How $11bn Aave beat crypto’s summer slump

A version of this article appeared in our The Decentralised newsletter on September 17. Sign up here.

GM, Tim here.

• What’s behind Aave’s recent success?
• DeFi user scoops rare CryptoPunk NFT at 99% discount.
• Coinbase launches a DeFi-compatible version of Bitcoin.

DeFi’s dark horse

DeFi lending protocol Aave is booming.

It recently surpassed EigenLayer, becoming the second-biggest DeFi protocol behind liquid staking giant Lido.

Investors have piled into the protocol’s token, pushing it up 28% since the start of the year, outperforming tokens of other major DeFi protocols like Uniswap and Sky, nee MakerDAO.

The recently announced Trump DeFi project, World Liberty Financial, chose to build on top of Aave. If successful, WLF could boost Aave’s $11 billion of deposits — and profits.

How has Aave kept DeFi users hooked during the summer slump while other protocols faltered?

There’s three main reasons:

It’s simple

The concept of a lending protocol is straightforward: Deposit your crypto to earn a yield, paid by those borrowing your tokens.

Aave was the first DeFi lending protocol, which established its dominance. Careful development from its founding company Avara and its DAO have helped it maintain that lead.

In-demand

No matter which way the crypto market turns, there will always be those looking to bet on it. As Aave has the most deposits, it’s the first stop for traders, especially whales, looking for leverage.

Analysis from Bernstein said demand for services like those offered by Aave will increase as US interest rates fall.

It makes money

While DeFi protocols are controlled by decentralised governance structures like DAOs, they still have expenses — and that means they must make more money than they spend.

Aave is among a handful of protocols that reliably make enough to cover their expenditures. It’s projected to bring in $54 million in revenue over the next year, per DefiLlama data.

That’s a steal

The NFT market is a ghost of what it once was.

This lack of interest recently created a unique opportunity for a DeFi user to snag a coveted NFT at an extreme markdown.

The NFT in question, ape CryptoPunk 2386, was previously fractionalised on defunct DeFi protocol Niftex.

Fractionalisation means the NFT was broken up into 10,000 fungible tokens, or “shares.”

The way the platform worked is that anyone could propose a buyout of a fractionalised NFT. Those holding the shares are given a 14-day period from when the offer is made to accept or reject it.

Two weeks ago, someone made an offer to buy the Punk at 0.001 Ether per share. Nobody holding shares noticed the low-ball offer and the NFT sold for 10 Ether — about $23,000.

An ape CryptoPunk sold at the start of September traded hands for over $1.4 million.

NFT Valuations, a site that uses market data to estimate rare NFT prices, values Punk 2386 at between $1 million and $4.5 million.

Coinbase launches cbBTC

Coinbase has rolled out cbBTC — a DeFi-compatible version of Bitcoin designed to compete with Wrapped Bitcoin.

Since its Friday launch, cbBTC has soared to a $100 million market value.

Adoption could provide a much-needed boost to Ethereum’s ailing DeFi ecosystem.

Despite Bitcoin hitting an all-time high in March, deposits to Ethereum DeFi protocols have lagged behind their 2021 levels.

And cbBTC has a large pool of potential users.

Coinbase customers store approximately one million coins on the exchange, worth some $58 billion, says an analysis by blockchain data platform Arkham Intelligence.

While around $40 billion of this amount is Bitcoin the exchange holds on behalf of exchange-traded fund issuers like BlackRock, some $18 billion is held by retail and institutional customers.

This week in DeFi governance

VOTE: Arbitrum mulls update to reduce MEV spam

VOTE: Aave to onboard Coinbase’s cbBTC token

VOTE: TrueFi DAO rejects Cicada Partners split proposal

Post of the week

With the Token 2049 and Solana Breakpoint conferences flooding the timeline this week, Crypto Twitter comes out with some humorous conference “life hacks.”

What we’re watching

World Liberty Financial has finally released details about its WLFI token distribution:

• 20% will go to the project’s founding team, which includes the Trumps.
• 17% will be set aside for user rewards.
• The remaining 63% will be made available through a public sale.

That’s in contrast to earlier documentation and code tests that showed the founders’ share at 70%.

Got a tip about DeFi? Reach out at tim@dlnews.com.