4 min read
01 April 2021

Named after the Finnish word for ‘ghost’, Aave is  a key pillar of the DeFi or decentralized finance   space focused on creating an open and transparent  peer-2-peer lending and borrowing money market. So, Let’s lift the lid on Aave.

Unlike traditional banks or other  centralized finance services, Aave   requires zero registration or Know Your Customer  processes. Simply connect your Web 3.0 wallet like   Metamask and start depositing, borrowing,  staking or swapping on the DeFi platform.  All transactions are automatically executed on  the Ethereum blockchain using smart contracts.

How Aave works is that instead of  matching a lender to borrower 1:1,   lenders deposit their funds into liquidity  pools, which users then borrow from.   And Each pool has reserves to act  as a hedge against volatility.WHAT IS AAVE? Instead of traditional banks  raking in all the fees,   Aave rewards lenders for depositing their  funds and providing liquidity to the market.   Lenders earn from two sources:  the interest rate paid on loans,   and a percentage of flash loan fees. We’ll  get into what flash loans are in a minute.

But first, Aave lenders earn interest-earning  tokens called aTokens. For example, depositing   ETH will earn you aETH, which is pegged 1:1 to  the value of the underlying asset deposited.   But, if the price changes, aTokens will  continue to maintain the underlying asset price   while increasing or decreasing  the amount of aTokens owned.

What  is are flash loans?

Flash  loans are a unique Aave feature   native to DeFi as a whole. Flash loans are  loans charged at a low fee of just 0.09%,   and they let investors take out  loans without any collateral. Instead, borrowers must repay the loan before the  transaction ends — or in blockchain terms — before the   next block is mined. If the loan is not repaid  in time, the transaction and all subsequent   transactions that were performed with it will  get reversed, cancelled or will just fail.

Given the rather complex technicalities involved,   flash loans are designed for advanced  technical investors capitalizing on   opportunities like yield farming, arbitrage  or refinancing within the Ethereum ecosystem.

What about borrowing?

Borrowers collaterize  their crypto assets to take out loans   from the liquidity pools. Borrowers must lock  up collateral to borrow an amount that is less,   or around 50% to 70%, of the collateral locked up. Which brings us to another unique feature of Aave:  interest rate switching.

Borrowers are able to   switch between fixed and variable or floating  interest rates to take advantage of different   market conditions at any time. This flexibility  is definitely unique to Aave and DeFi as a whole,   which is why Aave is well poised to be the  decentralized future of finance where lending and   borrowing is executed completely peer-2-peer, and  without middlemen, restrictions or regulations.

Currently, Aave allows users  to lend and borrow across   24 cryptocurrencies from stablecoins  to altcoins like DAI, YFI and SUSHI.

What about the AAVE token?

Aave’s native token  is an ERC-20 token called well, Aave, Though,   it was formerly known as LEND before Aave  rebranded from ETHLend back in September 2018. The Aave token provides utility  for several functions. First,   Aave can be staked as a governance token,  giving holders the power to decide on the   future direction of the protocol by  voting on Aave Improvement Proposals.  

Secondly, users can stake Aave within  the protocol to earn staking rewards. Finally, borrowers who use Aave as collateral  also get discounted fees on the platform. Aave is burned whenever users  pay fees on the protocol,   making it a deflationary token. Also, , Aave  has an extremely limited circulating supply   of just 12 million Aave coins and a max supply of  16 million, even less than Bitcoin’s 21 million.

So what are your thoughts on the Aave protocol or  the Aave token? Are you bullish on Aave for 2021   and beyond? 

Alex 10.6K
Joined: 4 years ago
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