Six One Capital: How to Profit a Thousand Times from AAVE

Source: Liu Yi Capital

The value investment philosophy is the core investment philosophy of Liu Yi Capital. We firmly believe that the internet world today will inevitably become the blockchain world tomorrow. 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 completing the investment operations of each project. 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 want to share the project Aave (AAVE), formerly known as ETHLend (LEND).

Thanks to the development of the DeFi sector in 2020, ETHLend emerged as a dark horse in the lending field, overtaking competitors. In the second half of 2019, First Class Cabin initiated a "project screening," during which Liu Yi Capital discovered Ethlend, conducted project research, and entered the market with a cost basis of 0.0039 USDT/LEND (after token conversion, the cost was 0.39 USDT/AAVE).

Subsequently, LEND skyrocketed, breaking through a hundredfold, rebranding, and undergoing a token consolidation (100 LEND exchanged for 1 AAVE), changing its name to AAVE.

After a brief correction, AAVE surged, reaching 520 USDT on February 4, 2021, with its CMC ranking growing from #504 to #13 over 16 months, achieving a total multiplier of 1200 times, during which we did not sell a single coin and fully captured the complete multiplier, resulting in Liu Yi Capital earning 63.18 million RMB.

Below is Liu Yi Capital's review of how we steadfastly held our positions throughout AAVE's growth process.

Disregarding 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 loan rates, collateral types, collateral asset ratios, and other parameters.

Borrowers and lenders could directly find suitable orders on the platform, with the matching process being peer-to-peer. However, due to the lack of standardization in the product, the demand differences between borrowers and lenders were 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, 2019-6-20

ETHLend Operational Data, 2019-6-20

We believed that the demand for lending in a bear market would be stronger than in a bull market, as users, when trapped, would be more inclined to collateralize cryptocurrencies for loans rather than selling at a loss. However, the order-matching lending model had a contradiction: it was difficult for both parties on the ETHLend platform to reach an agreement on loan rates and amounts through orders.

This led to a lack of actual transactions that could be matched in the market, and borrowers often had to withdraw their orders after waiting for matching loan orders that never came, 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 the ICO price of 0.0173 USD.

Aave's Transformation

The project discovery work continued, and we periodically screened the top 1000 projects on the CMC website for research, capturing new projects in the industry. By September 2019, ETHLend had rebranded to Aave and reappeared on our target list. After the first round of screening, Aave's product revision plan caught our significant attention.

The Aave project underwent a name change and rebranding, announcing 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, allowing lenders to 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 as needed.

Comparison of Principles Before and After Product Improvement

At that time, Compound's launched product also adopted a similar decentralized lending liquidity pool solution, 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. The price of LEND had been consolidating in the range of 0.006-0.012 USD for about 7 months. With such an attractive price and a promising future, we decided to enter the market.

On September 7, 2019, we made our first purchase of LEND on Gate Exchange at a price of 0.0034 USD (33 Satoshis).

Gate Transaction Records, 2019-9-7 to 2019-9-25

Binance Transaction Records, 2019-9-10 to 2019-9-19

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 know every detail of a project, holding coins is not difficult at all.

Our chief bottom-fishing officer, Luiz, even predicted that the price of LEND would 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 relentlessly, 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 disclosure of product information, code audits were 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 capital scale in the industry 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 prices rising to the upper range of the rounded bottom at 175-280 Satoshis, and the price had retraced to the daily MA300, not yet breaking below 100 Satoshis. Moreover, good news for the project was approaching, but the price of LEND was declining instead of rising, and trading volume was shrinking. This raised our suspicion that LEND was in a washout phase. We decided to hold 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 period, if it is confirmed that the project's fundamentals have not undergone significant changes and there is no negative information 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 a sufficient understanding of the project, most information can be discerned for its truthfulness. Making decisions based on an understanding of the project is the correct choice.

Initiating a "Smooth Sailing" Surge

As we continued to follow up, our understanding of Aave's lending sector deepened, increasing the likelihood of accurately grasping the price movements. The first major correction did not shake us off, and after exiting the bottom, LEND, combined with project progress, welcomed a "smooth sailing" surge.

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 DeFi. Aave's capital scale quickly surpassed 10 million USD, 50 million USD, and 100 million USD, with business data continuously improving.

During this period, the price of LEND rose from 100 Satoshis to 500, 1000, 2000, and 3000 Satoshis, and we remained steadfast, not selling. Meanwhile, Aave's collateralized 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 introduce token staking.

Additionally, the DeFi sector was buzzing with new trends and community discussions. Eventually, DeFi projects began launching mining mechanisms, igniting excitement in the crypto community. Compound launched its governance token COMP, leading the trend of lending/market-making mining. Aave also improved the utility of its tokens, launching a new token AAVE to replace LEND and introducing new gameplay.

As the enthusiasm for DeFi project mining surged, the FYI yield aggregator launched a new product, and Uniswap issued tokens, among a series of hot events, Aave's project progress was also very smooth, securing a 3 million USD investment from two well-known institutions, 3 Arrows Capital and Framework Ventures, in July.

In August, the plan for the launch of Aave V2 was announced, introducing community governance features, a new token economic model, and new 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 (equivalent to 25.94 USD after conversion to AAVE), a correction of about 70%.

LEND/USDT Daily Chart, Source: CoinGecko, November 2020

A popular saying in the crypto community is "the team is working," often used to mock projects whose prices do not rise. Indeed, not every action taken by the team necessarily reflects 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 the LEND token was converted to AAVE, we felt that the project's product iteration was rapid and its business was developing steadily. The founder continued to participate in interviews and AMAs, expanding the community and demonstrating strong operational capabilities. We decided to hold through the correction!

Profiting a Thousandfold, Selling Out

On December 4, Aave officially launched the V2 version, achieving several important functions that had been previously planned.

Aave Major Events, Source: First Class Cabin Wealth Research Report, December 2020

As market sentiment warmed, the DeFi capital scale surpassed 30 billion USD, Aave's capital scale exceeded 5 billion USD, and the number of users reached 9,777, firmly placing it among the top three lending projects.

As a result, the price of AAVE began a major upward trend, rising about 30% over two consecutive days, with a cumulative increase of over 50%. After discussion, we determined that AAVE's price movements were overbought, and short-term risks had increased. Thus, we decided to initiate a liquidation mode, starting from 400 USD, gradually reducing our position, with the highest sale at 519 USD, and AAVE's intraday high at 520 USD.

Liu Yi Capital sold a total 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 Launch Timing and Selling Points, February 2021

Binance Transaction 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 will continue to hold this portion, as Aave's fundamentals have turned around and it has grown into a white horse project. However, with the growth of the blockchain industry, we believe that Aave's business can continue to develop.

Reflecting on this, holding onto a thousandfold return and not easily losing a single token is crucial. We believe that it is important to:

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 operates in, allowing one's understanding to synchronize with or even surpass the current state, thereby better grasping project valuations.

Understand clearly and hold firmly! 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 may think that we earned our profits through luck after reading our review; however, we will use one project after another to prove that in value investing, strength is more important than luck!