Aave Token Price Takes a Hit, but Promising Fundamentals Indicate a Potential Recovery

The Aave token (AAVE) experienced a significant decline of 17% between July 30 and August 1, with its price dropping to $62. Although the token has managed to bounce back slightly to $64.40, it is still 12% lower compared to its daily close on July 30. Investors are now questioning whether this decline is indicative of a more cautious sentiment towards the decentralized finance (DeFi) sector or if there are other factors at play affecting the Aave token price.

One of the contributing factors to the recent movement in the AAVE token can be attributed to the risks associated with cascading liquidations on DeFi protocols due to the Curve Finance pool exploit that began on July 30. However, Aave’s decentralized liquidity protocol has successfully weathered similar scenarios in the past, and the protocol currently boasts a substantial $295.6 million deposited in its Safety Module, indicating its resilience.

It is worth noting that Michael Egorov, the founder of Curve, holds a significant $76.6 million loan backed by 357.3 million Curve DAO (CRV) tokens across three DeFi applications. This represents 40.5% of the entire CRV circulating supply and raises concerns about potential liquidation repercussions on major protocols like Aave.

18/ Update: Having paid down some of his loans, Egorov has managed to significantly reduce his liquidation price points.

*Note on his Fraxlend position: Utlization has fallen to 37% so the APY should continue to decline* pic.twitter.com/LUyeopWRMp

— Delphi Digital (@Delphi_Digital) August 1, 2023

According to Delphi Digital data, Egorov holds 267 million CRV tokens, securing a 54.2 million Tether (USDT) loan. The current liquidation price for the CRV token stands at $0.37, with a 55% liquidation threshold. While this appears relatively secure at the moment, Egorov is paying a significant 50% APY for this loan.

Aave’s Concerns: Stablecoin Trading and Total Value Locked

One ongoing concern impacting AAVE’s token performance is the stablecoin GHO, which has been trading below the $1 peg since its launch on July 16. The low fixed-rate borrowing associated with GHO dissuades borrowers from holding the token, as they seek higher yields in other stablecoins. This selling pressure results in the depegging of the GHO stablecoin on decentralized exchanges.

Despite this concern, the Aave protocol currently boasts a total value locked (TVL) of $5.1 billion across six chains. However, it recently experienced a 12.5% decline in TVL within just one week, while protocols like Uniswap and Compound remained relatively stable. Aave’s annualized revenue of $12 million falls short compared to competitors like Convex Finance and Radiant, which have revenues of $52 million and $20 million, respectively.

Recent Events and Aave’s Resilience

In May 2023, the older version of the Aave protocol (v2) encountered a bug that temporarily hindered users from withdrawing $110 million worth of assets on the Polygon Network implementation. However, the issue was promptly resolved within a week, and no funds were reported lost.

Another contentious event on Aave occurred on June 12 when a proposal was introduced to prevent a specific account, belonging to Curve founder Egorov, from accumulating further debt. This raised debates among participants, with some questioning its impact on the principles of censorship resistance and “neutrality” in DeFi.

Despite the recent decline in the AAVE token’s price and TVL, Aave’s decentralized application remains a strong contender in the DeFi space. With a robust insurance fund and competitive protocol fees, Aave is well-equipped to navigate market fluctuations and potential risks. Its higher fees compared to competitors could pave the way for future revenue growth. Overall, Aave’s solid foundation and significant TVL showcase its resilience and potential for continued success.

This article is for general information purposes only and should not be taken as legal or investment advice. The views expressed here are the author’s alone and do not necessarily reflect the views of Cointelegraph.