Compound vs Aave: A Competitive Landscape and Sustainability Analysis of the Decentralized Finance Lending Market

Does Compound's Tokenomics and financial model have long-term sustainability? In what aspects does Compound have advantages or shortcomings compared to Aave? Which protocol has more growth potential in the current market environment?

Written by: Andrew LIU

Introduction: The DeFi lending platform is an inevitability of history.

In ancient Greece thousands of years ago, people (including Aristotle) believed that charging interest on loans was dirty and against the will of God. However, just a few hundred years later, people broke this restriction and accepted the existence of lending interest.

Lending relationships originally occurred between individuals, which are inherently decentralized. With the emergence of governments and banks, centralized lending subsequently arose. The advantages of centralized lending primarily lie in the ability for a third party, outside of the lending parties, to handle default situations based on fair and just rules, but this is not the reason for its long-term existence. The foundation of the long-term existence of centralized lending is precisely because of the "inabilities" of people in the original decentralized lending relationships:

• Borrowers have a high probability of not strictly adhering to the contract, such as willingly transferring collateral to the lenders;
• Weak borrowers have a high probability of not being able to take effective action to protect their own interests;
• Even if one party takes action, neither party can ensure whether that action is fair and just;

DeFi lending technology has disrupted the aforementioned fundamentals, making the return of lending relationships to decentralization a likely event.

From a fundamental perspective, DeFi lending can be divided into two forms. The first is the original pure decentralized lending method (, which this report will refer to as basic DeFi P2P ). The second is the decentralized lending platform ( DeFi Lending Platform ). Through the comparison in the table below, we can find that DeFi Lending Platform has greater potential for long-term development.

The business model of DeFi lending platforms is essentially the same as that of traditional centralized banks, with revenue primarily coming from interest and service fees; however, because it is based on blockchain and smart contracts, operational costs are significantly lower than those of traditional centralized banks. Therefore, the emergence of DeFi lending platforms is historically inevitable.

This report selects two currently influential DeFi platforms and presents the industry's development status, competitive landscape, future directions, and opportunities through comparative analysis.

Overview of the DeFi Lending Market: One Dominates

According to DeFiLlama data, as of April 7, 2025, the market TVL of the Lending sector is 37.5b, among which Compound and Aave account for 2.0b and 16.8b, respectively, accounting for 5.3% and 44.7% of the Lending sector. Other top participants are shown in the table below:

In addition to TVL, Fees and Revenue are two key indicators, among which:

• Fees: Reflects the user's cost of using the protocol and activity level. The higher the Fees, the stronger the demand for borrowing.
• Revenue: Reflects the protocol's own profitability, usually a part of Fees.

According to DeFiLlama data, the 30-day Revenue proportion of the Lending sector accounts for 19% of Fees, which means that more than 80% of the Fees collected by DeFi platforms are distributed to depositors or used for other purposes.

In contrast, the ratios for Compound and Aave are lower, at 17% and 14% respectively, showing that large platforms indeed place more emphasis on ecological incentives rather than short-term profits.

Compound Analysis: Design Flaws Lead to Death Spiral

Overall, the development status of Compound is not good. As an established project that released its white paper as early as 2019, by April 2025, important metrics such as revenue and TVL have been surpassed by other competitors.

Income:

From 2022 to 2024, Compound's fees have significantly declined for three consecutive years, with revenue only rebounding in 2024, indicating that the project team has increased the proportion of income extracted from fees. This shows that Compound is facing difficulties in its development and has to pay more attention to short-term profits. In contrast, Aave's situation is noticeably better. Aave's fees have exceeded Compound since 2022, and despite the same downward trend in the lending sector, it still achieved a 2.5 times rise in fees and a 1.9 times rise in revenue in 2024.

Market Cap:

In April 2025, the latest market value of COMP Token is approximately 350 million, a decline of over 90% from its peak market value in 2021, which is equivalent to 16% of its TVL ( of approximately 2 billion ). Aave's latest market value is around 2 billion, a decline of 72% from its peak market value in 2021, which is equivalent to 12% of its TVL ( of approximately 17.8 billion ). The two other projects with a TVL larger than Compound (JustLend and Morpho )) also only account for 8%. This also reflects that COMP's valuation is relatively high.

Tokenomics:

Next, this report analyzes the Tokenomics of Compound from the following four dimensions and compares it with Aave, in order to identify the reasons why Compound is not developing as well as Aave, and hopes to provide references for the design of new project economic models.

1) Token supply and distribution (Supply and Distribution)

The total supply of COMP is 10 million coins, with an initial distribution rule of 49.95% to project shareholders and the team, and 50.05% to users, showing a less obvious tendency towards decentralization. In contrast, the total supply of Aave is 16 million coins, with 80% allocated to the community, indicating a more obvious tendency towards decentralization.

