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. 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?