Author: Nancy, PANews
Recently, AAVE’s currency price has continued to strengthen, and Aave’s plan to introduce a token destruction mechanism has further aroused market attention. Compared with short-term price performance, what deserves more attention is that Aave is opening a new door for growth. A few days ago, the lending leader Aave announced that it would launch mortgage lending for seven tokenized stocks such as Apple and Nvidia, and plans to further expand to real-world assets such as energy and space infrastructure in the future.
For Aave, this not only means an expansion of the scope of collateral, but may also become an important attempt to find new lending needs and protocol income. For the entire DeFi market, RWA may also open up new market space for the on-chain financial market, which has long been subject to a lack of high-quality underlying assets.
U.S. stocks can also be used to borrow money, and the risk of short gaps still needs to be resolved
Last week, Aave V4 was launched on the Equities Hub on Base, allowing eligible non-U.S. users to borrow tokenized U.S. stocks issued by Coinbase as collateral to borrow USDC. This means that tokenized stocks have begun to move from mere on-chain trading assets to further entering the DeFi credit system.
Currently, Equities Hub only supports 7 tokenized US stocks in the first batch, including Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla. Users can deposit these stock tokens into Aave and gain USDC liquidity without selling stock positions. Chainlink is responsible for providing on-chain price data of relevant tokenized stocks. In the future, Aave may also continue to add Coinbase’s other tokenized shares and include GHO as a loanable asset, subject to governance and risk reviews.
Judging from the initial risk control parameters, Aave is still adopting a more cautious strategy. According to the settings of the risk control service provider LlamaRisk, the total collateral limit for the seven stocks is approximately US$29 million, the USDC supply limit is US$32 million, the borrowing limit is US$21 million, and the collateral factors of different stocks are approximately 65% to 79%. Currently, these stock tokens can only be used as collateral and cannot be lent directly, nor can one stock token be used to borrow another stock token.
Judging from the actual use of funds, the market has not yet shown obvious demand for borrowing. Since its launch, Equity Hub's deposits have exceeded US$8.15 million, of which approximately US$6.234 million is USDC and approximately US$1.917 million is tokenized stocks. However, only approximately US$435,000 of USDC has been lent, and the overall utilization rate is only 5.34%.
In other words, the first step into DeFi with tokenized stocks has been completed, but the financial activity surrounding these assets is still in a very early stage. Of course, this is also related to the short time that Equities Hub has been online. Next, what is more worth observing is whether the demand for borrowing can continue to grow, whether the capital utilization rate can be improved, and whether the market can gradually form deeper liquidity as more stocks and assets are added.
It should be noted that in addition to borrowing needs, tokenized stocks also need to be vigilant after entering DeFi. There is a time misalignment between U.S. stock trading hours and the round-the-clock operation of the on-chain market, which may amplify price and liquidation risks under extreme market conditions. Aave initially uses Chainlink's 24/5 tokenized stock price data, which is continuously updated from Sunday evening to Friday evening, Eastern Time, while maintaining the last published price during weekends and market holidays, thus forming a special risk window.
For example, if a major event happens to Nvidia on Saturday, the market expects its stock price to fall sharply on the next trading day, but the NVDAc used by Aave to calculate the value of collateral is still stuck at the last official price on Friday. During this period, the value of the collateral identified by the protocol may deviate from the market's actual expected value for the asset.
For on-chain lending protocols like Aave, the price of collateral is directly related to the health of the borrower and the subsequent liquidation mechanism. Once U.S. stocks gap up sharply after reopening, the value of collateral may drop rapidly in a short period of time, causing some positions to move directly from the safe zone into the liquidation zone. For tokenized stocks with shallow liquidity, this price shock and its impact on liquidation may be further amplified if there is insufficient on-chain market depth. Of course, as large exchanges such as the New York Stock Exchange and Nasdaq gradually implement a nearly all-weather 23-hour trading system, the time mismatch between the traditional market and the on-chain market is expected to narrow.
But for DeFi protocols such as Aave, if tokenized stocks hope to become regular collateral from a small-scale pilot, what needs to be continuously verified in the future is not just market demand, but also price update mechanisms, mortgage rate design, liquidation parameters, as well as liquidation efficiency and risk handling capabilities under extreme market conditions.
DeFi lacks high-quality underlying assets, and RWA expands the financial boundaries on the chain
Tokenized stocks are becoming a new puzzle piece for DeFi protocols to expand the boundaries of assets. In addition to Aave, the lending protocol Morpho also recently announced the launch of Coinbase tokenized stock mortgage lending on Base.
According to encryption analyst Qinbafrank, tokenized stocks have begun to become DeFi lending collateral, which means that TradFi and DeFi are further integrating. In the past few years, the development of DeFi has been limited to a certain extent by the insufficient supply of high-quality assets on the chain. Previously, the on-chain lending and derivatives market mainly revolved around a few mainstream crypto assets such as Bitcoin and Ethereum, and a large number of other tokens were difficult to qualify as collateral or underlying assets. If there is more supply of high-quality assets in the future, the scale of on-chain lending and derivatives will expand to a huge size, much higher than the current size.
