recent expansion to non-EVM chains such as Aptos has broadened the market reach.

AAVE's active loan size has also seen significant growth. The latest data shows that active loans on AAVE have reached $7.4 billion, reinforcing its dominant position in the DeFi lending market. This growth is attributed to recent adjustments in token economics, which have reduced inflation pressure on AAVE tokens, redirected income to stablecoin stakers, and increased attractiveness to lenders.

2. Underestimation and Accumulation Potential

Despite AAVE's prominent market position, AAVE and other DeFi projects still appear undervalued. A few months ago, analysis pointed out that AAVE's price-to-earnings ratio was 2.8 times, with an annual revenue of $240 million. Considering that 93% of the token supply is in circulation, AAVE may face less selling pressure and is expected to experience a rebound after 2.5 years of consolidation. Recent breakthroughs suggest that AAVE may be in the early stages of a new upward trend, making it an attractive long-term accumulation asset. This technical trend, combined with solid fundamentals, supports the argument for its potential price recovery, especially as DeFi projects regain attention.

3. Institutional Interest

The interest of institutions in AAVE mainly stems from its launch of AAVE Arc, a permissioned DeFi product designed for regulated financial institutions. Currently, over 30 whitelisted companies can use the platform, including several well-known crypto investment firms. AAVE Arc aims to connect traditional finance with DeFi by providing a compliant environment for digital asset lending, offering high-yield opportunities while meeting regulatory standards.

In addition, a well-known investment institution has officially included AAVE in its digital asset portfolio. With the possibility of interest rate cuts in the United States, the decline in traditional interest rates will make the high yields of DeFi more attractive, increasing demand.

The launch of ETH ETFs this year may also bring a significant influx of funds to DeFi. As an important player in the Ethereum lending market, AAVE is expected to be a major beneficiary, attracting new capital from institutional investors.

4. Competitive Advantage

Compared to its competitors, AAVE stands out with its multi-chain capabilities and broader asset support. AAVE operates across multiple networks, offering wider coverage, lower fees, faster transaction speeds, and greater appeal to users.

In addition, AAVE supports a more diverse range of collateral types, from traditional cryptocurrencies to tokenized assets and staked derivatives. This diversification, along with features like flash loans and the GHO stablecoin, helps AAVE capture a larger share of the DeFi market and maintain its dominance in the lending space.

5. Future Development Catalyst

AAVE 2030 is a strategic proposal aimed at expanding the protocol beyond Ethereum and introducing new features in the coming years. The main objectives include:

1. Multi-chain Expansion: Support non-EVM chains and build a network-agnostic cross-chain DeFi platform.
2. AAVE V4 Upgrade: Introduces real-world asset integration, improves capital efficiency, and enhances governance tools.
3. Active Capital Model: Proposes a proactive budgeting model, with an initial budget including 15 million GHO and 25,000 stkAAVE for research and development as well as security audits.

The overall goal of AAVE is to establish a sustainable, cross-chain, compliant DeFi ecosystem by 2030, adapting to market changes and becoming the core infrastructure for retail and institutional users.

Bullish Factors

• AAVE controls 67% of the Decentralized Finance lending market, managing $7.4 billion in active loans, holding a dominant position in the growth of DeFi lending.
• High multi-chain activity, planning further expansion, expected to attract more users and liquidity.
• The GHO stablecoin is developing well, increasing platform revenue and making revenue sources more diverse and stable.
• AAVE Arc attracts institutional investors to participate in Decentralized Finance in compliance, helping to bring in a large amount of traditional financial capital.
• The potential launch of ETH ETF and the decline in interest rates may bring more capital inflows into Decentralized Finance, providing AAVE with an opportunity to increase its TVL.

Bearish Factors

• AAVE has a large market share in the Decentralized Finance lending market, and any technical issues or regulatory actions could have a significant impact on the entire industry.
• If GHO adopts a slowdown or competitors' stablecoins rise, it may affect AAVE's revenue and competitive advantage.
• The global economic recession may reduce the funds flowing into risk assets, limiting lending activities on DeFi platforms.
• The escalation of geopolitical risks may increase uncertainty and market volatility, affecting investors' willingness to participate.
• Although the current regulatory threats are not urgent, future policy changes still pose potential risks, especially in key markets such as the United States and the European Union.