Aave — How the new token launch will influence Aave’s total Total Value Locked?

In this article, I am going to analyze the problem that how the new token launch will influence Aave’s total Total Value Locked. All the data, tool come from Flipside Crypto.

Firstly, let’s look at the question we are going to analyze in this article:

What effect does a new token launch have on AAVE’s total TVL? Can you identify “cannibalization” effects (transfer of liquidity to the new protocol) from existing lending/borrowing tokens when a new token is added?

Let’s start with the the introduction to Aave, which in official definition is a “ an open source and non-custodial liquidity protocol for earning interest on deposits and borrowing assets.” In other world, Aave is like a small decentralized bank you can use to deposit your extra fund to earn interest and the other people who is in need to get money can pay the fees to borrow money from that.

Different from centralized bank, usually in your local bank, they will only provide the single currency, like US Dollar, Japanese Currency, etc. In the decentralized world, there are many different currency or in crypto world, we called it “token” can be listed in the Aave for borrowing or lending.

After the introduction to the background, let’s go back to our two questions, how the introduction of new token influence the Aave TVL and how to identify the “cannibalization” effects?

How a new token launch influence AAVE’s total value locked?

Looking at the total value locked in all the AAVE versions: The following chart is generated using Flipside Crypto data. We can see from the chart the trend of the AAVE V2 total value locked development trend and the daily deposit/withdraw amount (blue line is the total value locked and green bar chart is the daily net value (deposit-withdraw):

Then, let’s look at the date when there were new tokens added there: the blue bar charts height indicates how many new tokens added to the AAVE — V2, it is hard to say that whether there are clear correlation between these 2 things, but we can derive some conclusions based on the 2 charts.

Combine both chart together, when the AAVE firstly introduced, there were many tokens added to the ecosystem, but it doesn’t influence the total value locked trends due to the small amount of users and activities, as time went by, there were some up-trend in the TVL line chart, but still the tokens added don’t have a clear influence.

How to identify the “cannibalization” effects?

Firstly, let’s define what is “cannibalization” effects, here my definition is that when there is a new tokens added, how it influences the other reserves amount. We already get the new tokens added time like above query, now just need to visualize how it influence the the other liquidity provider.

There is one more definition needs to be clarified here, what is the aave market liquidity here? Take an example: “0XAE461CA67B15DC8DC81CE7615E0320DA1A9AB8D5”, if we search this one in etherscan:

We can find that the liquidity bond in AAVE is the similar item like Uniswap, it is a paired tokens, which can be derived from the AAVE market contract addresses. Queried from the database, there is in total 49 market addresses.

Here the analytical thoughts are: Take the date when the new tokens added to the AAVE market, look at the pool except for this token, how the volume changes.

Take the date 03/08/2021, when there are 10+ new tokens added to AAVE, if we pulled the data after 03/08/2021, if we took one week reserve amount after the 03/08/2021, we can see clearly that the first day after 03/08/2021, the reserve for other pool dropped significantly, and then the amount reversed back.

If we expand the time series to 1 month, we can see clearly that the first day drops comes with a bounce back and then there was not much impact to other liquidity pool

So, the conclusion is that, is there “cannibalization” effects? The answer is Yes! There is impact from new tokens to other reserves and pools, but the first day drops come with the bounce back strongly!

All the data, tool come from Flipside Crypto.The link to all the queries is here.