Blue-chip DeFi New Narrative Reviewing the Fundamental Data of Aave and Compound

Author: Jill, LD Capital

Introduction

Recently, the announcement of Compound founder Robert establishing a new company focusing on the securitization of US Treasury bonds on the blockchain has ignited the narrative of Real World Asset (RWA) tokenization, causing the price of Compound token COMP to skyrocket. In addition, RWA leader MakerDAO and lending leader Aave have also experienced significant price increases recently.

Compound and Aave have similar product forms, and we have already published MakerDAO related business data before, so this article mainly reviews the fundamental data of Aave and Compound from three directions: lending business, token issuance, and protocol revenue and expenditure.

Summary

Aave’s fund size is 2.6 times that of Compound and it is currently the largest protocol in the DeFi lending field. Although Compound was the first protocol to propose the money pool lending model, its conservative team and lagging business expansion have led to weak subsequent development. Aave, on the other hand, seized the opportunity of multi-chain development and its team is innovative, allowing it to surpass Compound.

The security of DeFi protocols is fundamental to project development, and reducing potential protocol risks is the most important task for the team. Both Aave and Compound have risk isolation measures in their product designs, but Compound’s current approach is more aggressive, directly reducing the complexity of the protocol and isolating each asset pool based on different underlying assets, which also means that Compound has given up a portion of the market share of altcoins as underlying assets. Aave, on the other hand, tends to be a comprehensive and universal lending protocol, seizing more market share, and isolating new assets from the core asset pool to reduce potential risks associated with new assets as collateral.

In terms of risk control measures, both have introduced reserve funds as a remedy when the protocol incurs debt losses. In addition, Aave has an embedded security module, in which token pledgers provide security for the entire protocol, not only empowering the protocol token but also locking a portion of the token’s liquidity to reduce market inflation.

In terms of token issuance, both currently have relatively low token issuance, and the impact of token selling pressure on the secondary market is minimal. Aave is a protocol that has been launched earlier, with a token circulation rate of 90.5%, but the security module locks a portion of the token’s liquidity. Compound pioneered liquidity mining, but this method brings liquidity that participants can immediately sell when they obtain substantial returns, which has a significant impact on the protocol. Therefore, Compound has changed its liquidity incentive measure and distributed tokens to real users. Currently, the token circulation rate is 68.6%.

The prices of COMP and AAVE tokens have both experienced significant increases recently due to the narrative of RWA. However, in reality, the founder of Compound’s new company is still in the application stage, and Aave’s RWA fund size is only $7.65 million, which is only 0.3% of the fund size of RWA leader Maker.

From the perspective of protocol revenue and expenses, Aave has a more diverse source of income, and all the interest on loans for stablecoin GHO goes to the treasury. From the trend of treasury revenue, it can be seen that after the last bull market, Aave’s protocol revenue sharply decreased. However, the current protocol revenue is able to cover protocol expenses, while Compound still needs to be supplemented by COMP token rewards. Compound has a relatively single source of revenue, and Aave’s protocol revenue is about 4 times that of Compound.

I. Product Basics

1. Product Version

The initial version of Aave was peer-to-peer lending, but it was later redesigned due to low lending matching efficiency, taking inspiration from Compound’s money pool lending model to provide high liquidity. Aave is currently in version 3 (V3), which aims to provide higher capital efficiency, increased security, and cross-chain lending functionality.

Higher capital efficiency refers to the efficient mode (eMode), which categorizes assets and sets risk parameters based on asset types. When the collateral of the borrower is the same category as the loaned asset, a higher loan amount can be obtained. Increased security refers to the isolation mode, where newly listed lending assets are first placed in isolation through on-chain voting. Assets in this mode have a debt limit, and when used as collateral, only approved stablecoins are allowed to be borrowed, with the aim of listing more long-tail assets while ensuring protocol security.

