Aave Token Has Beaten the Market With a 45% Price Surge. Here's Why

• Proposals aimed at overhauling AAVE's tokenomics and protocol's risk management have galvanized investor interest in the cryptocurrency, observers said.
• The so-called Umbrella proposal could ease sell-side pressures for AAVE in the market, said Katie Talati, head of research at Arca.

AAVE, the native token of the decentralized crypto lending platform Aave, has rallied over 45% to $135 in four weeks, outperforming every other top 100 cryptocurrencies by market value, including market leaders bitcoin BTC$89,736.60 and Ethereum's ether ETH$3,036.64.

Such has been the investor bias for AAVE that Helium's HNT is at a distant second position with a price gain of 26%, according to data source Coingecko.

AAVE's price rally began in late July after the Aave-Chan Initiative founder Marc Zeller proposed a fee switch to distribute some of the platform's net excess revenue to the critical actors in the ecosystem and buy back tokens from the secondary market.

"There has been speculation that AAVE could activate their 'fee switch' to redistribute excess revenue generated by the platform to stakers. This follows a proposal aimed at seeking governance feedback on the protocol's potential to buy back tokens using surplus revenue and redistribute them to AAVE stakers and the minters of their stablecoin, GHO," Joshua de Vos, research lead at London-based digital assets data and index provider CCData, told CoinDesk.

"This has boosted market sentiment around the project, with the possibility of new incentives for holding and staking AAVE," Vos added.

Another proposal called for replacing the "seize and sell" loan liquidation process that negatively impacts the AAVE price with a "seize and burn" mechanism that AAVE's GHO stablecoin and aTokens, representing assets deposited in the protocol.

According to Katie Talati, head of research at Arca, this so-called Umbrella proposal could ease sell-side pressures for AAVE in the market.

"The proposal aims to create a new system, called Umbrella, which would use a variety of assets to cover “bad debt” in the protocol (when a position is liquidated and the collateral does not cover the cost of liquidation) versus only using the AAVE token to cover bad debt. The new system, therefore, would relieve some of the sell pressure on AAVE," Talati said in a note in late July.

Web3 agency Deelabs explained on X that buybacks would create persistent bullish pressure in the market and Umbrella would eliminate the negative impact on AAVE price during loan liquidations. "This just scratches the surface. There is a lot more to this proposal," Deelabs said.

These proposals aimed at overhauling AAVE's tokenomics and protocol's risk management galvanized institutional interest in the token, algorithmic trading firm Wintermute said.

"The tokenomics update discussion brought more eyes on the protocol back in July, and it's generally seen as a 'blue chip' defi asset that tracks the growth of crypto in general. Additionally, large funds have been allocated, and research notes have been written up for their investors," Wintermute told CoinDesk.

"We have also seen similar OTC flow in the name from institutional counterparties wanting to get exposure," Wintermute added.

Aave is also the top protocol in terms of revenue and fees earned over the past four weeks. According to data tracked by TokenTerminal, Aave has generated over $27 million in fees, outshining other lending and borrowing protocols.

As such, some in the crypto community believe the token is undervalued.