Grayscale Aave Trust conversion fuels growing aave etf competition in US markets

Growing institutional interest in DeFi is accelerating as the aave etf narrative gains momentum among major US asset managers.

Grayscale moves to convert its Aave trust into a spot ETF

Grayscale has filed to convert its existing Aave trust into a spot exchange-traded fund, adding fresh momentum to the race for the first AAVE-backed ETF in the United States. The firm submitted its application to the U.S. Securities and Exchange Commission on February 13, proposing the Grayscale Aave Trust ETF. The fund would hold AAVE tokens directly and seek a listing on NYSE Arca, with Coinbase named as custodian and prime broker.

The move places Grayscale alongside Bitwise, which filed a similar proposal earlier, as institutions slowly turn their attention toward DeFi tokens. Moreover, the new filing underscores how traditional finance is starting to explore regulated structures for altcoin exposure, not only for Bitcoin and Ethereum.

Second major manager in the AAVE ETF race

Grayscale is now the second major asset manager to seek approval for an AAVE-focused ETF. Bitwise filed its own proposal in December 2025, aiming to bring a regulated AAVE investment vehicle to U.S. markets. Both firms are vying to launch the first product that offers compliant, exchange-traded exposure to the token.

Grayscale already operates an Aave trust, a vehicle that has historically provided investors with indirect exposure to AAVE. Now the company wants to convert that product into a full ETF. This approach mirrors its earlier strategy with Bitcoin and other crypto trusts, where conversions helped channel billions of dollars into the ETF market.

That said, the new application also signals that institutional interest is moving beyond Bitcoin and Ethereum. Additionally, asset managers increasingly view DeFi tokens as the next frontier for regulated crypto investment products.

Key features of the proposed Grayscale Aave Trust ETF

The proposed ETF would hold AAVE tokens directly, rather than relying on futures contracts or synthetic instruments. This structure is designed to deliver straightforward price tracking for investors. Grayscale plans to charge a 2.5% sponsor fee, which will be paid in AAVE. However, that fee level is higher than many existing crypto ETFs, reflecting the added complexity and risk associated with altcoin-based portfolios.

Coinbase will act as both custodian and prime broker, responsible for securely storing the AAVE held by the fund and handling trade execution. Moreover, the ETF aims to list on NYSE Arca, making it accessible through standard brokerage accounts. If the aave etf wins approval, it would offer investors simple, regulated access to AAVE without the need to manage wallets or private keys.

Potential impact on AAVE and the DeFi ecosystem

Aave underpins one of the largest decentralized lending platforms in crypto, supporting billions of dollars in deposits and loans. The protocol plays a central role in the broader DeFi ecosystem, enabling users to borrow and lend a wide range of digital assets. An ETF tied to AAVE could unlock new capital flows, particularly from institutions that avoid direct token holdings due to custody and compliance concerns.

Many investors remain hesitant to interact with DeFi smart contracts or self-custody solutions. However, a regulated exchange-traded product would allow them to gain price exposure through familiar brokerage infrastructure. This could gradually increase liquidity around AAVE and deepen institutional engagement with decentralized lending.

Bitcoin ETFs saw massive inflows following their approvals, and some analysts believe a similar, though smaller-scale, pattern could emerge for major altcoins. That said, expectations remain more measured, as single-token DeFi products are likely to attract a narrower investor base than Bitcoin-focused funds.

Regulatory path and broader altcoin ETF implications

The latest filing is only the first step in a lengthy regulatory process. The SEC must review and potentially approve the proposal, a process that could take several months and carries no guarantee of success. Regulators remain cautious about single-asset altcoin ETFs, especially where market depth, liquidity, and price discovery are still evolving.

Even so, the environment has grown more crypto-friendly after the approval of multiple spot Bitcoin ETFs. Moreover, each new application helps build a track record and framework that regulators can reference when assessing future DeFi and altcoin products.

If approved, an ETF focused on AAVE could open the door to a broader wave of DeFi token and altcoin etf filings. Asset managers are already exploring similar structures for other protocols, watching closely how the SEC responds to these proposals. For now, the Grayscale move highlights that institutional demand is expanding beyond Bitcoin and Ethereum, suggesting that DeFi may be next in line for mainstream, regulated market access.

In summary, Grayscale’s attempt to transform its Aave trust into a listed ETF on NYSE Arca, with Coinbase as custodian and prime broker, marks another step in the convergence between decentralized finance and traditional capital markets.