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Aave Defies Expectations But May Be Getting Overheated

Aave continues to surpass expectations from an investment standpoint and in terms of progress in the underlying protocol, but on-chain data shows holders may be preparing to take profits.

Aave recently achieved over $5 billion in total value locked, becoming only the second protocol to achieve this feat. Having nearly doubled in TVL within a month, Aave is closing in on Maker for the number one spot in DeFi.  

As of February 11, 2021 using IntoTheBlock’s DeFi Insights

Aave also launched the functionality for users to stake through a Balancer Pool Token, earning depositors both AAVE and BAL tokens simultaneously in addition to trading fees. The pool will be allocated 550 AAVE/day pro-rata, increasing the total supply emission to 1,100 AAVE/day.

Aave had already previously increased safety incentives obtained from staking by 37.5%. It is important to note, though, that this also introduced the risk of slashing, where depositors could lose as much as 30% of their capital in the event of a liquidity shock. 

AAVE is Leaving Both CEXs & DEXs

A good sign to gauge investor positioning is whether investors are depositing or withdrawing their funds from exchanges. Netflows, which take the total amount deposited minus the capital withdrawn, provide an indication of trading activity in this sense. 

As of February 11, 2021 using IntoTheBlock’s Aave Exchange Flows

In AAVE’s case, the number of tokens leaving centralized exchanges has accelerated as evidenced by the negative netflows. This suggests that more funds are being held outside exchanges or staked than entering to potentially be sold at lower costs (given the current high gas fees).

By observing DEX flows we obtain a clearer picture of the activity taking place. When applied to DEXs, negative netflows mean that users are swapping into a token and withdrawing it from AMMs’ liquidity. 

As of February 11, 2021 using IntoTheBlock’s DeFi Insights

The most liquid DEX trading pair for AAVE, the AAVE/ETH pool has had mostly negative netflows throughout the past month. In other words, traders have been favoring AAVE in the pool, swapping more ETH for AAVE than the other way around. 

Potential Profit-taking Following a Parabolic Run

Diving even further into on-chain data, potential signs of holders looking to take profits are starting to emerge. Aave’s staking contract — which requires users to go through a cooldown period of 10 days prior to withdrawing funds — has been experiencing a decrease in its token balance over the past couple of weeks. 

Source: Etherscan

While this trend has not yet materialized, it does suggest that holders may be looking to take profits following a remarkable 480% price increase year-to-date. 

Moreover, signs of AAVE getting overheated appear in derivatives markets. Perpetual swaps’ funding rate is charged to either long or short contract holders to push the perp’s price towards the spot price. When the funding rate goes too far in either direction, it can be indicative of an over-extended price move. 

As of February 11, 2021 using IntoTheBlock’s Aave Derivatives

In this case, AAVE’s funding rate in Binance has constantly been positive, meaning that long holders pay this percentage to short holders every 8 hours. This fee has been increasing as AAVE’s price pushed towards new highs. 

While this does not mean there is an imminent correction coming, it does point to trading activity on the long-side getting overheated and should be taken as a sign of caution, especially as funds leave the staking contract.