All of the above features are currently available in V3, while the cross-chain lending (Portal) feature reached deployable status when V3 was released in March 2022. However, due to security considerations, the team has been cautious about the official deployment of this feature and it has not been deployed to date. This is because Aave’s cross-chain lending is not controlled by the Aave protocol itself, but instead introduces a third-party cross-chain bridge protocol.

Compound was the first DeFi protocol to propose money pool lending, allowing for mutual borrowing between mainstream cryptocurrencies. However, in V3, it deviates from the previous generic lending approach and isolates each asset pool based on the underlying assets. This is also to isolate pool risks at the architectural level and avoid irreparable losses to the protocol due to potential risks associated with individual assets.

Specifically, in Compound V2, the protocol allows users to freely deposit (collateralize) or borrow supported assets. Collateral assets are self-explanatory, while underlying assets are the assets that users lend. In Compound V3, each pool will have only one unique underlying asset, but collateral assets are not restricted. The first underlying asset pool launched in V3 is USDC, allowing users to collateralize mainstream cryptocurrencies and borrow the stablecoin USDC.

2. Lending Business

When choosing a lending protocol, the primary consideration for users is the security of their assets. Under the premise of fund security, users generally prefer protocols with larger fund sizes because a larger fund size usually means better liquidity. In addition to this, other factors to consider include which side has a more advantageous interest rate, supports more asset types, lending incentives, etc. We will compare the two protocol products from the above dimensions.


The TVL data comes from defillama.com. After the last bull market, the overall size of DeFi protocols has experienced a significant retreat. Compound and Aave are the leading protocols in the DeFi lending field. Currently, Aave’s funds are 2.6 times that of Compound, making it the largest protocol in the lending field.

Both Aave and Compound are now deployed on multiple chains. However, Aave entered chains like Polygon as early as 2021 and is also in a leading position on other chains, occupying a larger market share. Compound, on the other hand, only started deploying on other chains this year. Nevertheless, the Ethereum chain remains the main lending venue. Aave supports more types of altcoins, but some tokens have been frozen due to potential risks, so the number of supported tokens is currently similar to that supported by Compound V2. Compound V3 supports very few asset types. The USDC basic market collateral includes ETH, WBTC, COMP, UNI, and LINK, while the ETH market collateral only includes wstETH and cbETH. And Aave has supported stETH as collateral since February 2022, but Compound only started supporting wstETH and cbETH in January this year. From this perspective, Compound is making slow progress in multi-chain development, while Aave is more aggressive in business expansion, gradually widening the gap between them.

Both use dynamic interest rate lending, with Ethereum blocks as the interest calculation unit, with Compound taking the lead. The core of the interest rate model is the utilization rate of funds, which is calculated based on market borrowing demand and the algorithm is not significantly different. When the utilization rate is high, the interest rate will also be higher, and both introduce optimal interest rates, that is, when the utilization rate reaches a certain threshold, the borrowing interest rate will increase sharply to restrict borrowing and prevent liquidity depletion. The fund utilization efficiency of stablecoins and altcoins in Aave is higher than that in Compound.

In terms of the fund pool model, both have measures for risk isolation. However, Aave’s fund pool still uses the full pool risk model, but for the sake of protocol security, newly listed assets will enter the isolation mode first, reducing the risk of the asset being used as collateral by setting specific risk parameters and specific underlying assets. In Compound V3, each asset pool is isolated based on different underlying assets, isolating risks from the system architecture level. However, it also means that Compound has given up some market share of altcoins as underlying assets.

To address potential risks that may occur in the system, Compound introduces the concept of “reserve.” The system will use the reserve coefficient to allocate a portion of the loan interest as a reserve to cope with protocol losses. In addition to collecting reserves, Aave also uses a safety module to backstop the protocol. That is, AAVE token pledgers will bear up to 30% of the protocol’s security risks. In return, pledgers can receive AAVE token rewards and protocol income dividends.

