OpenFi: Aave
I review Aave using the OpenFi framework in this post, one of the most well-known lending applications in DeFi.
Disclaimer: The following piece is simply a summary of my opinions and should not be construed as investment advice.
O: Opportunity - How large is the Total Addressable Market? Does the project disrupt an existing market, or does it create a new market?
SCORE: 5/5
Aave originally launched as ETHLend in 2017. The platform operates in the consumer lending space. According to analysis by Morgan Stanley, total origination volume in personal loans reached $120 billion in 2019. Typically, I take only a sliver of traditional market TAM when computing for DeFi applications. However, given considerable FinTech disruption in the space with FinTech companies taking almost 30% total market share, DeFi has the potential to take an outsized share of the consumer lending segment from traditional banks and other FinTech companies alike.
Over the past year, Aave has seen exponential growth in liquidity and market share. The platform currently boasts almost $3 billion Total Value Locked. This puts Aave squarely at #2 overall on DeFi Pulse at the time of writing.
P: Product - How innovative and differentiated is the product? Is there product-market fit? How easy is it to use the product (i.e. good user interface and experience)?
SCORE: 5/5
Aave offers all products under one application that can be accessed through the web interface or popular wallets such as Argent, imToken, and many others. For a DeFi application, the user experience is as simple as it gets. I connected my MetaMask wallet, deposited ETH, and was good to start lending and borrowing on the platform. Users are able to track their transaction status in real-time with a connection to Etherscan. To access the more advanced features, such as flash loans, users would need additional development skills, or they can leverage third party automation companies, such as collateralswap and defisaver.
With its retail focus, Aave has developed the appropriate user experience for retail customers. Not only are users able to deposit funds in 21 different tokens (competitor Compound supports 9 tokens), but they can also swap tokens right on the platform (albeit with a Uniswap fee in addition to flash loan fees). Borrowers have the ability to take out both traditional collateralized loans, as well as uncollateralized flash loans. No other DeFi lending product on the market currently offers the same degree of flexibility, scale, and low transaction fees as Aave does.
E: Experience - Does the team have any previous experience building software and technology? Is the team well-versed in blockchain? What previous experience does the team have to ensure success?
SCORE: 3.5/5
Aave was founded by Stani Kulechov who has a law degree from the University of Helsinki and worked at various startups and law firms before founding the company in 2017. Other key team members include COO Jordan Gustave and Chief Compliance Officer Ville Valkonen, both of whom worked at numerous startups and NGO’s prior to joining the company. The core team is based in London and includes mostly engineering and marketing team members. Investors and community contributors include Parafi Capital, Blockchain Capital, Framework, Three Arrows Capital, Standard Crypto, Blockchain.com, DTC.Capital, and Winklevoss Capital.
While the team has the necessary experience and background to expand development, Aave’s strength lies in its marketing and branding more so than individual contributions from any one team member. Stani is the most well known of the group and consistently provides great insights via his blog.
Furthermore, AAVE has been known for its rapid innovation through shipping new features. From the novel yet controversial flash loans, to new V2 features such as collateral swaps and credit delegation, it seems the AAVE team and community are certainly strong problem solvers who are not afraid to try new things.
N: Network Effects - Will more people in the network benefit when others join? Are there high switching costs and stickiness in using the platform?
SCORE: 3/5
Naturally, lending protocols such as AAVE are more useful as more users utilize them. AAVE’s current position as a leader in the market ensures that it has a high chance to maintain a significant market share.
As I’ve noted above, Aave is a marketing powerhouse when it comes to retail users. The project has a loyal fanbase with over 88,000 Twitter followers. There are frequent community events, polls, and updates to drive user engagement. There are valuable network effects generated from the brand alone.
However, as far as token network effects, the only thing that keeps users tied down are token locking periods for users who are unstaking their AAVE tokens from the Safety Module (10 days by default). Otherwise, users can withdraw their tokens from the protocol at any time. Users with a simple objective of maximizing yield may just compare the deposit APYs on Aave vs. other platforms to determine which one to use. These rates change quite often and somewhat drastically depending on the utilization rate of each particular asset. The higher the utilization rate, the higher the interest earned. Although the absolute rate of return in dollars for AAVE staking is not very high, I suspect users who stake AAVE may expect higher rates of return through appreciation in the overall protocol value.
F: Fundamentals: Do the underlying unit economics make sense within the current network? How quickly are users growing? How much value has been transacted or locked up?
SCORE: 4/5
For standard loans, per the project FAQs, Aave charges 0.00001% of the loan amount origination and 0.09% on flash loans, with zero origination fees for borrowers. Swapping is done through Uniswap with 0.3% Uniswap fees on top of the flash loan fee. And of course, as with any ETH-based token, gas fees are incurred by the user for any transactions. Depositors earn 70% of all flash loan fees generated with the rest going to referral originators and the protocol fund.
Aave has grown exponentially over the past year from $300,000 TVL to almost $3 billion at the time of writing. The company maintains a bounty program and has had six independent security audits of its platform, done by well-known security firms: Certik, Certora, Consensys Diligence, Open Zeppelin, Peckshield, and Trail of Bits. While it’s unclear how much loan volume originated through the platform over the same period, this kind of growth cannot be understated. Aave has taken a significant chunk of the overall consumer lending segment in the past year, even when compared to more “traditional” institutions.
I: Incentives - Are there proper cryptoeconomic incentives in place for network stakeholders and users to support blitzscaling?
SCORE: 4/5
With the launch of Aave’s v2 platform, governance and staking is done through the AAVE token. The token has a fixed supply of 16M AAVE with 3M reserved for Ecosystem Incentives. In short, AAVE token holders can stake their tokens into the security module, which allows users to earn AAVE tokens and fees generated from the protocol. AAVE holders can directly create Aave Improvement Proposals (AIPs) and vote on AIPs to introduce new features and products to the protocol, as well as delegate their proposition and/or voting power to other community members and expanding the network effects.
Overall Score: 24.5/30
Aave offers one of the best DeFi lending platforms on the market based on useability and scale. Its strong branding and community focus stand out even amongst the wide range of crypto platforms that exist today. It would be great to see more network effects generated from cryptoeconomic incentives. With v2 governance just rolled out, I will be eagerly tracking the team’s progress in the coming months.
* This post has been updated to reflect the latest data and user experience available on Aave.
