Liuyi Capital: How did we achieve a thousandfold profit from investing in the Aave project?
From the perspective of the track, the overall potential of decentralized futures exchanges (futures Dex) is enormous, and currently, the active traders of various futures Dex projects are only in the thousands, so high-quality projects in this track all have good potential.Original Title: "First-Class Warehouse Review: How Liu Yi Capital Profited a Thousand Times from AAVE"
Written by: Liu Yi Capital / First-Class Warehouse
The value investment philosophy is the core investment principle of Liu Yi Capital. We firmly believe that today's internet world will inevitably be tomorrow's blockchain world. Advocating for value investment not only helps us better capture future unicorns but also guides funds into truly pragmatic teams, thereby promoting the healthy development of the blockchain industry.
To this end, Liu Yi Capital will disclose all transaction and decision details after the investment operations of each project are completed. We hope to provide some insights and references for a wide range of users and also hope that more users can correctly understand the value investment philosophy.
Today, we are going to share the project Aave (AAVE), originally named ETHLend (LEND).
Thanks to the development of the DeFi track in 2020, ETHLend emerged as a dark horse in the lending field, overtaking competitors. In the second half of 2019, First-Class Warehouse initiated a "project screening," during which Liu Yi Capital discovered Ethlend. After conducting project research, we entered the market with a cost basis of 0.0039 USDT/LEND (after token conversion, the cost was 0.39 USDT/AAVE). Subsequently, LEND surged over a hundred times, underwent brand restructuring, token consolidation (100 LEND exchanged for 1 AAVE), and was renamed AAVE.
After a brief correction, AAVE surged again, reaching 520 USDT on February 4, 2021, with its CMC ranking growing from #504 to #13. Over a period of 16 months, the total multiplier was 1200 times, during which we did not sell a single coin and fully realized the complete multiplier, resulting in Liu Yi Capital earning 63.18 million RMB.
Below is how Liu Yi Capital maintained its position throughout AAVE's growth process.
Underestimating ETHLend
We first encountered this project in June 2019 when it was still called ETHLend.
In 2017, after raising over 16 million USD, ETHLend launched a decentralized lending application built on Ethereum, utilizing smart contracts to achieve disintermediation. Borrowers and lenders could post their needs on the platform, customizing parameters such as loan interest rates, collateral types, and collateral asset ratios. Borrowers and lenders could directly find suitable orders on the platform, facilitating a peer-to-peer matching process. However, due to the lack of standardization in the product, the disparity in needs between borrowers and lenders was too great, leading to mismatched interest rates and amounts, making effective matching very difficult, ultimately resulting in a dismal actual trading volume. Below are screenshots of the statistics at that time.
ETHLend user interface, June 20, 2019
ETHLend operational data, June 20, 2019
We believed that the demand for lending during a bear market would be stronger compared to a bull market because when users are trapped, they are more inclined to pledge cryptocurrencies for loans rather than sell at a loss. However, the order-matching lending model had a contradiction: it was difficult for borrowers and lenders on the ETHLend platform to reach an agreement on interest rates and loan amounts, resulting in very few actual transactions being matched in the market. Often, after borrowers posted lending orders, they would wait a long time without receiving matching loan orders and would have to cancel their orders, further reducing the platform's effective transaction volume.
Therefore, we questioned whether Ethlend's lending model could meet user needs. How significant was the user demand? After intense discussions, we decided: not to invest.
At that time, LEND was ranked 318 on CMC, with a price of 0.0101 USD, down 42% from its ICO price of 0.0173 USD.
The Rebranded Aave
The project exploration work continued, and we periodically screened the top 1000 projects on the CMC website for research, capturing new projects in the industry. Time flew to September 2019, and ETHLend had been renamed Aave, appearing again on our target list. After the first round of screening, Aave's product revamp plan caught our great attention.
The Aave project underwent a name change, brand restructuring, and announced the launch of new products such as the lending liquidity pool DLP, Aave Pay, and Aave Pocket, although the latter two products were never launched.
