AAVE — Valuation (Based on AAVE V2 Data operating on EthL1)
Since it is actually possible to carry out some sort of fundamental analysis for tokens, considering these protocols are actually generating revenues that can be tracked on chain, I thought I’d try valuing AAVE using a Discounted Cash Flow valuation methodology, using projected cashflows from all of AAVE’s revenue streams for the next 5 years (spread, flash loans, loan origin fee) to calculate NPV using total supply.
· TVL per asset (Deposits) and Flash loan usage grow at a rate based on historical trends. Assuming an incoming bear cycle, assumption is that the growth rate will decrease for the next 2 years before increasing.
· Utilization rate will be assumed to be ~15% less than current rates for assets with rates >80% and for assets less than 80%, utilization rate will be considered to be current figures.
· APY’s will be taken as the current rates (now) as all-time average rates produce unrealistically high interest payments.
· Discount rate used is 40% (a conservative estimate considering BTC has given an average return of ~160% since 2019)
· Terminal Multiple to be present P/E ratio (176X)
· Revenues that are distributed to liquidity providers, and depositors will not be taken into consideration.
AAVE has 3 revenue streams: Spread from lending and borrowing assets, fees from flash loans, and origin loan fees.
Spread = Interest earned on loans — interest paid on deposits.
Flash loan Revenue= Total Flash loans x Flash loan Fee (0.09%)
Origin Deposit Fees = Total new loans x Fixed fee (0.00001%)
Summary and Insights
While carrying out this valuation method, it occurrs to one that crypto-assets do have intrinsic value (although currently heavily based on assumptions) that can be proven through pure cashflows. Based on quite conservative growth numbers, considering close to only 37,000 cumulative daily users of the platform currently exist, the outcome of the model is quite optimistic. AAVE currently is trading at a price of ~$295 (edit: at the time of publishing the price of the token was ~$408), at the time of writing this, and my valuation analysis puts AAVE’s intrinsic value at around ~$394 based on 5 years of projected future cash flows. Most of AAVE’s short term price movements follow BTC and ETH, in my opinion, but with growing revenues, the long-term price will reflect true cashflows and real value. If AAVE were to distribute this revenue to token holders in the future, it could push the price up even further. I am bullish on AAVE, with my valuation analysis indicating that AAVE is undervalued currently, with respect to its current market price.
A very interesting point to note is that AAVE V2 has a cumulative total user count of only 37,000 — which gets me really excited as to what the future can possibly hold for AAVE revenues when retail investors get some form of access (easier UI’s, Crypto AMC’s). At a total no. of users of 37,000 — AAVE V2 generated around 20Mn USD worth of protocol revenue. The growth in users has been stark, with liquidity mining programs being a high incentive for De-Fi users to initially migrate to the platform and deposit and borrow funds — with most realizing the true utility of AAVE once they get here. In Jan 2021, the total cumulative users stood at 4200. 6 months later, it has increased almost 800% to 37,000 users. In May, post the heavy dip in the market, AAVE stood strong with users almost doubling from 20,000 then to 37,000 now.
Stablecoins are the most popular asset class on AAVE, in terms of liquidity and borrowing. According to Dune Analytics, USDT is the most borrowed asset on AAVE V2 — with 63.2% of the total borrows. USDC comes in next at 16%. My hunch for this extreme borrowing pressure for USDT is that the Stablecoin has its issues with respect to its reserves, and audits. There is a lingering feeling that USDT may lose its peg, sending the loaned value for most users shooting downwards.
AAVE seems to have loads of upside potential, with an active community, growing user base, a flowing governance and AIP model — and decent security with its staking module. With AAVE Pro coming soon to provide institutional access to De-Fi, and rumors of a decentralized version of twitter in the works, there is a lot to look forward to for AAVE enthusiasts, as well as in regard to the potential future use cases of the AAVE token.
Sources of Data for Model: