Beyond Maker and Compound, what does AVE rely on?

The original title: "Research on | Nirvana Rebirth: Why Does AVE Achieve Supremo?"  

Zhao Weisheng, Cryptoyc Tech Cryptoyc Labs 

This article contains 7945 words & NBSP;

The recommended reading time is 20 minutes.

The competition for Lending as infrastructure in DEFI has always been fierce. But according to the latest data. This year, AVE began to gradually surpass its big brothers, Maker and Compound, leaping to become the industry leader. Due to space constraints, this article will not repeat basic concepts such as DEFI or Lending. The point is to look at the success of AVE from a data point of view.

Value Analysis & NBSP;

Own Innovation & NBSP;

Compared with Compound and Maker, the AVE's biggest innovation is to allow unsecured flash loans (only the lender is also a smart contract) and the unique variable interest rate model. The interest rate model allows users to switch between a stable rate and a floating rate (both rates vary based on liquidity).

In addition to the two most basic features, AVE V2 adds several new features:  

Lightning loan upgrade: including one-time loan of multiple currencies, process optimization, etc. The main features are as follows:  

 ,Collateral trading: Allows the user to convert the Collateral directly into another asset (not required to be redeemable first, but via a flash loan), such as Collateral         Link and UNI are converted into AVE.  

  , & have spentIt is possible to Repay a debt with collateral directly.  

Debt token,. Allows borrowers to have both fixed - and variable-rate debt and switch between them at any time. It also allows debt tokens to be assigned to other addresses (Native Credit Delegation only) after they are transferred to the cold wallet. This is equivalent to introducing the concept of convertible bonds.  

What problems does AVE solve?  

"Aave is an open-source and non-custodial protocol to earn interest on deposits and borrow assets with a variable or stable interest rate. It also enables ultra-short duration, Uncollateralized flash loans designed to be integrated into other products and services. "(From Messari)& NBSP;

Compared with compound, the interest rate is more flexible, and there is a lightning loan specifically for smart contract, which provides the same function as Money Lego, allowing AVE to do more things, such as various arbitrages.  

History of its own development & NBSP;

As the title suggests, AVE has had a nirvana. It was originally the famous ETHLEND protocol, but for a variety of reasons, ETHLEND failed and was forced to become the AVE (" ghost "in Finnish) to compete with the leading Compound of the time, so let's take a look at what went wrong with ETHLEND.  

First of all, ETHLend is also a loan agreement,However, the biggest difference between ETHLEND and AVE is that ETHLEND uses P2P collateral rather than pool-based lending. The biggest problem with decentralized P2P lending is thisIt is difficult to standardize, and it is difficult to match interest rate and capital quantity, resulting in low liquidity, and it is difficult to have good price depth to meet the borrowing needs of different roles. In addition, the loan terms of this mode need to be set by the lender, which requires the platform to have a strong audit ability and prevent risks. It was clear that ETHLEND did not meet this requirement at the time. Then Compound was born, and Ethlend was destroyed and forced to transform itself.  

It's worth noting, though, that Ethlend didn't get much bad news, including news of a massive default. I'm very curious about this: although ETHLEND has both ECR-20 and ENS pledged, the ERC-20 he is pledging is not only an asset on the original chain, but also a Token after the physical Token is offline. Therefore, for borrowers pledged with physical tokens, once they default, the liquidation risk will be very large according to reason. It is rare for Ethlend not to see news of such defaults. Unfortunately, due to the upgrade to AAVE, I am not currently able to experience the ETHLEND process for myself. Data are also hard to come by.  

Aave Token Model & NBSP;

For DEFI, the token model is a very important part of determining the evolution of its mechanism. So we need to take a look at the AAVE token itself ----AAVE token model.  

Issue of Token: AVE, formerly LEND, buyback and replacement in accordance with LEND: AVE 100:1.  

Role: In addition to the general participation in voting, setting parameters and other governance functions. The biggest difference is that it is an important part of the security module, the core module of AVE.To put it simply, in order to deal with the situation of bad debts caused by liquidation failure caused by extreme market conditions, or other unexpected situations, AVE +ETH pledged in the module (or pure AVE) will be used to cover the bottom of bad debts. The AVE source in the security module is the AVE deposited voluntarily by the currency holder. Of course, there will be a series of incentives, such as the distribution of AAVs, to incentivise holders to pledge AAVs.From the perspective of token economy, it is not enough for currency holders to hold AVE, and they need to pledge to the bottom module to fully capture the value. This also means that AVE has higher requirements for currency holders, rather than simply making money. It needs to promote the progress of the agreement in a real sense, otherwise it will suffer great losses. The relationship between the AAVE Holder and the protocol itself is shown in an official structure diagram:

Token Allocation: Because most of the AVE is converted through the previous token LEND. The LEND main net has been offline, and now we can't find out what happened to the distribution mode of that year.The theoretical total AVE is 16 million (1.3 billion LEND conversions +3 million additional issues), while the actual total in circulation is currently below 13 million.

