Heavyweight Lending: Aave vs. Compound
When it comes to DeFi lending protocols Aave and Compound are the de facto market leaders. They, along with MakerDAO, are the largest protocols in DeFi in terms of their “total value locked” (TVL), otherwise known as “assets under management” (AUM).
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Largest Protocols in DeFi
Both Aave and Compound are decentralized, non-custodial, overcollateralized cryptocurrency lending protocols that pool the assets of lenders into lending pools from which borrowers can take and pay interest to lenders, all without the necessity of a middleman.
What’s more?
They are both built on the Ethereum blockchain, both have their own native ERC-20 governance token, both facilitate their operations through a system of on-chain smart contracts, and both support a wide range of assets.
That said...how do you decide which one to use?
I’ll tell you how.
You put them in the ring together and see how they stack up against each other. You let them fight to divulge their true strengths, their weaknesses, and their differences, and see who comes out on top.
Alright, let’s get ready to rumble.
Round 1: Lending in Numbers
Naturally, one of the most fundamental metrics when measuring the success of a decentralized lending service, or any DeFi protocol for that matter, is volume.
After all, the core purpose of a decentralized lending service is to facilitate loans for borrowers and the service with the most deposits, the most users, and the most capital under management would be considered by most to be a winner.
That said, let’s crunch the numbers and see who wins this round.
First off, the volume is a metric that can be measured in a variety of ways. In this round, we’ll be measuring:
Dollar value deposited in lending
Number of outstanding loans
Number of daily unique borrowers
The market share of loans
Dollar Value Deposited in Lending
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Data Source: Dune Analytics
Over the past few months, both Compound and Aave have experienced an explosion in deposits that can be used as collateral for crypto-backed loans.
As seen in the chart above, Compound is the clear winner here with a total of $5.1B in deposits for lending, up from $2.3B just three months ago, giving it a three-month increase of $2.8B.
Aave, on the other hand, has a total of $4.6B in deposits, up from $1.3B three months ago, giving it a three-month increase of $3.3B.
That said, while Compound is leading in the total value of deposits, Aave has shown accelerated growth over the past three months in comparison to Compound.
Number of Outstanding Loans
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Data Source: Dune Analytics
An outstanding loan is the portion of a loan that has yet to be repaid. A borrower with an outstanding loan is legally obligated to repay their outstanding loan balance to the lender.
As seen in the chart above, Compound has a large outstanding loan balance of $2.2B while Aave only has an outstanding loan balance of $764M. Therefore, Compound currently has a lot of money being owed to lenders and is therefore earning its lenders more interest.
This volume metric can also be seen as a win for Compound as long as the outstanding loans are repaid.
The market share of loans
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Data Source: Dune Analytics
As seen in the chart above, Compound makes up the large majority of loans between the two lending platforms. As of January 28, 2021, Compound makes up 75% of all loans while Aave makes up 25%.
Once again, Compound beats Aave in this metric as well.
Winner: Compound
Round 2: Network Growth
Another key fundamental metric when it comes to measuring the success of a decentralized lending service is its network growth (number of active users and wallets interacting with the protocol).
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Network activity tracking wallets that interact with either Compound or Aave for the first time (1-year timeframe)
The above chart visualizes the network activity of both Compound (green) and Aave (pink) by tracking wallets that interact with their respective DeFi lending protocols, (the axis on the right shows the number of wallets).
As seen in the chart, Compound’s network activity really kicked off in June 2020, while Aave’s network activity kicked off three months later in October 2020.
Compound’s network activity from June 2020 to today is relatively the same but it had a brief period of explosive growth from October to November before petering off. Aave, on the other hand, migrated from $LEND to $AAVE tokens hence the spike in the middle of nowhere. Since then, the network has been growing steadily.
That said, while Aave falls behind in dollar-denominated volume metrics, its number of daily active borrowers and number of wallets interacting with the protocol continues to outpace Compound and is showing strong growth.
Aave’s network growth is not to be ignored and is viewed as a strong win for this round.
Winner: Aave
Round 3: Revenue
With Compound leading in numbers involving volume and $$ and Aave leading in the number of users and network growth, the next key metric to look at is revenue. Revenue in this case is the total amount of fees paid by its users.
Let’s see how Compound and Aave’s revenues stack up against each other:
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Aave’s Annualized Revenue and MarketCap (Source)
Just like Aave’s network growth metrics, its monthly revenue and market cap is growing steadily with a current annualized revenue of $65.5M.
