Worked Example: Analyzing Aave with the 7-Layer Framework

A complete walkthrough of the 7-layer framework applied to Aave with current 2025-2026 numbers. DefiLlama TVL, Token Terminal revenue, Dune dashboards, Glassnode token-holder analysis, and clear examples of "good" and "red flag" patterns.

13 min · expert · part of Protocol Analysis & Due Diligence

Why a Worked Example Matters

The 7-layer due diligence framework is a useful template, but a framework is only as good as your ability to apply it. This lesson does that: a complete walkthrough of the framework applied to Aave, with the actual numbers and data sources you would use in 2026. Aave is a useful subject for several reasons. First, it is one of the largest and most-studied DeFi protocols, with extensive on-chain data and analyst coverage. Second, its tokenomics are mature enough to evaluate cleanly (the AAVE token has been live since the Aavegotchi-era rebrand from LEND in October 2020). Third, Aave's 2025-2026 history includes both a record-setting peak ($30.5B TVL in September 2025) and a significant correction (down to ~$20B following the April 2026 Kelp hack), giving a complete cycle to analyze. The structure: walk through each of the seven layers, cite the specific data sources and current numbers, and at each step flag what "good" looks like and what would be a "red flag" if you saw it. By the end, you should be able to apply the same framework to any protocol you encounter in the wild.

Also in this lesson

Layers 1-2: Problem/Solution and Team/Execution
Layers 3-4: Technology and Tokenomics
Layers 5-6: Competition and Community
Layer 7: Risk Assessment and Specific Tools
For Deeper Reading

Key terms

7-Layer Framework Worked Example: Application of the due diligence framework to Aave with current 2025-2026 numbers, demonstrating how each layer of the framework is evaluated in practice.
Aave V3: Current production version of Aave, launched March 2022. Introduced isolation mode, efficiency mode, and cross-chain Portal. Multi-network deployment across Ethereum, Arbitrum, Optimism, Base, Polygon, and many others.
Aave Safety Module: Mechanism where AAVE token holders stake to backstop protocol bad debt, earning rewards in exchange for slashing risk. Currently holds ~$400M+ in staked AAVE.
Compound Finance: Original algorithmic money market launched September 2018. Smaller TVL than Aave today (~$2-4B vs Aave $20B+) but cleaner codebase. Pioneered the cToken and COMP governance models that triggered DeFi summer 2020.
Morpho: Peer-to-peer matching layer optimizing rates on top of Aave/Compound. ~$2-4B TVL; growing rapidly with Morpho Blue. A complement to and competitor for Aave.
Spark Protocol: Aave V3 fork operating as a subDAO of Sky/MakerDAO with native USDS integration. ~$1-2B TVL; smaller and more focused than Aave.
Aave Governance Forum: governance.aave.com is the canonical Aave debate venue. One of the most-active DeFi governance forums. Reading recent AIPs is the fastest way to assess governance health.
AIP (Aave Improvement Proposal): Aave's formal governance proposal mechanism. Submitted on the forum, debated, then voted via Snapshot or on-chain. Determines parameter changes, asset listings, treasury actions, and protocol upgrades.
Aave V3 Audit Trail: Audits by Trail of Bits, OpenZeppelin, Certora, Sigma Prime, and others. Archived at github.com/aave/aave-v3-core/tree/main/audits. Multi-firm audits before each major release are best practice.
Aave Concentration Risk: Aave's primary markets are concentrated in stablecoins (USDC, USDT) and ETH-related assets (ETH, wstETH). Stablecoin depegs or major LST failures create severe protocol stress.
Aave Bad Debt: Loans that cannot be liquidated profitably (e.g., when collateral value drops below loan value during illiquidity). Backstopped by the Safety Module up to its size; bad debt has historically remained well under 0.1% of deposits.
Composability Risk: Risk that a problem at one DeFi protocol cascades through integrated protocols. The April 2026 Kelp hack ($6B drained) hit Aave's TVL hard despite Aave itself not being directly exploited, illustrating composability risk in practice.

Continue this lesson — 5 more sections in the CryptoBipto app.

Open lesson

Educational only — not financial advice.