Just like other DeFi applications such as Uniswap, Aave uses smart contracts to eliminate intermediaries between lenders and borrowers, operating in a truly decentralized fashion.
What is Aave?
Aave is a decentralized lending protocol built on Ethereum and uses decentralized autonomous organization (DAO), it enables users to lend and borrow cryptocurrencies in a trustless manner. It is governed and operated by AAVE token holders who vote on changes to the protocol.
Aave determines lending rates and matches lenders to borrowers. While lenders earn interest for depositing cryptocurrency assets into liquidity pools, borrowers pay interest for borrowing amounts lent by depositors.
Aave is currently the most popular decentralized peer-to-peer loan service in the world. Users can either earn interest by depositing funds into the service or borrow funds stored by other users to the service. All this is possible without third parties, such as banks. Aave’s range of services is often growing, and at some point, we may find ourselves in a situation where Aave offers its users an even wider range of services than many traditional banks.
Aave is a distributed, open-source Defi protocol that also has its ID, AAVE. Account owners can vote on Aave development and thus impact the direction of the protocol through their actions. In addition to this, Aave also has a betting function, where the owners of AAVE accounts can choose to lock their AAVE account in the service. At this point, it is good to remember that stacking your AAVE is a different matter from the loan service mentioned earlier in the text, where it is possible to get an annual interest rate on your deposit.
Aave staking is a protocol security mechanism that prevents liquidity problems and protects the funds of service depositors in the event of sudden market disruption. By stacking the AAVE, it is also possible to earn interest income in exchange for tokens deposited in the assistance. Of course, interest is also paid on AAVE codes. Aave’s Origins
Aave was founded in 2017. The founder and current CEO of Aave are Stani Kulechov, who has a Finnish background. Aave’s headquarter is currently in London and employs many of the most skilled experts in the cryptocurrency world.
Aave was originally known as ETHLend (Ethereum Lending). In 2017, ETHLend offered ICO (Initial Coin Offering) and raised $ 16.2 million in funding. Next year, ETHLend changed its name to Aave (it means ghost in Finnish). In connection with the name change, the operating model of the service was also changed. The new operating model made it easier to provide liquidity to the protocol.
The protocol began operating on the Ethereum network in January 2020. In 2020, it also received a license from the UK Financial Conduct Authority, making Aave the authorized electronic money institution. It has been one of the most significant missionaries of the Defi protocols since the beginning and has defined the direction of the entire Defi sector through its activities.
Features of Aave.
The final element to understanding Aave in detail would refer to the features offered in the protocol. One of the important things you have to notice in the features of Aave refers to the tokens on the platform. While liquidity providers receive tokens, the native AAVE token has a significant role in the Defi lending protocol. The Aave crypto token offers various advantages for holders. For example, people borrowing the token would not have to pay the transaction fee for taking out loans in denominated tokens. In addition, borrowers using AAVE as collateral also get the chance to bargain on the transaction fees.
The next distinctive feature of Aave as an open source Defi protocol is the ability for users to earn revenue in real-time. In addition, flash loans on Aave also offer the opportunity for obtaining crypto without any collateral. However, borrowers have to repay the loan within the same transaction. The loan transaction overturns back if borrowers don’t return the funds within a specified time.
Another important highlight in the features of the Aave crypto lending protocol is the facility for rate switching. The protocol supports borrowers in switching between fixed and floating interest rates. As a result, it can help in reducing borrowing costs. With a diverse portfolio of products covering various domains such as technology, games, and finance, Aave protocol is also the most diverse lending pool in the Defi space right now.
How does Aave Protocol Works?
Aave allows users to request loans and earn rewards by lending. A user can recognize as a borrower or as a lender.
Like its ancestor, ETHLend, Aave is fundamentally a money market. ETHLend manually matched the loans and authorized them directly between users. That said, Aave is what’s called an algorithmic money market.
Tokens on Aave are held in pools. As a lender, you deposit into the currency pool you choose. If you’re borrowing, you’re borrowing from a currency pool, not from a lender directly.
Aave’s interest rate is demand-driven. They call it the utilization rate. It’s almost like the hospitality industry. Hotel rooms become much more expensive on holiday nights because they’re highly in demand. Their price quite falls over when demand drops on regular evenings. That’s also what happens on Aave.
If the assets in a pool are almost used up (as in, lent out), the utilization rate is high. In that case, the interest goes up to persuade more lenders to stimulate the pool. If the pool’s funds are mainly unused, the utilization rate is low. That means the interest is also low to facilitate borrowing activity.
What is Aave Token?
Aave issues two different types of tokens:
- ATokens – ERC-20 tokens issued to lenders to collect interest on deposits not to be confused with AAVE tokens.
- AAVE tokens – the native governance token of the Aave protocol and can be purchased from CoinFlip.
AAVE token holders can provide information and count on improvement recommendations that change the direction of the protocol. AAVE tokens can also be used for fee reductions when using the Aave protocol. As one of the largest Defi tokens on the market, AAVE allows you to invest in the technology while having a say in its future.
AAVE has a maximum supply of 16 million tokens, with 3 million tokens set aside for program development and held in an ecosystem reserve contract. AAVE is also a deflationary asset, as tokens are “burnt,” or removed from circulation when used to pay for fees on the Aave protocol.
What is The Future of Aave?
Aave continues to develop its DeFi ecosystem. In July 2022, Aave revealed it plans to launch its own stablecoin, GHO—pending the approval of an ARC (Aave request for comments) by AAVE token holders. Should the proposal pass, GHO will launch as an overcollateralized stablecoin, backed by a “diversified set of crypto-assets,” according to the proposal.
The introduction of GHO would make stablecoin borrowing on the Aave Protocol “more competitive,” as well as generating extra revenue for Aave’s DAO by “sending 100% of interest payments on GHO borrows to the DAO,” the proposal added.
As a decentralized, collateralized stablecoin, GHO would follow a similar model to Maker’s DAI, unlike the algorithmic stablecoin model pioneered by Terra’s ill-fated UST—whose collapse was one of the most dramatic effects of the mid-2022 crypto crash.
Aave Companies further promised that “significant risk mitigation features” would be in place to prevent too much GHO from being minted.
Aave is also branching out beyond DeFi with the launch of Lens Protocol, a Polygon-based decentralized social media platform that lets users store their content as NFTs.