Among them, Aave's decentralized lending pool DLP referenced Compound's design, which is an open-source lending protocol. Aave designed a lending liquidity pool using smart contracts, where lenders could deposit liquid funds and immediately earn interest. Borrowers could borrow by depositing collateral, with the ability to borrow and repay at any time. Both parties did not need to wait for orders to be matched, and this liquidity pool greatly solved the problem of low matching transactions, allowing lenders to earn interest on deposits and borrowers to access funds instantly.
Comparison of principles before and after product improvement
At that time, Compound's launched product also adopted this decentralized lending liquidity pool model, and the user experience was good. After comparison, we found that although Aave's product was still in the planning stage and had not yet launched, the direction of project improvement was correct, addressing the previous issue of difficult matching transactions. Therefore, after re-evaluating, we immediately decided to invest.
At that time, LEND was ranked 507, with a price of 0.0036 USD, down 64% from our first encounter at 0.0101 USD. LEND's price hovered in the range of 0.006-0.012 USD for about 7 months. With such an attractive price and a promising future, we immediately decided to build our position.
On September 7, 2019, we bought LEND for the first time on Gate Exchange at a price of 0.0034 USD (33 Satoshis).
Gate's trading records, September 7 to September 25, 2019
Binance's trading records, September 10 to September 19, 2019
From September 7 to September 25, 2019, we completed our purchase of LEND, totaling 9,200 USD for 2,348,418 coins, with an average price of 0.0039 USD, approximately 37 Satoshis.
The First Major Correction
As the saying goes, buying coins is easy, but holding them is difficult. However, if you are well-acquainted with every detail of a project, holding coins is not difficult at all.
Our chief bottom-fishing officer, Luiz, even predicted that the LEND price would possibly rise to 1000 Satoshis when it was at 80 Satoshis (October 16, 2019), as shown in the image:
Unfortunately, before we could fully build our position, the price began to rise without looking back, reaching a peak of 268 Satoshis (0.0220 USD) on November 19, 2019, which was nearly a 6-fold increase compared to our cost basis. The price then corrected, dropping to a low of 116 Satoshis (0.0085 USD) on December 29, a decline of 61%.
During the major correction, Aave increased its product information disclosure, code auditing was underway, and the product was released on the Ethereum testnet. The mainnet launch was approaching. Among similar products, Compound's capital scale had reached 27.05 million USD, and Dharma's capital scale had reached 21.39 million USD. The industry's capital scale was gradually rising, indicating a positive trend.
LEND/BTC daily chart, December 2019
LEND/BTC daily chart, January 2020
At that time, we initially judged that the LEND/BTC trading pair had formed a rounded bottom pattern on the daily chart, with the price rising to the upper range of the rounded bottom at 175-280 Satoshis, and it had not yet fallen below 100 Satoshis after a pullback to the daily MA300. Moreover, with good news approaching for the project, the LEND price was not rising but falling, and trading volume was shrinking. There must be something unusual, so we initially judged that LEND was in a washout phase. We held our positions.
From December 30, 2019, to January 1, 2020, LEND surged 260% in three days, breaking through the previous high of 268 Satoshis, while also entering the top 200 on CMC. This somewhat aligned with our expectations.
In trading, things often do not go as planned. When faced with a sudden drop during the holding process, if it is confirmed that the project's fundamentals have not undergone significant changes and there are no negative reports about team members, one can continue to hold. Of course, many people may make decisions based on rumors or even conspiracy theories, but we believe that as long as one has sufficient understanding of the project, most information can be discerned for its authenticity. Making decisions based on understanding and knowledge of the project is the correct choice.
Initiating a "Smooth Sailing" Rise
As we continued to follow up, our understanding of Aave's lending track deepened, increasing the probability of accurately grasping the price movements. The first major correction did not shake us out, and after leaving the bottom, LEND, in conjunction with project progress, welcomed a "smooth sailing" rise.
On January 9, 2020, Aave's product officially launched on the Ethereum mainnet, supporting 16 cryptocurrencies. On January 18, Aave's first flash loan was completed. Flash loans, a brand-new product, refreshed the understanding of the DeFi space. Aave's capital scale quickly broke through 10 million USD, 50 million USD, and 100 million USD, with business data soaring.
During this period, LEND's price rose from 100 Satoshis to 500, 1000, 2000, and 3000 Satoshis. We consistently held our coins without selling, remaining steadfast. Meanwhile, Aave's collateral lending business volume continued to rise rapidly, and the team consistently innovated products, launching flash loans, CA unsecured loans, adding ENJ and SNX as collateral, and changing the token mechanism to include token staking.
