Is AAVE a Good Investment in 2023? (On-chain Data Analysis)

aave analysis crypto defi Nov 09, 2022

Wanna Know if Aave is a Good Investment?

So, you wanna know if Aave is a good investment in 2023? Well, you came to the right place! This article will explain what Aave does, how it compares vs its competitors, and what the on-chain data says about its future price. If you've never heard of Aave before, or you've never used it, you're in for a treat!

What Exactly is AAVE Anyway?

Aave protocol is a decentralized lending platform built on Ethereum that allows users to earn interest on their crypto assets. Aave also allows users to take out loans against their crypto assets. On Aave you can do the following things:

Earn interest on your crypto assets. With Aave, you can earn interest on your crypto assets by lending them to other users. This is a great way to earn passive income on your crypto holdings.
Take out loans against your crypto assets. Aave also allows you to take out loans against your crypto assets. This can be useful if you need to borrow money but don't want to sell your crypto.
Get access to a decentralized lending platform. Aave is a decentralized lending platform built on Ethereum. This means that it is not subject to the same regulations as traditional lending platforms.
Use your crypto assets as collateral. With Aave, you can use your crypto assets as collateral for loans. This can be useful if you need to borrow money but don't have any traditional collateral.

How Does Borrowing/Lending Work on Aave?

Aave is a good investment because it allows lenders and borrowers of digital assets to connect via smart contracts (i.e. no middle man). Users of the Aave platform deposit their crypto and earn interest in order to connect with borrowers in a trustless manner.

The lender locks their crypto in a public, security-audited Ethereum smart contract, from which the platform's borrowers receive funds. The lender earns interest payments based on the amount of time they lend their funds out, and rates may vary based on market conditions. They can remove some or all of their crypto whenever they desire.

This mechanism is facilitated by issuing borrowers an equal amount of aTokens for their loan. The aTokens are pegged to the value of the borrowed asset (for example, ETH would be referred to as aETH). These tokens are issued to borrowers after they deposit the same amount (or more) of the crypto they wish to borrow. Interest is included in the aToken's code, so that the Aave knows how much to lend.

A borrower can take as long as they want to repay their loan, but the longer they take, the more interest they will owe. In addition, a health factor is calculated for each asset that is posted as collateral, representing the security of the asset against the asset borrowed. If the health factor dips below 1.00, then Aave will seize the collateral.

What is Aave staking?

The Aave staking mechanism is designed to guarantee the safety of the protocol. It works by allowing stakers to deposit their Aave tokens into the "Safety Module," which is a smart contract programmed to cover losses in the platform in the event of a shortfall. In other words, Aave will use stakers' funds to shore up any losses the protocol might experience during a liquidity crisis (i.e. collateral asset failure, oracle malfunction, hack, etc), and in return for taking such risk, stakers are awarded an APY on their Aave tokens. This focus on financial stability is another reason why Aave is a good investment.

Stakers are provided with a derivative token called stkAave when they stake. This token (stkAave) can be transferred and used in other protocols across the Defi ecosystem to earn additional rewards, but in order to unstake their Aave from the safety module stakers must turn in their stkAave tokens first. In addition, there is a seven day "cooling period" that stakers must wait before they can unstake their Aave tokens.

Does Aave Have Competitors?

One of the reasons why Aave is a good investment is because it provides critical infrastructure to the decentralized financial system, namely the ability to lend, borrow, and earn interest on digital assets. However, Aave does have competitors. Their most notable competitor is MakerDAO, which is a token also worth researching for potential investment.

MakerDAO is a decentralized autonomous organization that creates and maintains the Dai stablecoin on the Ethereum blockchain. The Dai stablecoin is pegged to the US dollar and is designed to minimize the volatility of cryptocurrency prices.

On MakerDAO, you can:

Create Dai. You can use the Dai stablecoin to hedge against cryptocurrency price volatility or to make purchases without having to convert your cryptocurrency to fiat currency.
Maintain Dai. You can help maintain the value of Dai by participating in the Dai Stability Fee. The Dai Stability Fee is a fee that is charged to Dai holders in order to incentivize them to hold Dai and help maintain its value.
Earn Dai. You can earn Dai by participating in the Dai Savings Rate. The Dai Savings Rate is a interest rate that is paid to Dai holders who lock their Dai in the Dai Savings Rate contract.

Is AAVE a Good Investment? What Does the On-Chain Data Say?

(Note: Check out our on-chain metrics post to find out what they are and how to interpret them).

Let's examine 7 key on-chain metrics which will help us determine whether Aave is a good investment or not. If you want to know more about the software we are using for this analysis, read our post on nansen.ai.

On-Chain Metric #1: Smart Money Activity (30d)

Smart money has been accumulating over the last 30 days = bullish

On-Chain Metric #2: Top Exchanges Inflow/Outflow (7d)

Top Exchanges showing higher outflow than inflow last 7 days = bullish

On-Chain Metric #3: Tokens on Exchanges (60d)

Tokens on exchanges showing sideways trend last 60 days = neutral

On-Chain Metric #4: Token Balances (Exchanges vs Dex Traders)

Exchanges > Dex Traders + slight divergence = bullish

On-Chain Metric #5: Top Balances (30d Negative Change)

Top sellers keeping bags at 100% rate last 30 days = bullish

On-Chain Metric #6: Seniority Distribution

Majority of tokens being held by long-term holders (1year+) = bullish

On-Chain Metric #7: Unique Addresses for Token

Unique address count showing steady long-term uptrend = bullish

So, is AAVE a Good Investment or Not?

Well, Aave scored a 6.5 out of 7 in our analysis of the current on-chain data. This is almost a perfect score! This is considered a very bullish rating. If we add this to the fact that Aave has very strong fundamentals, and a proven track-record of delivering technology that provides critical infrastructure to the Defi ecosystem, we can easily conclude that Aave is a good investment. We know the DAO has plans to continue expanding its partnership with various industries and to continue building integrations with popular blockchain networks. Aave has a strong team of developers and a passionate community, so, in our opinion, it has the potential to become the standard for decentralized banking in the blockchain space. In short, yes, we think Aave is a good investment in 2023!