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Analyst Spotlight: Aave Overview

By: Cooper Duschang, Talos Research Analyst

Introduction

With over $50 billion in total deposits and $21 billion in borrows, Aave is a popular DeFi protocol among retail and institutional investors. Aave (AAVE) is a decentralized lending protocol supporting various markets for users to lend and borrow, earning interest on-chain on previously idle capital.

In this report, we break down how Aave markets operate, yield opportunities they create, how Aave generates revenue for the Decentralized Autonomous Organization (DAO), and how the AAVE token can benefit from these products. We highlight how much revenue is earned by select lending markets and how this can benefit AAVE.

Key Takeaways

• Emphasis on Risk Measures: Aave calibrates risk at the asset level, using conservative collateral parameters, supply and borrow caps, and kinked interest‑rate curves to protect borrowers from sudden shifts in token prices and liquidations.

• Returning Revenue to Protocol Development: Lending markets and the GHO stablecoin generate revenue to sustain protocol development. Revenue is directed towards working groups, security incentives, and AAVE buybacks on public markets.

• Decentralized Governance’s Role in Aave: Aave’s governance structure involves AAVE tokenholders in deciding protocol changes. The extent of the protocol’s decentralization has been challenged, as the Aave DAO and Aave Labs both contribute to the protocol’s development.

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