The bear market investment in cryptocurrencies This year could have meant the end of many projects in the DeFi sector. But Aave and Uniswap saw it for what it was, a wake-up call to shore up their fundamentals. And their hard work seems to be paying off, as their tokens (AAVE and UNI) have doubled in value since June. So let's review the information about each of them, and why their astute positioning could still make them long-term cryptocurrency investment opportunities.
Why make our cryptocurrency investment at UNI?濾​
Uniswap was the first decentralized exchange (DEX) to use automated market making (AMM). The AMM allows anyone to deposit their own tokens into Uniswap's liquidity pools and generate income from fees from anyone else who trades them. This is unlike centralized exchanges like Binance and Coinbase, where there are a handful of institutional market makers, and the exchange takes the lion's share of the fees. Uniswap is one of the largest DEXs by total value locked (TVL) within their smart contracts. According to DeFiLlama, the protocol currently has liquidity worth $5.680 billion, made up of all types of tokens. Given that the price of most of these assets is down more than 80% this year, the TVL figure can be expected to take just as big a hit. But this has not been the case, as its TVL has only gone down 30% this year if we measure it in dollars, and it has actually gone up 120% if we measure it in ETH. In other words, Uniswap continues to gain momentum, despite bear market fears.
Total Value Locked (TVL) of Uniswap during the year 2022. Source: DefiLlama
The same goes for trading volume. At the beginning of this year, Uniswap was processing about a third of the amount that Coinbase was processing. But right now, they are practically tied, with the decentralized first steadily gaining market share from the centralized second.
Comparison of Coinbase trading volumes to Uniswap. Source: Kaiko.
It should be noted that DEX trading volume overall is still less than 10% of the combined trading volume of Binance, FTX, and Coinbase. Since Uniswap accounts for almost 90% of all DEX trading volume, it could be a good cryptocurrency investment opportunity. Uniswap is also set to add NFT trading to its platform, after announcing that it purchased Genie (an NFT marketplace aggregator) in June. This suggests to us that UNI could offer us value in the long term. Especially since it is down over 60% so far this year, and 85% from its May 2021 high. UNI also gives us the right to vote on any changes to the way the exchange operates, sort of like the way in which shareholders can vote at general shareholder meetings.
History of UNI movements during the last year. Source: Token Terminal
Why make our cryptocurrency investment in AAVE?​
Aave is a giant in the DeFi lending space. We can order and lend a number of digital assets on Aave without going through a centralized intermediary. Lenders generate interest by advancing the capital that the platform can lend to its clients. Meanwhile, borrowers pay interest and put up more collateral than they borrow. This prevents the lending cycle from being broken and eliminates counterparty risk from untrustworthy borrowers. This is important because there is no financial institution in the middle to manage that risk. Aave has just over $6.000 billion in TVL stored in its smart contracts right now. Its TVL trajectory has not had the same success as Uniswap this year. It is down about 57% measured in dollars and 43% measured in ETH. But that's not what makes Aave worth a closer look in any case.
Total Value Locked (TVL) of Aave during the year 2022. Source: DefiLlama
Unlike other DeFi platforms where anonymity reigns, Aave Arc has know-your-customer and anti-money laundering (KYC) checks for all its counterparties. And given Aave's strong track record of DeFi innovation, it could be the first project institutions look at when they start getting serious about DeFi lending and credit. In addition to building a pipeline of projects for DeFi adoption by institutions, Aave has two equally ambitious projects underway. In February of this year, it launched its own decentralized social media platform, Lens Protocol, in an attempt to challenge centralized social media platforms like Twitter or Facebook, arguing that users are not products and own their own data.
Lens Protocol aims to challenge the centralization of social networks. Source: Lens Protocol
Aave announced plans to launch its own algorithmic stablecoin called GHO earlier this month. And despite what happened with the recent collapse of the Terra stablecoin, investors saw the news favorably, with the price of AAVE jumping nearly 25%. This means that the token is down about 65% so far this year, and 86% from its all-time high in May of last year.
History of AAVE movements during the last year. Source: Token Terminal
How do we take advantage of this cryptocurrency investment opportunity?螺​
When the entire cryptocurrency investment market is on the ropes, it makes sense to stay with the strongest projects in each sector. Then, Uniswap(UNI) and Aave (AAVE) certainly dominate the DEX and DeFi lending markets respectively. You have to take into account MakerDAO (MKR, cryptocurrency lending) and CurveFinance (CRV, DEX) as other possible cryptocurrency investment bets in the DeFi sector.
But we have to keep in mind that we are still in a bear market in cryptocurrency investing until proven otherwise. Therefore, although the fundamentals look compelling for Aave and Uniswap, prices may still decline if the market decides to take another leg lower. As with all volatile assets, dollar-cost averaging is typically the best way to take advantage of this cryptocurrency investment opportunity.
Current situation of the regulation of investment in cryptocurrencies globally. Source: Thomson Reuters
Cryptocurrency investing in the DeFi sector could also face a run-in with regulators at some point. But so far this year, cryptocurrency investment in the DeFi sector has held up much better than large centralized lending and credit platforms (CeFi) like Celsius and Voyager, who have declared bankruptcy. After all, with DeFi cryptocurrency investing, it's all on the blockchain for everyone to see. With CeFi, no one sees anything until it's too late to regret it.