Aave Liquidity Mining Catapults Lender to Become Top DeFi Protocol

On-Chain Markets Update by IntoTheBlock

Almost a year since the initial release of COMP fueled DeFi Summer, Aave’s governance voted to implement a similar incentive program. The effects were just as momentous. Aave’s total value locked more than doubled within less than two weeks. 

As of May 5, 2021 through IntoTheBlock’s DeFi Insights

This sharp increase took Aave from fourth largest TVL to second within a couple of weeks. Moreover, it is worth noting that TVL for Aave and Compound subtracts the amount borrowed from the protocol, whereas Maker’s TVL does not deduct the DAI issued. 

The reason for this is that TVL measures the amount of available liquidity in a set of smart contracts. In the case of Aave, the liquidity deposited from one user can be loaned out to a borrower. In Maker, on the other hand, depositors’ collateral remains untouched as DAI is minted for loans rather than relying on other users’ supplied funds.

In terms of total liquidity, Aave has grown into the largest protocol with $14.33 billion supplied across its three sets of markets. Another key driver for this growth has been its Polygon market, propelled by the MATIC liquidity mining incentives. 

Polygon’s liquidity mining program was received with immediate support from large players in DeFi. This is apparent from the $2 billion in assets supplied to pools on Polygon the day prior to rewards kicking off on April 14. 

The increase in liquidity, while impressive, only considers the supply-side of the equation. Equally important, or perhaps even more so, is the growth Aave registered in its borrowing activity. 

The total amount of loans outstanding in Aave has increased by approximately 7x within a month to $4.72 billion. Tied to the growing borrowing demand, the fees accrued by Aave have grown substantially.

As of May 5, 2021 through IntoTheBlock’s DeFi Insights

Aave’s projected yearly revenues have reached over half a billion. This figure excludes interest fees from Polygon market, meaning that its fees are even higher. Based on Crypto Fees, Aave is now the second largest grossing DeFi protocol, only behind Uniswap.  

The recent liquidity mining program approved on AIP 16 is expected to last at least until July 15, 2021 with the possibility of being extended by governance vote. While incentive schemes like these are still in an exploratory phase, their impact cannot be understated. 

Liquidity mining arguably creates a positive feedback loop for Aave and its token holders: token rewards incentivize activity (either lending or borrowing) on Aave, thus improving Aave’s liquidity and revenues. This then leads to higher potential value being accrued through AAVE’s governance token, which in turn encourages even more activity in its pools. Overall, this effectively aligns token holders’ and the protocols’ best interest, and if executed correctly could further grow Aave beyond crypto-natives.