Everything You Need To Know About AAVE
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 is a lending protocol in the DeFi ecosystem that allows users to borrow crypto and earn interest by contributing liquidity to the protocol's pool. Aave’s decentralized protocol operates without a third party or any central authority, providing transparent, open-source, and permissionless financial services.
As we all know, the traditional lending and borrowing process involves saving money into a bank account, with the bank giving the money as a loan to another customer. For instance, if you put your money into a savings account, the bank offers you an interest rate of 0.5% on your savings. The bank then gives your money out as a loan to another customer at a 4% interest rate keeping 3.5% as their profit.
However, in the Aave protocol, you put your asset into the lending pool and earn the interest on your deposit without paying hefty fees to middlemen.
Like in the traditional financial system, two sets of users are important in this DeFi ecosystem: the lender and the borrower. The lenders give out their assets as loans and earn a yield; borrowers take crypto loans from the pool, after which they pay either a variable or fixed interest rate.
Aave is one of the biggest crypto lending protocols, with remarkable improvement recorded in the price of its native token.
It acts as a dynamic system that permits users to participate in the administration and growth of the DeFi protocol. The protocol's native cryptocurrency, AAVE token, gives holders the power to participate in voting and governance.
Aave is a system of smart contracts—a collection of code and data deployed on the Ethereum, Avalanche, and Polygon networks.
What exactly are smart contracts? Smart contracts are programs used to build applications on a blockchain. They are simply programs that run when certain pre-programmed conditions are met. They could also automate a workflow, activating the next action when certain requirements are met. Smart contracts are immutable, decentralized, and autonomous.
Users do not need any intermediary to manage or control their funds. Rather, the code is deployed to the network and run based on the predefined criteria.
Aave software allows for the creation of liquidity pools that enable users to borrow or lend a variety of digital assets, including ETH, MANA, and many others.
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, 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 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.
How Does Aave Work
Crypto assets can be volatile; just keeping them in wallets typically doesn’t accrue interest or make any profit. This is where Aave lending comes into play.
Aave enables users to become liquidity providers while making passive income in return. Also, users who need a loan can borrow crypto assets from Aave's pools.
There are over 20 liquidity pools with more than 20 cryptocurrencies. These assets include stablecoins like the USD Coin, Tether, Gemini Dollar, and DAI; with other pools such as Uniswap, BAT, and Chainlink.
Lending: Unlike in banks, Aave benefits both parties— the lender and borrower, and anybody can become a lender in the DeFi ecosystem. A user (lender) becomes a liquidity provider by putting their crypto in the protocol's liquidity pool, after which they earn interest on the loan.
DeFi uses smart contracts—they do the hard work of issuing loans and other services, eliminating intermediaries. Simply put, DeFi ensures that borrowers get easy and direct access to crypto loans from assets pooled by lenders.
Borrowing: This process involves taking a crypto loan from the protocol pool after the borrower has met the protocol's requirements for collateral. In DeFi platforms, rather than physical assets like in conventional financial institutions, borrowers are committed to providing collateral in crypto.
Furthermore, the volatility and instability of the crypto market demand enforcing over-collateralization. The collateral issued in another crypto has to be higher than the loan's value. If the token’s price drops and the value of the collateral no longer covers the loan, the position would be liquidated.
Flash loans: With flash loans, users can take crypto loans with no collateral on the condition that the borrower pays the loan back to the protocol within the same block.
One of the benefits a borrower also gets is a reduced interest fee when they use the protocol's native token—AAVE for collateral.
To facilitate their financial services, Aave issues two types of tokens, including the AAVE token and aTokens.
aToken: Aave issues aTokens to lenders as a right to their deposit. This token is issued at a ratio of 1:1 (to the underlying asset) upon every deposit into Aave's pool. It means, for every 1 DAI token a lender deposits in the protocol's liquidity pool, an aToken—aDAI is generated and allocated to the lender.
These aTokens bear interests; that is, lenders accrue interests when loans are granted from the pool they deposited liquidity into. The interests accrued are then sent to lenders’ wallets.
AAVE token: is Aave's native token and serves as the protocol's governance token. Hence, AAVE token holders can vote, put up their assets for staking, and participate in the protocol's growth and administration.
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.
Aave Coin Price
The Aave protocol's Total Value Locked (TVL) influences the Aave 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 $14.3bn as of 4 April 2022.
As of April 11, the Aave price was $159.21 with a day trading volume of $265,812,437 and a market cap of $2,178,051,775. Currently, Aave has a supply of 13,680,318 AAVE coins in circulation and a total supply of 16,000,000 AAVE coins.
Due to the volatility of the crypto market, Aave prices and those of other cryptos vary frequently. Nevertheless, Aave can be traded on various exchanges such as Redot, Kraken, and Coinbase. As far as Aave price predictions go, we wrote a separate article you might want to check out.
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
Over the years, Aave has been on the list of the top and largest DeFi protocols and has strived to maintain its position at the top.
Aave has been working relentlessly to make crypto lending and borrowing profitable and accessible to users. A proof of this claim is the Aave v3 upgrade that was recently introduced to help users easily trade assets across different networks within the Aave3 Markets.
There's a lot Aave has in stock, and we are looking forward to what the future holds for Aave and the DeFi ecosystem at large.
*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.