  AVE Protocol Features & NBSP;

Since AVE V2 is already online, here's a look at the difference between V1 and V2.  

First, two new features:  

Debt Tokenisation: V2's proof of liabilities no longer exists only within the protocol, but instead becomes a token.This means that the "debt" itself can be withdrawn into the user's cold wallet, which can perform various functions, for example, multiple fixed interest rate and multiple variable interest rate positions can exist at the same time, with locally managed debt positions. Moreover, since the token itself does not need to be tied to an account within the protocol,This means that the borrower will be able to borrow against someone else to help finance the loan without having to over-mortgage the loan itself. Of course, this process will need to be monitored by additional agreements to ensure the interests of the lenders. This feature, along with the upcoming Lightning Loan v2 upgrade, will make AVE itself an excellent arbitrage tool.  

, Flash Loan v2: Previously, in order to control risks, the funds of lightning loan could not be used inside AVE, such as liquidation arbitrage and multi-currency arbitrage, etc. V2 allows flash loans to be used directly in AVE. And the official way to use it is, you know, collateral transactions, you don't have to exchange them and you pay them back with collateral. The collateral repayment is mainly to reduce the number of on-chain transactions and reduce fees.While collateral trading, which is more severe, can be used in extreme market conditions to exchange collateral for stablecoin to reduce losses and reduce the possibility of liquidation. It can be directly converted into other assets that you like, giving full play to the monetary value of your time. Cooperate with debt token to achieve multiple lightning loan arbitrage. There are batch lightning loan, lightning liquidation, liquidity from V1 to V2 seamless migration is not a repeat.  

· Secondly, the optimization of the original functions :& NBSP;

The biggest thing is that it optimizes the logical structure,It reduces the number of times that users need on-chain authentication when interacting with the protocol, which can be conservatively estimated to be reduced by 15~20%If you can cooperate with the flash loan, according to the official statementThe service charge can be reduced by 50% compared with V1. This is much more attractive to users in the context of Ethereum's high fees.  

,Code structure optimization, support for automated testing and regular expression validation tools. This is mainly to reduce the difficulty of code audit. Of course, this is for individuals, and capable users can quickly verify the authenticity and reliability of AVE codes. It's just a little less work for the audit firm.  

,Upgraded token logic. This is actually related to the first logical structure. Apart from upgrading to support EIP-2612 (a protocol that allows users to sign authenticated signatures on the chain to facilitate off-chain transactions, thus reducing fees), the biggest change is that now all Fund data is no longer in Lending Pool Core. Instead, it follows the aToken directly. In other words, the aToken itself has the same value as normal tokens and can be used to yield farming.  

,Other conventional technology to achieve you can be interested in their own white paper, very full.  

Valuation of Tokens:  

Let's take a look at the current numbers (as of 2021.06.09) :  

In terms of trading activity, the token trading activity of the two in the past 180 days is:  

AAVE:

COMP: 

It can be seen intuitively from the figureAVE is more active than COMPIn terms of average daily trading volume, however, AVE and COMP are similar. If you look at the NVT model,The price of the currency is related to the transaction volume, and the value of the AVE should be similar to the value of the COMP. But now the AVE price COMP is 20% lower. So, to some extent, AVE is undervalued.  

However, if we had valued things differently, the result might have been very different. For blockchain projects,"The number of wallet addresses" is the most important indicator of project quality. Let's look at the difference between AAVE and COMPOUND in terms of "number of addresses with balance" and "number of active wallet addresses". As for the reason why you chose these two parameters over the "total number of wallet addresses,"To put it simply, the former two are more like the "number of shareholding" and "number of users who have purchased goods" of traditional e-commerce, while the latter is the "number of registered", which is of great moisture. So, the comparison is as follows:    

 As can be seen from the above table, the multiple of "market capitalization/number of addresses" of AVE is much higher than that of COMP at present, and it seems that AVE is overvalued according to the valuation method of traditional industry.  

Of course, there are differences in the composition of the lending business between the two and no easy comparison is possible. So we need to analyze the other performance of the two in the secondary market.  

I. Performance of the secondary market

First we can take a look at the performance of the representative tokens related to defi-lending as of May 31:

Source: intotheblock messari 

As can be seen from the above table,AAVE's current market value is inflated, close to three times the value of compound. In other respects, the two figures are not far apart. In addition to the concentration degree of chips, AVE has a higher concentration degree. The reason for this phenomenon cannot escape from the chain reaction caused by the 5.19 incident. Compared with the COMPOUND, AVE is more secure, and the audit is more strict. Besides, there are V2 ways for users to reduce their losses in extreme market conditions. Therefore, in the case of the sharp drop in the price of 5.19,The AVE itself has been continuously bought by the whales, resulting in a high concentration. We'll talk about the advantages of AVE over COMP later.  

