Original author: Vaidik Mandloi
Original compilation: Chopper, Foresight News
Last week, Aave announced it would shut down lending markets on six blockchains. Each of these six chains generated less than $5,000 in quarterly revenue. With Aave's typical 13-cent cut per dollar of interest, its earnings on Mentis and Aptos would barely cover a dinner. In contrast, Aave's deployment on Ethereum generated $142 million in revenue last year; meanwhile, it expanded to new chains like Linea, with V4 deposits surpassing $300 million.
This article will delve into what these public chains will face after Aave's withdrawal, and whether any project will replace Aave. If no one steps in, these chains may permanently lose their credit functions.
The Chain Reaction of Collapse
When a leading lending protocol on a public chain exits, what exactly happens? Let's review past cases.
The first case is Harmony Protocol. In June 2022, its core cross-chain bridge Horizon was attacked, losing approximately $100 million. As the largest lending protocol on the chain, Aave froze all reserve assets on the chain. Later that year, a rescue proposal was put forward by the community, but it was rejected by 99% of Aave token holders. Today, this public chain is dead, fundamentally due to the complete loss of lending liquidity.
You might wonder: why not simply fork Aave and redeploy it on Harmony? After all, the code is open source, and deploying a lending protocol takes less than a day. That's true, but what's easily overlooked is that a lending market also requires continuous maintenance, oracles backed by funding entities to price collateral assets, and sufficient DEX liquidity to ensure that when borrowers are liquidated, collateral can be automatically sold without causing price slippage of over 40%.
It also requires stablecoin issuers to recognize the chain and support native redemptions. That is, issuers like Circle and Tether can natively issue tokens on the chain, allowing users to directly convert USDC to fiat without cross-chain transfers. After Harmony's cross-chain bridge collapsed, all stablecoins on the chain de-pegged, oracle price feeds failed, and the liquidation mechanism completely broke down. The entire set of components supporting the lending market collectively failed. Since then, no party has had the commercial incentive to rebuild this system. On a chain with no lending demand, who would be willing to pay to maintain oracle price feeds?
Another typical case is Fantom, which also suffered a cross-chain bridge hack in 2023. Before that, 78% of the chain's market cap relied on this bridge. After the attack, the bridged USDC price on Fantom plummeted to about $0.22, causing a large amount of collateral to shrink in value and become insolvent.
The most thought-provoking point is: Fantom was once the third-largest DeFi public chain in the crypto industry, with real users and lending demand. Even with these foundations, it still failed to rebuild its credit market. For a chain that is losing users, the cost of rebuilding the entire underlying infrastructure of oracles and stablecoins always exceeds the potential revenue, as the core user base has already left.
Later, Fantom attempted a rebranding and restart, renaming itself Sonic, trying to turn things around purely with capital. The project conducted a $190 million token airdrop, and on the first day, Aave, Silo, and Euler were all deployed, with Wintermute providing market-making support. But the result backfired, as the project suffered a Sybil attack. Depositors and borrowers were mostly the same users: depositing assets to farm airdrop points, then borrowing against the same assets to maximize point earnings. The TVL was inflated, with the same funds being repeatedly counted through leverage cycles.
Lending demand came entirely from airdrop incentives, not from genuine on-chain economic activity requiring working capital or leverage. For example, Ethereum users borrow for reasons like looping staked ETH or funding trading strategies, and the demand exists regardless of whether the protocol issues rewards. But on Sonic, once incentives are removed, there is no real lending demand. This directly led to a 98% crash in on-chain TVL after Wintermute's partnership ended, with the token price dropping to less than one cent, and both founders resigning from the board. Subsidies and market-making partnerships can create a false appearance of a credit market, but they cannot sustain it in the long run.
Data source: DeFiLlama
Now look at the chains Aave is about to exit, such as Soneium, Aptos, Zksync, and Scroll. Their situation is even worse than Harmony and Fantom. On-chain deposits have already plummeted by 95%, and quarterly lending business revenue is less than $5,000.
Harmony and Fantom at least had native lending demand from real users before being hacked. But these six chains have never formed native business demand. These chains raised an average of $250 million each and deployed the most cost-efficient lending protocol in DeFi, yet still failed to generate real demand.