Compound is a protocol that pioneered the concept of liquidity mining, with COMP tokens as rewards, which are currently gradually decreasing. The Aave protocol went online relatively early, and its tokens are basically in full circulation. Currently, it can only collaborate with other projects to incentivize liquidity, such as the collaboration with Polygon in June 2021, providing over $85 million in token rewards for Aave Polygon market liquidity mining.

3. Other Businesses

Stablecoins: Aave’s stablecoin GHO went live on the mainnet on July 15th, with a borrowing interest rate of 1.5%, making it more competitive than other stablecoins. GHO interest income will be fully owned by the treasury. Within two days of going live, the total amount borrowed in GHO reached 2.21 million tokens, and the large-scale minting of GHO needs to pay attention to the team’s follow-up measures to promote liquidity. Compound currently has no plans to issue stablecoins.

RWA: Aave is the second DeFi protocol to introduce RWA assets after Maker. It collaborates with Centrifuge Tinlake, and the RWA market operates separately from the Aave lending market. The current fund size is approximately $7.65 million, which is far from Maker’s $2.3 billion scale. Currently, only the USDC market can provide deposit and borrowing APY, while other markets no longer provide it. Users who pass KYC only need to deposit USDC in the USDC market to receive a basic annualized return of 2.83% and a wCFG liquidity mining yield of 4.09%.

On June 29th, the founder of Compound announced that the company has submitted the establishment documents of Superstate, a bond fund company, to the U.S. Securities and Exchange Commission. However, it is still in the application stage.

Source: Aave official website

In terms of the development of lending businesses, although Compound pioneered the capital pool lending protocol, its team is relatively laid-back, resulting in weak subsequent development and lagging business expansion. On the other hand, Aave seized the opportunity of multi-chain development and has an innovative team, gradually pulling ahead of Compound. The latecomer takes the lead.

II. Token Demand and Emission

In July 2020, Aave released a new version of its economic model, replacing the original LEND token with AAVE at a ratio of 100:1. The LEND token is in full circulation. The total supply of AAVE tokens is 16 million, of which 13 million are available for the conversion of the original LEND tokens, and the remaining 3 million are for protocol issuance, used for Aave’s ecosystem reserve.

The main use cases of AAVE in the protocol are governance and staking. Aave has a built-in Safety Module (SM) component, where token holders can stake their funds to provide a backstop when there is a debt shortfall in the Aave protocol. In return, stakers can receive AAVE token incentives and share in the protocol’s revenue.

From the official website’s staking interface, it can be seen that the current daily emission of AAVE tokens is 1,100, which, based on the Coingecko price of $80.56 on July 15th, is worth approximately $886,000. The current circulating supply of AAVE tokens has reached 90.52%.

Source: Aave Official Website Pledge Interface

The Compound token is COMP, which was officially launched in June 2020 with a total supply of 10 million coins. COMP is the governance token in the Compound protocol and is mainly used for participating in protocol governance (proposal voting) and as liquidity incentives for the lending market. The initial distribution plan for COMP is as follows:


The current continuous unlocking pressure on the token mainly comes from the founders and team, as well as the portion allocated to users, where the distribution plan for the founders and team is unclear, and the portion allocated to users is mainly for incentivizing lending activities.

According to the proposal passed on July 15, 2023, the incentives for users participating in the USDC and DAI borrowing and lending markets in the V2 market have been reduced from 161.2 COMP to 111.2 COMP. The total reward for the V2 market lending is 111.2 * 4 = 444.8 COMP per day (0.015 COMP per block for borrowing and lending market rewards respectively). The simultaneous proposal reduces the borrowing reward for the V3 lending market from 481.41 COMP to 381.41 COMP, and increases the supply reward from 0 to 100 COMP per day, shifting the borrowing incentive to the supply market. Therefore, the total reward for the V3 market is still 481.41 COMP.

According to the above proposal, the current deterministic daily emission of COMP is 926.21 coins, which, based on the price of $74 on Coingecko on July 15, is worth about $685,000, and the current circulating supply of COMP tokens has reached 68.56%.