2) Incentive Mechanism

According to the Compound official website, the project team plans to distribute COMP over 4 years. As of April 11, 2025, the latest situation is that 1723 coins are distributed daily, which is 40% faster than the initial rate (1234 coins daily). This reflects the Compound team's desire to attract more users by increasing incentives, despite being in a disadvantaged position. However, this has not achieved the expected effect, as simply increasing the quantity of Token distribution does not enhance users' sense of value; rather, it may lead users to feel that the value of the Token has decreased, as free things are often perceived as worthless. A truly effective mechanism is to combine Token distribution with the platform's developmental goals, giving users a reason to feel rewarded at the time of distribution. For example, Aave rewards liquidity providers with Tokens as staking incentives, which is more beneficial for attracting users to provide liquidity to the platform in the long term.

*April 16, 2025, website screenshot

3) Value Accrual

The Compound project team did not fully and comprehensively consider the application scenarios of the Token from the very beginning, which is reflected in:

• When designing the economic model, the focus is on incentivizing users for liquidity mining, rather than incentivizing holders of COMP. This approach may seem reasonable at first glance, as prioritizing income distribution to depositors can maintain a high TVL and thereby enhance user attraction. However, the actual situation shows the opposite effect. The reason is that if users cannot taste the benefits of holding COMP, they will always feel that something is missing; this psychology of "wanting it both ways" is the mainstream in today’s era, and project teams can only comply with it; at the same time, this design by the project team has also initiated a death spiral: low earnings for holding COMP negatively affect the project's reputation, leading to a decrease in new users, which in turn causes a slowdown in the growth rate of TVL.
• Holders of COMP primarily participate in governance and have almost no qualifications for sharing project income. From a human perspective, for ordinary retail investors, the so-called governance rights is a relatively abstract concept, and its appeal is far less than the tangible benefits of profit sharing; it can be said that the project side has made the mistake of avoiding reality and chasing the intangible in this regard.
• COMP does not have a clear buyback or burn mechanism, meaning the project team has not designed a safety net for the Token price, and there is almost no emergency mechanism in place when the price drops significantly.

At the same time, it was mentioned earlier that COMP has been distributed at an accelerated rate. This may dilute its value.

Aave has a noticeably richer design in the application scenarios of Token. AAVE holders can share project revenue, including lending interest and flash loan fees, by staking into the Safety Module. Aave does not have a clear buyback or burn mechanism, but there was a proposal discussing using project Revenue to buy back AAVE and burn it, indicating that Aave is more likely to introduce a buyback or burn mechanism, providing an additional layer of protection for Token prices.

4) Governance and Power Distribution

According to the latest data from Estherscan on April 11, the top 10 addresses of the Compound project hold 39.1%, and the top 23 addresses hold over 50%. What does this mean?

Since ancient times, the results of purely voting-based decentralized governance are often not as good as the governance results of conscientious elites, which is also why there is no absolute democracy in today's world. The advantage of the former is absolute democratic decentralization, while the disadvantage is the heavy reliance on the quality and capability of proposers as well as the quality of proposals, which can be easily influenced by low-quality populism, leading to decisions that neglect the long-term interests of the project, potentially causing one to vote away their own future. The latter is more like Plato's ideal state, where the advantage is that multiple elites can check and balance each other to ensure a baseline for decision-making, while the disadvantage is the inability to achieve the ideal of decentralization, and multiple elites may collude to harm the interests of the majority. From this perspective, the governance power of Compound is relatively centralized, which cannot actually be considered a disadvantage; at least it should not be seen as the reason for the recent development stagnation.

At the same time, when considering the governance design of Compound in conjunction with the aforementioned value capture design, we can see more clearly the thinking of the Compound project team: since the substantive decisions are made by a few large holders (with a threshold: only holders of more than 100,000 COMP can participate in decision-making), and we can certainly share income through equity, we may not care too much about whether we and other users can share income through Token. This essentially reflects that the considerations of the Compound project team may not be comprehensive enough, and it also reflects that its shareholders have not provided good suggestions for the project design.

Conclusion

In the era of DeFi, the advancement of technology has made it possible for humanity to return to decentralized lending. Although the existing DeFi platforms today are not yet perfect, the activity level of the industry ecosystem still needs to be improved, and various risk events continue to emerge, we should still maintain confidence and attention towards DeFi projects.

• The DeFi Lending sector appears to be on a downward trend overall, but it is actually just normal industry fluctuations. When the overall macroeconomic environment is bleak, lending activities will inevitably decrease, and decentralized lending behaviors will also decrease accordingly.
• During the industry's low period, the phenomenon of Lending being dominated by one player is particularly obvious. Compound has fallen behind Aave and several up-and-coming contenders, and considering the flaws in its economic model design, it will be difficult to make a comeback.
• COMP Token is slightly overvalued compared to Aave, and the price may decline in the future.
• The design of the project's economic model must fully consider human nature in order to create a win-win and sustainable ecosystem. This is consistent with customer psychology research in traditional industries. If DeFi lending platforms are to achieve significant development, they need to drive continuous participation from users and partners from more aspects.