The whole concept of finance had been managed and controlled by traditional institutions before the emergence of DeFi. It was almost impossible for users to access loans and other financial services without being directly involved with a third party like the traditional banks.
The DeFi movement has changed how finance is perceived by taking control away from banks and giving it to users through peer-to-peer systems. Aside from having direct access to loans, decentralized financial platforms give crypto owners opportunities for profit on assets deposited into various lending pool protocols.
Lending and staking are two popular features of DeFi, and while they are relatively new compared to their traditional counterparts, their profit outlook can not be underplayed.
A popular DeFi lending protocol is Aave. If you have been around DeFi for a while, you would have heard of Aave at least once. This article explores “what is Aave crypto,” how it facilitates lending and borrowing without the need for a third party, and how you can effectively lend and borrow crypto from it.
What Is Aave?
Aave stands as a cornerstone in the DeFi landscape, offering a decentralized lending protocol that empowers users to both borrow and lend crypto tokens. By contributing liquidity to the protocol's pool, users can earn interest. Unlike traditional systems that rely on intermediaries, Aave's protocol is transparent, open-source, and operates without the need for a third party or central authority.
In the conventional financial world, individuals save money in bank accounts. For instance, depositing money into a savings account might earn you an interest rate of 0.5%. The bank then lends out your money to another customer at a 4% interest rate, pocketing the 3.5% difference as their profit.
Contrastingly, Aave offers a more direct approach. By depositing digital assets into its lending pool, users earn interest directly, eliminating the hefty fees typically taken by middlemen. Within this DeFi framework, two primary user types emerge: lenders, who provide their cryptocurrencies to earn yields, and borrowers, who take out crypto loans from the pool at either variable or fixed interest rates.
Aave has solidified its position as one of the premier crypto lending protocols, evidenced by the significant appreciation of its native token's value. This dynamic system not only facilitates loaning and borrowing but also invites users to influence the protocol's future. The AAVE token empowers its holders with voting rights and governance capabilities. Furthermore, the Aave DAO ensures that the broader community actively participates in shaping the protocol's direction and major decisions.
Central to Aave's operation is its foundation on smart contracts. As the protocol spreads across several chains beyond Ethereum (Avalanche, Fantom, and Harmony, with Polygon, Optimism, Metis and Arbitrum as Ethereum’s scalability networks), its smart contracts are deployed across all of them. Smart contracts are essentially self-executing contracts where the terms of agreement or conditions are written into lines of code. They ensure that all interactions within the project’s ecosystem remain secure, transparent, and fully automated. Given Aave's integration with numerous ERC-20 tokens, these smart contracts are crucial in smoothing interactions between diverse cryptocurrencies.
Users gain unparalleled autonomy with Aave, free from intermediaries that manage or control their assets. Instead, the protocol's code is autonomously executed on the network based on predefined conditions.
Lastly, the protocol’s software architecture supports the formation of liquidity pools, allowing users to engage in giving loans or borrowing a diverse range of digital currencies, from ETH to MANA and beyond.
Aave is a profit-making crypto company founded in Switzerland by Stani Kulechov in 2017. Kulechov was a trainee in law in Helsinki when he launched Aave.
The company was initially known as ETHLend, after which it was rebranded as Aave in 2018. Before rebranding, the brand generated more than $16 million in an Initial Coin Offering (ICO); at that time, it sold 1 billion units of its native token, LEND.
Later, in 2020, Aave was relaunched as V2 protocol version, and LEND was transferred to AAVE coins at 100 LEND tokens per AAVE. Thereby decreasing the total supply of its token to 16 million AAVEs.
One key feature the relaunch introduced was the algorithmic money market function of Aave. Originally, what ETHLend did was to match lenders with eligible borrowers. However, the new features of V2 allow for the implementation of a liquidity pooling structure in which the interest percentages depend on the assets available in the pool.
For this new feature, if a crypto asset is limited in supply, the interest rate is set higher to motivate lenders to make more contributions to the pool. Contrarily, if a crypto asset is in excess, the interest rate becomes lower to prompt borrowers to take out loans. This dynamic adjustment of interest rates based on supply and demand ensures that the lending market remains balanced and attractive for both lenders and borrowers.
