This deep dive has been written by Francisco Cuadros Ponce, CFA, an alumni of my Tech Stock Goldmine course. I decided to host a deep dive competition over the holidays and this is Kai’s entry and his first deep dive ever.
In the coming week my audience will be able to vote on the deep dive they like most and the winner will do a full podcast with me going through the deep dive.
INTRODUCTION – State of the Art in Crypto
The cryptocurrency market has experienced significant growth, with a current market capitalization of approximately $3.4 trillion. User adoption has also surged, with over 580 million crypto holders worldwide as of 2024.
Institutional interest is on the rise, with major financial entities like BlackRock and Fidelity integrating cryptocurrencies into their investment offerings, as well as a supportive regulation.
Bitcoin's role as digital gold is crucial as central banks continue to print more money.
-Fidelity
Crypto offers a robust hedge against inflation in an era of unprecedented money printing.
-Blackrock
Economic Parallels
Bitcoin as Digital Gold: Serves as a store of value, akin to gold, with a limited supply and increasing demand, particularly as global money supply (M2) expands.
Stablecoins as Digital Fiat: Mirror traditional fiat currencies by providing stability and liquidity, facilitating transactions and empowering decentralized finance use cases, specifically for Emerging Markets, which have high inflationary currencies.
Blockchain Projects as Digital Companies: Operate similarly to traditional companies, developing scalable solutions with revenue potential, governance structures, and the added benefits of transparency and decentralization inherent to blockchain technology.
Brief bullet points
Not all Crypto is Bitcoin. There are interesting business models build on blockchain technology.
Crypto users are expected to double in the next 5 years (BCG)
The expected market capitalization for crypto is projected to range between $5 trillion and $25 trillion. (ARK Invest, BCG, Blackrock).
About AAVE
AAVE, founded by Stani Kulechov in 2017, is the leading decentralized finance (DeFi) protocol that enables users to lend and borrow cryptocurrencies without intermediaries. Aave is primarily built on the Ethereum blockchain but nowadays has interoperability with most Layers 2. That means that almost any user can connect and work with AAVE.
Aave facilitates decentralized lending and borrowing by allowing users to supply and borrow cryptocurrencies through smart contracts, earning interest on deposits and paying interest on loans.
The protocol enables users to provide capital and earn yield, while others can borrow without intermediaries, delays, or complex processes. All loans are overcollateralized, requiring users to supply sufficient collateral to secure their borrowing. Aave has an impeccable track record, with no history of hacks or supplier losses.
Additionally, the protocol offers unique opportunities unavailable in traditional finance, such as borrowing against digital assets. It also extends financial services to the unbanked and underbanked populations, estimated at over 1.7 billion adults globally, unlocking access to credit and yield-generation for those excluded from conventional financial systems.
AAVE integrates automatic systems of liquidation in case a borrower gets overleveraged and liquidates him to maintain healthy financial stability in the platform, like the process of a margin call in a broker.
Market Opportunity
Some numbers in order to figure out the potential of AAVE at its limit:
Current growth until now:
AAVE could be managing more than a $trillion in less than 10 years, leading to an exponential growth business model that is very interesting and with a high level of efficiency.
Organisational Traits and Management
The only point that could be a bit unfortunate now is that the market already started to move.
Stani Kulechov, the CEO and founder of Aave, is a visionary leader known for his technological expertise as a programmer and his strategic approach to innovation in decentralized finance. A trained lawyer, he combines a focus on regulatory compliance with a deep commitment to fostering community-driven growth. Charismatic and resilient, Kulechov has built Aave into a leading DeFi platform with a proven track record of success, driving the adoption of cutting-edge financial solutions globally.
AAVE’s 7 Powers MOATs:
● Economies of scale ✔️ More users lead to more TVL
● Network effects ✔️ More TVL leads to more efficient loans
● Switching costs ✔️ Other platforms don’t have trust and track record
● Branding ✔️ Very well known on the ecosystem already
● Process power ✔️
● Cornered resources ✔️
● Counter positioning ✔️ Versus banks
Aave’s Flywheel
More users lead to more capital that leads to more operational efficiency generating a capital flywheel.
Its business model is related to crypto prices. So, it’s very cyclical and the inflection points start with the crypto bull markets. But in the long term, the growth is exponential.
The flywheel effect keeps growing as more capital and institutional come into the crypto space.
The institutional capital in crypto with a supportive regulation in USA is the perfect catalyzer to transform this decentralized business model into a Finance Titan.
Financials and Valuation
As a decentralized organization, the business has no debt and no interest. The operating expenses and capex are paid via token issuance (1.5% market cap annually), as stock-based compensation.
Decentralized organizations have no taxes, so they are much more efficient models / structures versus current banks.
Healthy balance sheet with more than 300m cash and net profit.
Growth in benefit per token will come from:
• Buybacks
• Operating leverage on crypto market cap
• Increase in DeFi Adoption
• More technologies and integrations
• More users (more accessible and easier to use every time)
• More Capital leads to more efficiency and margin expansion
Important KPIs
Current approach to allocation
At current prices, an allocation into AAVE could make sense but it is not the bargain that was during 2023 and 2024. If the investment horizon is long, it is a good opportunity anyway because of the exponentiality.
The Future
2025 Crypto Market Cap: 3.5T – TVL in DeFi: 170bn – Percentage: 4.8%
2035 Crypto Market Cap: 30T – Percentage DeFi: 30% – TVL in DeFi: 9T – AAVE TVL: 2T
Assumptions
Crypto Mktcap 30T, DeFi usage 30%, Same Market Share and Profit Margin, PE 30
Valuation in 2035: 330 $B Return CAGR: 52%
Bear Case: At least it should outperform Crypto Market Cap growth due to operating leverage, DeFi adoption, and Capital Efficiency that leads to margin expansion.
Important: It is a technology company, so the growth could go beyond this model.
Conclusion
If the long-term crypto trend continues its growth trajectory, AAVE presents a compelling asymmetrical investment opportunity.
P/S Ratio: Currently at 4.9x, though not a perfect KPI as it depends on volatile crypto prices.
Growth Drivers:
More efficient operations compared to traditional financial institutions.
Increasing MOAT with time: no history of hacks or bankruptcies, growing capital inflows, stronger network effects, expanding user base, and enhanced technology deployment.
A leader in the DeFi sector with rapidly growing Assets Under Management (AUM) compared to banks.
Key Metrics:
2023: $7B AUM and $2.5B in loans.
2025 (Projections): $36B AUM and $15B in loans, with higher credit spreads boosting profitability and reduced token issuance and capex needs.
2035 (Projections): $4T in TVL and $2T in loans, representing a massive expansion driven by institutional adoption, global DeFi integration, and new innovations in decentralized finance.
Positioning: As a technology-driven company rather than a traditional bank, Aave's growth potential extends far beyond its current business model, making it a strong contender for reshaping the global financial system.
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