As DeFi protocols that have been launched relatively early, Compound and Aave currently have relatively low token emissions, so the token selling pressure has a relatively small impact on the secondary market price. The tokens of both protocols are mainly used for governance and incentives for protocol users. The difference is that Compound distributes tokens to users who actively participate in lending activities to attract liquidity, while Aave incentivizes token holders to pledge their tokens. On one hand, this can provide a backstop for protocol debt, and on the other hand, it can reduce token inflation. Currently, there are approximately 4.68 million tokens pledged in the safety module, so the actual circulating supply of AAVE is around 61.3%.

III. Protocol Revenue and Expenditure

The Aave treasury consists of system reserves and treasury collectors. The sources of income for the Aave protocol are as follows: 1) the interest rate spread on deposits and loans, which varies depending on the lending market rates; 2) flash loan fees, which are typically 0.09% of the borrowed amount, with 30% going to the protocol treasury and the remaining 70% distributed to depositors; 3) GHO coin minting revenue; 4) in V3, there will also be instant liquidity fees, liquidation fees, and portal fees paid through bridging protocols, but the latter two have not been activated yet.

The Aave treasury currently has an accumulated value of $130 million, of which $91.5 million (1.2 million tokens) is in the form of AAVE tokens as the ecosystem reserve, and the remaining $25.8 million is in stablecoins.

Source: llama.xyz

The above data is from llama.xyz, an officially recognized website by Aave. However, the data on this website is only available from January 2022. Taking the income and expenditure in June 2023 as an example, the monthly expenditure (token incentives) is $1.5 million, the monthly income is $2.4 million, and the surplus is $900,000. This data is consistent with the data from Token Terminal.


The source of income for the Compound protocol is only the interest rate spread for borrowing and lending. Since there is no officially provided statistical website, Token Terminal data is used as a reference to maintain consistency.

Source: Token Terminal

In Token Terminal’s calculation, protocol revenue = fees paid for borrowing – interest on deposits (supply-side fees), and earnings are equal to protocol revenue minus liquidity incentives.

The revenue of the Aave protocol gradually increased since May 2021, reaching its peak from September to November 2021. Afterward, the revenue gradually declined. By April 2022, the monthly revenue was significantly reduced to $1.9 million. By October 2022, the monthly revenue was only $860,000, which is 12.6% compared to the peak period ($860,000/$6.8 million * 100%), and it continues to decline. Starting from March 2023, the protocol revenue began to recover, reaching $1.3 million per month.

Earnings are related to token price and the quantity of tokens distributed. The higher the token price, the lower the earnings. By December 2022, the protocol revenue was already able to cover the token incentive expenses. The main factor affecting this is the decline in AAVE token price. So far, starting from December 2022, the protocol has started to generate a surplus.

Source: Token Terminal

Since January 2021, the revenue of the Compound protocol has gradually increased, with its peak in March to April 2021, with a monthly revenue of around $5 million. Starting from February 2022, Compound’s revenue has dropped significantly, maintaining a monthly revenue of around $1 million. By May 2022, the revenue dropped to $460,000 and has been declining ever since.

Compound pioneered the borrow-and-mining model, with a relatively high level of token incentives. Therefore, the earnings are lower. After April 2022, Compound changed its token incentive model, gradually reducing COMP rewards, and the COMP token price also experienced a significant decline. As a result, earnings gradually recovered. However, the current protocol revenue is far from covering token incentive expenses.

Source: Token Terminal
Source: Token Terminal

According to LinkedIn data, Aave currently has 98 employees, while Compound has 18 employees. The number of employees at Aave is five times that of Compound, and personnel expenses could be much higher than Compound.

From the income of the two protocols, it can be seen that Aave’s income sources are more diversified, while Compound’s income is relatively single. If we only consider the income from the protocols, based on the income in June, Aave’s monthly income is 4.4 times that of Compound (105/24.5). Aave’s protocol income is already able to cover token incentive expenses, while Compound is still subsidized by COMP tokens.

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