Following the success of V2, Aave introduced the V3 protocol version. V3 brought about a series of enhancements, including optimized gas fees, more flexible loaning and borrowing options, and improved interoperability with other DeFi platforms. Additionally, V3 emphasized user experience, introducing a more intuitive interface and streamlined processes to cater to both novice and experienced DeFi users. The V3 update also incorporated advanced risk management tools, ensuring a safer and more secure environment for all participants in the ecosystem.
How Does Aave Work
The value of cryptocurrencies can fluctuate significantly. For many, merely storing them in digital wallets doesn't yield any tangible benefits. Recognizing this challenge, Aave pioneered a lending mechanism that has since become a beacon in the decentralized finance (DeFi) space. With a strong liquidity ratio and healthy collateral spreads, Aathe project ve is certainly making its mark in the space. Let’s go through the main features of the protocol.
Liquidity provision. At its core, Aave offers a robust platform where users can step into the shoes of liquidity providers. By doing so, they can earn passive income, transforming their static holdings into profit-generating tools. Users deposit their cryptocurrencies into liquidity pools, and in return, they earn interest on their holdings. This mechanism not only incentivizes saving, but also fuels the DeFi ecosystem by providing necessary liquidity. For individuals or entities in need of funds, the project facilitates borrowing from these very pools, creating a symbiotic relationship between lenders and borrowers.
Diverse asset options. Aave's platform is a treasure trove of liquidity pools, featuring an impressive array of over 20 cryptocurrencies. This selection encompasses well-known stablecoins such as USD Coin, Tether, Gemini Dollar, and DAI. Additionally, it includes other high-profile cryptos like Uniswap, BAT, and Chainlink. This vast array ensures that users, regardless of their investment strategy, have a plethora of digital currencies to choose from, allowing them to align their choices with their individual risk profiles and market predictions.
Lending dynamics. Aave's approach to lending diverges significantly from traditional banking systems. In its ecosystem, both the lender and the borrower reap benefits. When a user commits their crypto to liquidity pools, they're not just parking their cryptos; they're actively earning interest on their contributions. The decentralized finance (DeFi) model, underpinned by blockchain technology, leverages smart contracts to manage these intricate transactions. These contracts, which are self-executing with the terms of the agreement directly written into code lines, handle loan issuance and related services. By eliminating intermediaries, this ensures borrowers have streamlined, transparent, and direct access to funds, sourced from the collective assets of individual lenders.
Borrowing mechanics. Unlike traditional systems that might accept physical assets like property or gold, the protocol mandates collateral in the form of cryptocurrency. Given the inherent volatility of cryptocurrencies, it enforces a policy of over-collateralization. This ensures that the value of the crypto collateral provided must always exceed the loan amount. If, due to market dynamics, the collateral's value dips below a certain threshold, the system is designed to liquidate the position.
Flash loans. Aave's innovation doesn't stop at traditional loaning and borrowing. They introduced the concept of flash loans, a groundbreaking feature in the DeFi space. They allow users to borrow vast amounts without collateral, but with a unique condition: the loan must be repaid within the same blockchain block. This feature has opened doors for numerous arbitrage and financial optimization strategies. Moreover, the protocol incentivizes the use of its native token by offering reduced interest rates for borrowers who use the AAVE token as collateral.
To optimize and streamline its services, Aave has rolled out two primary tokens: AAVE and aTokens:
aToken. When users deposit cryptocurrencies into Aave's liquidity pool, they're not left empty-handed. They receive aTokens at a 1:1 ratio to the underlying asset, which can then be converted back to the original cryptocurrency at the user's convenience. For instance, for every 1 DAI token deposited, an equivalent aDAI aToken is generated for the lender. These aTokens accumulate interest in real-time. As loans are sanctioned from the respective pool, interest is accrued and seamlessly sent to the lender's wallet in the form of additional aTokens.
AAVE Token. It's the lifeblood of the project’s ecosystem. As a governance token, it empowers its holders with voting rights, allowing them to have a say in the platform's direction and future developments. By staking AAVE, users can actively participate in the protocol's evolution, decision-making processes, and even earn rewards. This decentralized governance model ensures that the broader community, rather than a select few, plays a pivotal role in shaping the project’s trajectory.
AAVE Mining and Staking
Staking is basically like putting funds into a treasury bond, and while smart contracts do the actual job, you earn interest.
Whenever a user locks their crypto assets into a DeFi lending platform, they make funds accessible to the borrower.