More importantly, he believes that the same tokenized asset can carry different financial needs at the same time: some people buy it and hold it for a long time, some people put it into a liquidity pool, and some people use it as collateral for financing. Around these positions, options, derivatives and structured products can be further developed. This multi-level financial activity is the key to promoting the expansion of on-chain finance. The volume of traditional finance has never just been determined by the trading volume of the stock itself. Greater financial activities come from mortgage financing, margin trading, derivatives and asset management. As RWA continues to enter the chain, traditional assets such as treasury bonds, index ETFs, and corporate stocks can become new collateral and underlying assets, providing more foundation for on-chain credit expansion and allowing DeFi financial applications to have a wider source of assets.
Therefore, the significance of tokenized stocks entering the lending market may not only be to add a new type of collateral, but also to begin to verify whether traditional financial assets can truly adapt to DeFi's pricing, risk management, clearing, and protocol combination mechanisms after being moved to the chain. If this model can be gradually implemented, the significance of RWA will no longer be just to move traditional assets to the chain, but to make these assets become financial components that can be combined with different on-chain protocols. For the tokenized asset track, the focus of competition may not only be “who can issue more assets”, but which assets can truly enter the on-chain financial system and form continuous demand for lending, trading, liquidity and derivatives. This could also become an important measure of the actual financial value of tokenized assets.
Aave founder Stani Kulechov also pointed out in his latest tweet that Aave’s market potential depends largely on the scale of assets that can be used as collateral. The more abundant the available collateral assets, the greater the lending market opportunities. Aave has expanded from crypto assets to cover the securities field through Coinbase tokenized stocks and Horizon real-world assets. In the future, it also plans to provide financing for assets such as solar energy, batteries, graphics processors, robots, and space infrastructure.
The rebound in scale cannot conceal the decline in share, and the official is considering introducing a token destruction mechanism
Since the beginning of this year, Aave has faced greater liquidity and balance sheet pressure due to the approximately 75,000 ETH gap caused by the Kelp DAO rsETH incident and the trust crisis caused by governance infighting. With the gradual expansion of new asset markets such as V4 online and tokenized stocks, Aave's overall scale has begun to repair, but from the perspective of market share and revenue performance, its competitive pressure still exists.
DeFiLlama data shows that as of September 29, Aave’s current TVL has rebounded to US$19.08 billion, a significant rebound from this year’s low of US$11.99 billion. Among them, the TVL of Aave V4, which was launched in April this year, has also grown to approximately US$640 million.
However, Aave’s market share in the lending market is being divided. Blockworks data shows that Aave’s market share in the lending market has dropped from about 59% at the beginning of this year to the current 41%. During the same period, the market shares of Morpho and Spark increased from 9% and 5% to 19% and 10% respectively. In the RWA lending market, this change is even more pronounced, with Aave’s market share falling from 62% to 33%. The income side is also under pressure. Aave’s daily revenue has dropped from approximately US$261,000 at the beginning of this year to approximately US$158,000 currently, a decrease of approximately 39%.
In recent times, the price performance of AAVE token has been quite impressive. Since this year’s lows, AAVE price has increased approximately 2.6 times, making it one of the few crypto tokens to post strong gains in recent times. However, due to the reETH security incident, Aave had to suspend the AAVE repurchase mechanism and prioritize using protocol income to cover bad debts. The resumption of token repurchases has become the focus of current market attention.
It is worth noting that Aave founder Stani Kulechov recently stated that he is considering introducing an AAVE token destruction mechanism in Aavenomics 3.0. Aavenomics 3.0 is a new round of token economics upgrade plan that Aave is promoting. Since last year, Aave has implemented an AAVE repurchase mechanism supported by protocol revenue.
However, whether the repurchase and destruction mechanism can be restarted ultimately depends on Aave's own income level and balance sheet repair progress. According to DeFi researcher Chado, the current revenue generated by Aave needs to be used first to repair the balance sheet and repay financing, so it is not easy to reactivate the repurchase.
According to Chado's analysis, in the 144 days after the rsETH incident, the Aave protocol incurred approximately US$181.2 million in fees, but the DAO's actual retained income was only approximately US$24 million, averaging approximately US$167,000 per day. Compared with the same period of 144 days before the accident, DAO’s retained income was approximately US$40.5 million, a decrease of approximately 41%. According to the current income level, it will still take a long time for Aave to repay the 30,000 ETH loan provided by Mantle. Chado estimates that if incomes remain at current levels, it will take about 15.6 months to repay the loan alone.
Overall, for Aave, the layout of tokenized stocks is both a new development space and a new test. Especially under the current pressure on market share and revenue, it remains to be seen whether the new assets can truly be converted into sustained lending demand and agreement income.