Aave price takes double-digit hit, but strong fundamentals point to eventual recovery

Cryptocurrency

AAVE, the governance token of the decentralized finance (DeFi) protocol Aave, experienced a 17% decline between July 30 and August 1, reaching the $62 level. 

While the $62 support has demonstrated its resilience, the current price of $64.40 is still 12% below the daily close on July 30. Investors are now questioning whether this movement signifies a more cautious approach to the sector or if other factors are exerting pressure on the AAVE token price.

AAVE price index, 12-hour chart. Source: TradingView

Part of the recent movement in the AAVE token can be attributed to the risks of cascading liquidations on DeFi protocols, resulting from the Curve Finance pool exploit that commenced on July 30. However, Aave’s decentralized liquidity protocol has successfully survived previous identical scenarios and the protocol has a substantial $295.6 million deposited in its Safety Module.

Notably, Michael Egorov, the founder of Curve, currently holds a substantial $76.6 million loan backed by 357.3 million CRV tokens across three DeFi applications, as reported by Delphi Digital. This represents 40.5% of the entire CRV circulating supply and poses risks to the ecosystem, raising concerns about potential liquidation repercussions on major protocols, including Aave.

According to Delphi Digital data, specifically on Aave, Egorov holds 267 million CRV tokens, backing a 54.2 million Tether (USDT) loan. With a 55% liquidation threshold, the current liquidation price for the CRV token stands at $0.37, which appears relatively secure at the moment. However, it’s essential to note that Egorov is paying a significant 50% APY for this loan.

This situation serves as evidence that Aave and other top DeFi protocols function as intended, without special rules or bailouts, even for project founders. While the Curve token debacle continues, there’s no distinct issue with the Aave protocol, aside from notable players taking assertive actions to close their positions.

Aave stablecoin trading below $1 is an ongoing concern

Another factor influencing AAVE’s token performance is the stablecoin GHO, which has been trading below the $1 peg since its launch on July 16. According to 21Shares’ on-chain data and research analyst, Tom Wan, the stablecoin’s low fixed-rate borrowing presents a double-edged sword.

The lack of DeFi integration and farming opportunities for GHO discourages borrowers from holding the token, as they seek higher yields in other stablecoins. Tom Wan emphasizes that this selling pressure leads to the depegging of the GHO stablecoin on decentralized exchanges.

The Aave protocol currently boasts a substantial $5.1 billion in Total Value Locked (TVL) across six chains, but it has experienced a recent 12.5% decline in this figure within just one week. In comparison, Uniswap’s and Compound’s TVL remained relatively stable at $3.75 billion and $2.23 billion, respectively.

Total value locked (TVL), USD. Source: DefiLlama

However, it is worth noting that Aave’s annualized revenue is $12 million, as per DefiLlama data, which falls significantly short of Convex Finance’s $52 million and Radiant’s $20 million.

Collateralized Debt, Yield and Lending protocols revenue rank. Source: DefiLlama

Despite this, some proponents argue that Aave’s higher fees compared to its competitors leave room for potential future revenue growth.

Recent events might have tamed investors’ views on Aave

In May 2023, the older version of Aave protocol (v2) encountered a bug that hindered users from withdrawing $110 million worth of assets on the Polygon Network implementation. The issue arose due to an interest rate curve patch on May 16, but it was promptly resolved within a week, and no funds were reported lost in this occurrence.

Another recent contentious event on Aave took place on June 12 when a proposal was introduced to prevent a specific account, belonging to Curve founder Michael Egorov, from accumulating further debt. This move sparked debates among participants, with some contending that it infringed upon the principle of censorship-resistance or “neutrality” in DeFi.

Despite the recent 17% decline in the AAVE token price and a 12.5% drop in TVL, Aave’s decentralized application remains a strong contender in the DeFi space. With a robust insurance fund and protocol fees, the protocol is well-equipped to weather market fluctuations and potential risks.

Although Aave’s annualized revenue may be lower compared to some competitors, the higher fees could potentially pave the way for future revenue growth. Overall, Aave’s solid foundation and significant TVL signal its resilience and potential for continued success.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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