Secondly, since AAVE adopts the form of DAO and currency holders can participate in the unique security module of AAVE to gain profits, we should also look at the indicators related to currency holders and the community to make a preliminary judgment on its development potential:

As can be seen from the above figure, there is not much difference between the index of coin-holding users and the relevant index of community. So this raises the question,Why is the market value of AVE so high on the premise that all the indicators are not so different? One important reason, of course, is that the total number of AOVE releases is 16 million, while the total number of COMP releases is 10 million. But that is not enough to justify a gap of twice as much.  

In order to understand the reason, we need to compare other indexes with the old rival compound separately, in addition to the general indexes mentioned above, which are applicable to all projects.  

For defi-lending, TVL (total number of locks. The data in this article only refers to the data on the Ethereum chain) and the total amount of borrowings are very important indicators. They are indicative of the market acceptance of the agreement itself, as well as an indication of how the market is trending (data from DeBank).  

  Aave V2:

  Compound:

From the above comparison figure, we can intuitively find that there is not much difference in TVL between the two, but the main thing is that AVE V1 is still in operation. At present, the lockup capacity of V1 is about 550 m, so the total lockup capacity of AVE should be 8.5B. Overall, however, TVL is similar, regardless of trends and numerical values.  

But the trend in total borrowing is clearOn the whole, AVE V2 shows a fluctuating rising trend, while the COMPOUND has a decreasing trend. To see the current market position of AVE, we can find a comparison between Compound and AVE on Dune, as follows:

And what this trend says is,AVE has steadily nibbled away at Compound and Maker. Then we need to analyze why this is happening. Due to the high coincidence degree of users of Lending Track, this also represents an inventory market to some extent. Therefore, there are usually two reasons for the increase in the share of AVEUsers have moved from Compound and Maker to Aave, and one reason is that the "customer unit price" of Aave itself has greatly increased. Let's start with the number of users and see if there is an advantage in the growth of the number of users of AVE.

So let's look at the total number of users. According to intotheblock data, the total number of Maker addresses is about 254K, the total number of AVE V1+V2 addresses is about 246K, and the total number of compound addresses is 472K, far more than that of AVE and Maker.

Of course, in terms of total number of addresses or total number of active addresses, the compound should have the absolute advantage. But in fact, the share is about the same as AVE, and even surpassed by AVE for a time. So, since active addresses don't explain market share, should we look at the number of real users? As follows:

Sure enough, AVE's share of de-heavy users accounts for more than 50% of the market. And has maintained a high - speed growth. And as you can see from this picture,AAVE draws on the real users of Maker and Compound. In particular, since May of this year, the real user growth of AVE and the other two has been basically the opposite trend.

Now, seeing this, we have to ask a new question,Why is AVE growing so much faster in real users than the other two? I think we can slightly explain this problem in combination with a new function in AVE V2 mentioned in the previous technical analysis, Lightning Lend V2. As I mentioned in my previous technical implementation, the AVE V2 Lightning Loan allows collateral to be traded directly. This means that in the event of an extreme move like 5.19,The lender can directly convert the collateral into stablecoin to stabilize the value of its mortgage and prevent it from being liquidated by the agreement, thus reducing its losses. At the same time, in this kind of market, the relevant institutions and agreements can also use the new lightning loan interest rate arbitrage, capture the bear market value.

Of course, for the Borrowing agreement, the most important point is the Borrowing interest rate and Lending interest rate, which are directly related to the interests of both borrowers and borrowers. So, we need to take a look at the interest rates of AVE and Compound to see if there is a big difference. Defirate shows the 30-day average for the two major lending currencies as follows:

  Borrowing Interest Rate: 

  Lending Interest Rate:

From the above two figures, we can see clearly thatThe Borrowing interest rate of AVE itself is far less than the Compound. And Lending interest rate Compound has absolute advantages. This is also in line with the situation that AVE is on the rise in the borrowing business we have seen above. In other words, a large proportion of the new subscribers of AVE are customers who borrow from the agreement. Given the recent bear market, there is plenty of room for arbitrage for both institutions and individuals, so this seems to make sense.

