DeFi bull run: Why Aave and SUSHI are surging despite Bitcoin price uncertainty

DeFi blue-chips, including Aave (AAVE) and SushiSwap (SUSHI), have been rallying hard in the past several days while Bitcoin is seeing range-bound consolidation at around $35,000 as of Jan. 17. 

Both AAVE and SUSHI prices have risen by more than three-fold since December, within merely a month. Investors attribute the bull run of DeFi tokens to the market “re-rating” the major DeFi projects.

Why is DeFi projects like SUSHI and Aave getting “re-rerated?”

The DeFi market has had an incredible run since 2020. The total value locked (TVL) across DeFi protocols has surpassed $22 billion, demonstrating the market’s fast growth.

However, despite the rapid growth, most DeFi protocols were valued at around $1 billion. In contrast, many “OG” altcoins have multi-billion dollar market caps, yet have lower user activity and no cash flow.

DeFi protocols are unique in that they are cash-flow generating. This means platforms like Aave, Synthetix, and Yearn.finance have small fees that can be used to fund the treasury or compensate users that stake their tokens to the protocols.

Based on the fast-growing userbase of most DeFi protocols and the increase in their cash flow, investors said that DeFi protocols are seeing a key “re-rating moment.”

Santiago R Santos, a partner at ParaFi, a DeFi-focused fund based in the U.S. said:

“DeFi protocols creeping up the top 20 is a key re-rating moment. As stupid as it may seem, it’s like being on page 1 of Google search results. So far, DeFi has captured limited mindshare. It’s <5% of total crypto market cap. Yet, it has the most usage, innovation & fundamentals.”

Santos emphasized that it is hard to describe any other asset class that is as capital-efficient, profitable, and fast-growing, like DeFi. He added:

“Watch as we go through a fundamental re-rating of DeFi protocols. Point to any other asset class that is as high growth, profitable, and capital efficient as DeFi? I’ll wait.

What’s next for DeFi?

Currently, Aave and SUSHI are valued at $2.2 billion and $900 million respectively. Yet, analysts still say that they are both undervalued at these market caps, given the user activity on both platforms.

SushiSwap, for instance, is continuously surpassing its record-high monthly volume. Ryan Watkins, an analyst at Messari, said SushiSwap is on track to quadruple the all-time high monthly volume it achieved last month. Watkins explained:

“Uniswap is on pace to 1.5x is ATH monthly volume set in Sept 2020. SushiSwap is on pace to 4x its ATH monthly volume set last month. This would produce $6.4 million in earnings for token holders.”

If the DeFi market continues to grow at the current pace, then major DeFi protocols would see higher cash flows, making them even more undervalued.

Arthur Cheong, a partner at DeFiance Capital, one of the largest DeFi funds in Asia, said on Jan. 13:

“Great piece from Delphi, further reinforcing our argument that Sushiswap is highly underrated is poised for a big re-rating soon.”