Further, as a risk-mitigation measure, staked AAVE tokens are deposited into the smart-contract-based Safety Module on the Aave platform. This staked Aave serves as a risk management mechanism in the case of a Shortfall Event (this event occurs when there is a shortage) within Aave's money market.
In addition to all these, the project is initiating an Aave mining pool to help improve liquidity for stablecoins and DeFi tokens.
Although these mining pools are designed to reward both the lender and the borrower for participation, the concept is not the traditional crypto mining, as in the case of Bitcoin. Instead, it's a mechanism to incentivize users to contribute more liquidity to the platform, thereby enhancing the overall health and stability of the lending market.
Aave Coin Price
The protocol's Total Value Locked (TVL) influences its native crypto price and determines the total supply in circulation. According to DefiiLlama, a DeFi (TVL) aggregator, the Aave protocol has one of the highest TVL at $4.6bn as of 18 August 2023.
As of April 18, the Aave price was $56 with a day trading volume of $117,650,000 and a market cap of $813,050,832. Currently, there is a supply of 14,520,125 AAVE coins in circulation and a total supply of 16,000,000 coins.
Due to the volatility of the crypto market, Aave prices and those of other cryptos vary frequently. Nevertheless, the token can be traded on various exchanges such as Redot, Kraken, and Coinbase.
It's essential to note that while the price of Aave and other digital currencies can be influenced by market sentiment, news, and regulatory developments, the underlying value proposition of the protocol, its features, and its adoption in the broader DeFi ecosystem play a crucial role in its long-term value.
How To Buy AAVE
When buying cryptocurrencies, there are a few things to consider, one of which is the exchange you are buying from. The following are four steps to guide you on how to buy AAVE crypto.
Step 1. Find an exchange that supports fiat and cryptocurrency to make buying Aave easier.
Step 2. Create an account on the exchange of your choice by signing up and filling in your details.
Step 3. Fund your account. There are a few options to choose from when you want to fund your account. You can use the bank transfer options, pay with a card or buy Aave with a different cryptocurrency.
Step 4. Select Aave from the list of assets and buy by choosing a trading pair that has both AAVE and the currency you deposited for purchase. For example, USD/AAVE or BTC/AAVE.
The Outlook for Aave
Aave has consistently marked its territory as a dominant entity in the decentralized finance (DeFi) sector. Its standing among the top DeFi protocols is a reflection of its strategic initiatives and technological advances.
The project’s team has been proactive in enhancing the platform's capabilities. This is evident from its v3 upgrade, which was introduced to bolster interoperability. This upgrade allows users to trade assets seamlessly across different networks within the Aave3 Markets.
Delving deeper into Aave's roadmap, several noteworthy developments stand out. In 2022, the protocol provided a progress update on the development of the stablecoin GHO, a significant initiative since its introduction to the community. This update encompassed details on the first GHO audit by Open Zeppelin and the release of the GHO technical paper for community review.
Post the launch of V3, the platform has seen a surge in user adoption and liquidity. The V3 market on Ethereum came equipped with risk-reducing features such as e-mode, isolation mode, and supply caps. These features have played a pivotal role in enhancing the platform's security and efficiency.
Audits play a crucial role in ensuring the security and reliability of any protocol. Open Zeppelin completed the first audit of GHO, specifically for its deployment on the Aave V2 Market on Ethereum. The audit did not reveal any major concerns, which is a testament to Aave's commitment to security. As the project continues to evolve, regular audits and community feedback remain integral to its development strategy.
Aave's approach to GHO also includes the concept of a Facilitator. A Facilitator can trustlessly mint and burn GHO, and various Facilitators can employ different strategies for GHO generation. Initially, there will be one Facilitator for GHO, but there are plans to release a framework detailing the process for entities to apply to become a Facilitator.
The GHO technical paper is another significant milestone. It provides insights into the smart contract design of GHO, covering aspects like supply and borrow mechanics, liquidation and repayment processes, the role of Facilitators, interest accrual, and more. With the technical paper in place and the first audit completed, Aave is gearing up for further enhancements and features in 2023 and beyond.
In conclusion, Aave's trajectory in the DeFi space is marked by continuous innovation and a commitment to user-centricity. The platform's roadmap, combined with its active community engagement, suggests that it is not only prepared for the present but is also strategically positioned for the future.
*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.