Data source: Aave governance page
Aave's exit will also trigger a chain reaction. Many people don't realize that Aave is the core pillar of these chains' financial infrastructure. Almost all Chainlink oracle price feeds on these chains are maintained at Aave's cost, since Aave is the largest caller. After Aave withdraws, all oracle service providers will reassess whether to continue maintaining price feeds for a chain with no active lending market. Market makers will also stop investing in DEXs on these chains for the same reason. Even stablecoin issuers won't provide native issuance support for chains with monthly revenue under a thousand dollars. One service provider exiting accelerates the departure of the next, as the commercial viability of all service providers is predicated on other supporting services functioning properly.
Resources will accelerate toward chains that are functioning well, have ample liquidity, and where lending markets work properly. Every infrastructure exit from a niche chain further strengthens the aggregation effect of leading chains, thereby making the business case for remaining niche chains to maintain their own lending infrastructure even weaker.
This centralization is self-reinforcing. Lending is the foundation of a chain's entire financial system. Without lending, most yield strategies cannot operate, as most strategies require borrowing one asset against another as collateral; efficient liquidity market-making also becomes impossible, as concentrated liquidity positions often rely on borrowed funds. Once lending disappears, all financial applications built on top of it lose their foundation. Consequently, developers gradually leave, on-chain activity further declines, and no infrastructure service provider is willing to stay.
That's why Aave has set a threshold for future deployments on new chains: a minimum annual revenue of $2 million. This amount essentially covers the cost of maintaining the entire lending infrastructure, including oracle price feeds, risk monitoring, and liquidation, for a single chain. This also fully demonstrates that the past model of raising hundreds of millions and quickly launching with subsidized liquidity is no longer viable or sustainable.
A Dilemma Not Unique to the Crypto Industry
The loss of credit infrastructure on public chains is not a phenomenon unique to the crypto space. Any industry with high fixed costs but small market size faces similar issues.
After 2008, major global banks began cutting correspondent banking relationships with some small countries. The logic is highly similar to Aave's: anti-money laundering monitoring and regulatory reporting incur fixed costs for each partnership, and the revenue from some small cross-border transactions cannot cover these costs. Between 2011 and 2022, effective correspondent banking relationships worldwide decreased by 30%. Dollar clearing channels for Pacific island nations shrank by over 60%, with some countries left with only one correspondent bank. The situation became so severe that the World Bank had to provide $69 million in subsidies to keep the remaining clearing service providers in eight Pacific countries operational.
However, there are key differences between the crypto industry and traditional cases. In the traditional correspondent banking system, the World Bank acts as a backstop, with central banks and development institutions providing subsidies to maintain operations. But the crypto industry almost entirely lacks such backstop mechanisms, which is exactly what these public chains are experiencing. A mid-sized bank spends $15-40 million annually on compliance costs alone, and the World Bank invested $68 million just to preserve the last dollar clearing channel in eight countries. In contrast, Aave's total risk monitoring contract costs across all public chains are only $5-8 million, and these six chains cannot even afford their share of this cost.
Of course, this does not mean that DeFi lending is shrinking overall; in fact, the opposite is true: the industry is growing rapidly while being highly concentrated. Morpho's TVL grew from $105 million to over $8 billion in one year; Euler expanded from $6 million to $300 million in just a few months. Within months of Aave V4's launch, deposits exceeded $300 million, and Société Générale became the first traditional bank to integrate with a DeFi lending protocol. The credit market is thriving, but resources are concentrated on Ethereum and two or three Layer 2 networks like Base and Arbitrum, rather than being dispersed across dozens of public chains.
In the past, many public chains were born with the idea that deploying infrastructure is extremely cheap, and every chain could build its own financial system. This idea was only half right: launching a chain is indeed cheap, but running a credit infrastructure on it is very expensive. Looking at current Layer 2 networks, Ethereum and the top three chains account for 90% of TVL. The remaining chains can only compete for a tiny share, which is not even enough to cover the cost of a single Chainlink price feed. In the future, these chains may see a fork of Aave with flawed oracles, or they may end up with nothing at all.