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Compound’s Annualized Revenue and MarketCap (Source)
As for Compound, its monthly revenue and market cap have been growing steadily as well with an annualized revenue of $180M.
While Compound is generating greater revenues than Aave and is growing on a per month basis, Aave’s revenues are growing at a faster pace than Compound’s. Compound’s revenues grew by a factor of 6x from June to January and Aave’s revenue grew by 58x during the same time period.
Therefore, if Aave can maintain its exponential growth, it may be going head to head with Compound’s revenues in 2021.
Winner: Compound
Round 4: Market Cap / TVL Ratio
Winner: Unclear
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(Source)
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(Source)
A common valuation metric for DeFi protocols like Compound and Aave is the ratio of market capitalization over the total value locked (TVL) of said asset. This ratio can be helpful in determining whether a token is undervalued (has more room to grow) or if an asset may be overvalued (less room to grow).
For instance, a token with a lower Market Cap/TVL Ratio may be more fair valued than a similar protocol with a higher Market Cap/TVL OR that the market has lower growth expectations for the token (and vice versa).
Now, to be clear here:
An asset’s market cap is the price of its token times the token’s circulating supply (market cap = price * circulating supply). An asset’s TVL is the capital deposited into its platform in the form of loan collateral or liquidity trading pool (TVL data is provided by DeFiPulse).
When you divide these two metrics by one another you get the Market Cap/TVL Ratio and when the ratio is more than 1.0 it means the asset’s market cap is greater than its total value locked and can thus MIGHT be considered overvalued.
However, this is still up for interpretation as there are many other metrics and factors that affect the valuation of an asset.
Without further ado:
Compound’s Market Cap/TVL Ratio = 0.42
Aave’s Market Cap/TVL Ratio = 0.94
Based on these ratios, Compound may be considered undervalued with more room to grow while Aave may be considered less undervalued with less room to grow. However, as seen in the previous rounds, Aave is the protocol experiencing greater network and revenue growth.
Therefore, this metric is subjective and should be taken with a grain of salt.
Final Round: Price Performance
It’s time for the final and most important round, price performance. Because at the end of the day, fundamental and valuation metrics only get you so far.
The free open market ultimately decides the winners and losers. So how have these tokens performed against each other?
Let’s take a look:
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Compound and Aave price chart (Time Period: June 2020 - February 2021)
We can only start comparing the $COMP and $AAVE price action from mid-October 2020 as that’s when Aave migrated from $LEND to $AAVE with the dilution of its supply. (Prior to that, the price was not 0, it was just very low.)
As you can see, $COMP and $AAVE mirrored each other closely and built incredibly positive price action with continuous higher highs and higher lows. Both assets are still in a strong uptrend and just recently in January 2021, $AAVE broke away from $COMPs price action and continued to go parabolic while $COMP cooled off a moment.
Needless to say, $AAVE is the clear winner in the price-performance round as it has provided investors the greatest returns and is in a stronger uptrend than $COMP.
Winner: Aave
The winner is…
The end results of today’s fight are? A tie: 2-2, with round 4 being “Unclear”
Compound won out on fundamental “lending in numbers” metrics like volume, liquidity, and revenue due to its long-standing reputation and first-mover advantage as the market-leading DeFi lending protocol.
On the other hand, Aave won out on the fundamental metric of network growth as the protocol has more active users than Compound and is growing more rapidly. It also won out on the valuation metric of price-performance as Aave is providing a better return on investment than Compound and has surpassed $COMP in market cap.
As for the winner of the market cap/TVL ratio round, we’ll leave that up to you to decide. On one hand, it proves that Aave is growing faster and performing better price-wise. On the other hand, it shows that Aave may be overvalued while Compound may still be undervalued.
So there you have it. It’s up to you to decide the winner!
Underdog Contenders
Let's talk about underdog contenders that one day might fight against one of our today's heavyweights.
Cream Finance ($CREAM) - a fork of Compound Finance with much a wider set of cryptocurrencies to lend
Yield Credit ($YLD) - a novel, non-custodial P2P lending platform with an incentivized borrowing & lending mechanism using its native crypto asset $YLD
dYdX - Not entirely 100% focused, but still offers nice yield for DAI, USDC and ETH with more than $150M total value locked in
On which one would you bet to be the next fighting against AAVE or COMP?