Additionally, the DeFi sector was continuously buzzing with new trends and community discussions. Ultimately, DeFi projects began to launch mining mechanisms, igniting excitement in the crypto space. Compound introduced its governance token COMP, leading the trend of lending/making markets through mining. Aave also improved the utility of its tokens, launching the new token AAVE to replace LEND and introducing new gameplay.
With the DeFi industry's heat continuing to rise, Aave's products were continuously innovating, and we dynamically raised our market cap estimates for Aave.
LEND/BTC daily chart, June 2020
Dynamic analysis of the project led to increased expected valuation
With the enthusiasm for mining in DeFi projects surging, the launch of the FYI yield aggregator's new product, and a series of hot events like Uniswap's token issuance, Aave's project progress was also very smooth. In July, it received a 3 million USD investment from two well-known institutions, 3 Arrows Capital and Framework Ventures. In August, it announced the launch plan for Aave V2, introducing community governance features, a new token economic model, and additional security modules. This series of project iterations and improvements demonstrated the team's strong product and operational capabilities.
On August 7, 2020, LEND reached a historical high of 0.8274 USD since its listing in December 2017, a 212-fold increase.
The Second Major Correction
During this period, Aave's asset scale surpassed 1 billion USD, the platform supported 19 tokens, and the number of users reached 1,500. However, after LEND reached a new high, it began to decline for three consecutive months. In October, LEND executed a migration, converting to AAVE tokens at a ratio of 100:1.
On November 5, 2020, it hit a low of 0.2593 USD (converted to AAVE price of 25.94 USD), a correction of about 70%.
LEND/USDT daily chart, source CoinGecko, November 2020
A popular saying in the crypto space is "the team is working," often used to mock projects whose prices do not rise. Indeed, not every action taken by the team is reflected in the token price. However, if the team is working diligently in the right direction, the project's value will eventually be reflected in the price.
Although there was a significant correction after LEND was converted to AAVE, we felt that the project's product iterations were rapid and its business was developing steadily. The founder continuously participated in interviews and AMAs, expanding the community, and demonstrating strong operational capabilities. We held firm during the correction!
Profiting a Thousand Times, Selling Out
On December 4, Aave officially launched the V2 version, gradually implementing several important functions.
Aave major events, source First-Class Warehouse Wealth Research Report, December 2020
As market sentiment improved, DeFi's capital scale surpassed 30 billion USD, Aave's capital scale exceeded 5 billion USD, and the number of users reached 9,777, firmly ranking among the top three lending projects.
As a result, the price of AAVE began a major upward trend, surging about 30% over two consecutive days, with a cumulative increase of over 50%. After discussion, we believed that AAVE's price movements were overbought, and short-term risks had increased. Therefore, we decided to initiate a liquidation mode, starting to reduce our holdings in batches from 400 USD, with the highest sale at 519 USD, while AAVE's intraday high was 520 USD.
Liu Yi Capital sold at an average price of 440 USD, reducing our position by 60%, with profits of approximately 6.1687 million USD, equivalent to 39.5 million RMB.
Aave V2 release timing and selling points, February 2021
Binance's trading records, February 5, 2021
After completing the reduction of AAVE, we still held 40% of our position, with a market value of approximately 3.7 million USD, equivalent to 23.68 million RMB. We would continue to hold this portion, as Aave's fundamentals had reversed and had grown into a white horse project. However, with the growth of the blockchain industry, we believed that Aave's business could continue to develop.
Reflecting on this, holding onto a thousand-fold return and not easily losing a single token is crucial. We believe the important points are:
- Maintain a keen curiosity about new things in the industry, especially regarding technological and business innovations.
- Fully understand the project's development and the industry it is in, allowing your understanding to keep pace with or even exceed the current state, thereby better grasping project valuations.
Understand it, hold it! Strength and luck are often separated by a fine line; many people mistakenly equate luck with strength, resulting in profits made by luck being lost through strength. Many friends, after reading our review, may think we earned money by luck, but of course, we will use one project after another to prove: Value investment, strength is more important than luck!