In addition, if only because of its merits, AVE would have been number one long ago, rather than waiting until now. So, there's another reason that can't be ignored- Problems with the Compound and Maker mechanics themselves. Compared with AVE, Compund has no bottom-up safety module itself, so when it encounters extreme market conditions, the bad debt rate is high. In order to prevent such high bad debt rate,Compound set a higher mortgage rate, which also represents a higher threshold to trigger liquidation, so the user's mortgage is easy to be liquidated, resulting in losses, as the situation on the day of 519 also testified. From May 17 to May 23, Compound liquidated total collateral of about $260 million and AVE liquidated total collateral of about $310 million. Compound and AVE had $10 billion and $13 billion worth of collateral assets, respectively. That is to say, the liquidation assets of AVE account for 2.3% of the total assets, and the Compound is 2.6%. Although the percentage difference seems small, the absolute quantity difference is huge. In addition, the compound itself does not have the agreement content to support the flash loan, so it is difficult to reduce losses in the same way as AVE.

Maker itself is positioned differently from AVE, though officials insist it is not an on-chain central bank. But it now plays a role similar to that of a central bank.Due to the bear market, the heat of the market decreases, and MakerDao's liquidation penalty is relatively large, while Yield Farming platform with a relatively simple way will naturally lose usersThis is not surprising given that USDC has been gaining momentum recently and is poised to overtake DAI in the DEFI area.

Of course, a change in the number of users is one reason for the growth of AVE. However, if the business development of the agreement itself is ignored, it will not be comprehensive enough. For a lending platform, the total amount of loans is an excellent indicator to measure the strength and market position of the platform. For AVE, Compound and Maker, the development of the total amount of loans of the three is shown in the figure below:

As you can see from the figure above,AVE's total borrowings nearly doubled in May, making it the leader. This also reflects the above analysis that AVE can help users reduce losses when they encounter a bear market. Of course, there's no denying that,The recent bundling of AVE and Polygon has also increased the market's enthusiasm for AVE. The situation in the figure above is also in line with the development path of blockchain. At the beginning of 2020, when the market was still relatively bearish, in order to pursue stable returns and reduce their own risks, people would often choose to pledge their funds to Maker to lend DAI or participate in Maker's liquidity mining, which is equivalent to that in the traditional market, bearish people are more inclined to buy national bonds. Since the third quarter of 2020, Maker has lost users because of the bull market and greater arbitrage opportunities, so people are moving to higher yielding platforms. This is also consistent with our understanding of economic laws.

In addition, in the process of searching for data, we found an interesting data, that is, there is a big difference in the composition structure of loan currency between AVE and Compound. The details are as follows:  

AAVE:

COMP:

As you can see from the above comparison, AVE supports the new Defi project more than Compound. When the market is good, there will be more arbitrage opportunities and the value of AVE itself will be further enhanced. This also explains to some extent the phenomenon that the market share of AVE grew very rapidly in the bull market in the first quarter of this year. However, the disadvantages of this approach are also obvious. In the case of extreme market conditions, AVE may collapse overnight. However, personally, due to the existence of the AVE security module, the probability of such a situation is very small.

Finally, let's take a look at the relative volume of transactions between the two businesses and see if we can find any other clues.

It is also more intuitive to see that the recent transaction volume of AVE is growing rapidly along with the influx of users. The growth of trading volume in the COMPOUND gradually slowed. This is also related to the total volume of the two. After all, the total transaction volume of Compound is much higher than that of AVE.

So far, we have tried to explain the reason why the status of AVE has soared, and we have found that the growth of its business can not be achieved without the credit of V2 Lightning Loan. So how big is the contribution of Lightning Loan to AVE? I think we can have a look at the data of last week:

Quite intuitively, the total amount of lightning lending capital business is twice the amount of conventional lending. This also proves how important the flash loan is to AVE. The subsequent development of AVE should pay more attention to the news related to Lightning Loan, as well as the official strategy of AVE.

Summary & have spent

It can be seen that the pace of AVE is very aggressive among a number of lending platforms, especially after the launch of V2, the function of flash lending becomes more powerful, and meanwhile, it also increases the risk of creditors. At the same time, debt toenization turns debt into tokens to achieve functions similar to convertibles. Whether it will be involved in the subprime problem still needs further observation. However, the target users of AVE are not only individuals. Many functions of AVE are targeted at institutions. At the same time, through its own unique security module, it cooperates with currency holders to take advantage of extreme market conditions.So the system itself is relatively robust. The market performance of 5.19 AAVE is a good example.

In contrast, the AVE team has been very solid in compliance, getting an EMI license in a country with strong financial regulation such as the U.K. (prior to AVE, only Coinbase and Revolut had this license). Moreover, I have been trying to conduct in-depth cooperation with traditional financial institutions to broaden my business lines (such as the cooperation with the real estate token platform Realt) and improve my ability to resist risks. This is rare in a group of DeFi projects that boast of being "unconventional".

It is this kind of code of conduct that makes ETHLEND reborn and AVE rise to power.

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