Aave Dominates the Decentralized Finance Lending Market with Hidden Systemic Risks

[Crypto Assets] Aave (AAVE), as a leading non-custodial liquidity protocol, has established its major position in the Decentralized Finance (DeFi) ecosystem, controlling about half of the DeFi lending market share. However, as the Crypto Assets market continues to thrive in the broader bull run of 2025, some issues have arisen internally at Aave that could have serious implications for the entire market.

The risks behind Aave's dominance in DeFi and market control.

According to data from the data platform, Aave's total locked value (TVL) is 36.73 billion USD. This accounts for almost 50% of the total TVL of 75.98 billion USD. Furthermore, the protocol's TVL reached a historical high of 40 billion USD last week. This dominance makes Aave a "pillar" of the decentralized lending system, allowing users to borrow and lend assets without intermediaries. Nevertheless, this central position also means that if Aave encounters issues, it could trigger a chain reaction throughout the market.

However, what problems might arise?

A key issue is the concentration of influence in protocol governance. Previously, Sandeep Nailwal, the founder and CEO of the Polygon Foundation, expressed concerns about the governance structure of Aave. He emphasized that the protocol is managed by one person (founder Stani Kulechov). Nailwal pointed out that Kulechov has significant control over proposals and voting, effectively operating the platform based on personal preferences.

The composition of the user base has further exacerbated the vulnerabilities of Aave. Research data indicates that by 2025, large users holding over $100,000 in collateral will increase from 29% in 2023 to 37%. Meanwhile, the proportion of small users with deposits below $1,000 has decreased from 15% to 12% over the past two years. This concentration of power among high-net-worth participants increases the likelihood of liquidity shocks and instability of the protocol. If these users withdraw en masse or face liquidation events, the impact may propagate across interconnected DeFi platforms.

Finally, excessive expansion also poses significant risks. Aave's deployment across 16 chains has depleted operational resources. A prominent analyst emphasized on social media that some of this expansion operates at a loss, increasing financial and technical risks.

The impact of these risks goes beyond Aave itself. As one of the main participants in Decentralized Finance, any disruption, whether stemming from governance failures, user concentration, or over-expansion, could undermine trust in decentralized lending and destabilize the broader ecosystem. Therefore, addressing these challenges is crucial for Aave.