Investment Metrics
Cash flow assessment is part of the fundamental analysis used to derive the fair value of any organization.
An organization’s market value is the total value of its outstanding shares or tokens (market cap). For the Aave and Compound protocols we have considered their token market cap.
Once the fair value of a token is known, it can be used to make asset management decisions. If the fair value is higher than the market value, the token should be bought, otherwise, it should be sold.
From a token holder’s perspective, Aave is more attractive than Compound. Aave’s margin is higher. Table 1 provides a quantitative summary of the analysis. As of 13 October 2021, Aave has $42M of monthly interest expenses versus $47M of monthly interest revenues. This $5M difference implies a 2.22% net interest margin (NIM) per annum.
Aave’s NIM is 58 basis points (0.58%) higher than Compound’s, therefore representing a better investment opportunity since NIM is expected to be distributed to token holders.
Table 1 - Net Interest Margin Analysis
Table 2 provides information on the protocols’ borrowing and lending rates. As could be seen from the data as of 13 October 2021, the weighted average borrowing rate for Aave is 2.85%, while the one for Compound is 1.43%, which is lower by 1.42%. For depositors (lenders) Aave is more attractive, but for borrowers, Compound is more attractive.
Table 2 - Weighted Average Funding and Lending Rates Comparison
Summary
Because Aave has a higher net cash inflow, it is a more attractive protocol from a token investment standpoint.
Aave & Compound have the same business model: both protocols attract deposits by offering interest payments, then lend out those same deposits at a higher rate. Profit to the protocol comes from the difference of interest paid out to lenders and interest paid by borrowers (the spread).
Last updated