All about AAVE
Aave is a decentralized financial or DeFi protocol that allows people to lend and borrow cryptocurrency without the participation of any decentralized intermediaries. Users can earn interest when providing loans on the platform, and pay interest when borrowing.
Based on the Ethereum blockchain, Aave is an open source DeFi protocol and a smart contract system. Thus, AAVE users do not need to rely on a specific institution or individual to manage their funds. Users can only trust that the smart contract code will work as intended.
What is Aave used for
The definition of Aave brings some clarity to its functionality. However, many people want to get reliable answers to the question “What is Aave used for?”, and the answers go beyond the simple tasks of lending and borrowing. At the most basic level, the Aave software supports the creation of credit pools. Credit pools can allow users to borrow or lend almost 17 different cryptocurrencies, including Ether, Brave Attention Token and MANA.
Borrowers must provide some form of collateral before borrowing on Aave, as in many other Ethereum-based decentralized lending systems. In addition, it is important to note that borrowers can take out a maximum loan in an amount not exceeding the value of the collateral provided by them.
General information about Aave
The next important aspect for understanding AAVE is related to the history of the DeFi protocol. Aave is, in fact, a commercial company that started its activities in 2017. The founder, Stani Kulechov, launched the Aave protocol in 2017, based in Switzerland. Initially, the platform was called ETHLend and raised almost $16.2 million during the first initial coin offering (ICO), which it launched in 2017. During this time, at the initial stages, the protocol sold almost 1 billion units of its native cryptocurrency, known as LEND. Subsequently, the Aave team held the remaining 300 million units of the Aave crypto token.
ETHLend differed significantly from Aave in that it was not focused on pooling funds. On the contrary, he deviated from the common examples of Aave that can be found today, and emphasized the comparison of lenders and borrowers on the principle of “peer-to-peer”. The Aave protocol that we know today got its name in 2018, and the name “Aave” took the DeFi world by storm.
● Aave work
Aave was developed on the basis of the Ethereum network, which serves as the basis for a wide range of emerging DeFi solutions. Aave network tokens also use Ethereum to process transactions, thereby qualifying as ERC-20 tokens.
In addition, the Aave protocol uses a decentralized autonomous organization or DAO as the choice of management model. One thing is absolutely clear about Aave: people who own AAVE tokens have privileges only for operations and protocol management. Now let’s delve into the lending process in Aave.
● Lending in Aave
In the case of traditional financial services, you will have to visit a bank. Such institutions will ask you for a deposit or some form of loan guarantee. For example, the collateral for a car loan can be the car itself. You must pay the principal amount of the loan and interest to the bank or financial institution on a monthly basis. However, AAVE is a completely different matter, since we are talking about DeFi.
DeFi does not include any banks, as their place is taken by smart contracts. Smart contracts are computer codes for automating transactions, such as the sale of a specific token upon reaching a certain price. They take on the hard work in financial services and eliminate intermediaries from savings accounts, asset trading and futures contracts.
Aave has pools for more than 20 Ethereum-based assets, including stablecoins such as USD Coin, Tether, Gemini dollar, DAI and Tether. Some of the other pools also include BAT, Uniswap, and Chainlink.
● Liquidity pools
In the early days of DeFi, users had to find another person on the platform who was willing to offer a loan. To complete the transaction, both parties had to agree on the price and terms of the loan. However, the Aave examples show that the situation has changed significantly since then. The new DeFi approach bypasses the peer-to-peer lending concept and introduces a pool-to-peer lending approach. So, what are these pools and how do they work in Aave?
Users deposit their cryptocurrencies into liquidity pools that the Aave protocol can issue on credit. Anyone depositing tokens into a pool is known as a liquidity provider. They receive new aToken tokens in exchange for providing liquidity to the protocol. AToken holders will receive a share in flash loans on the Aave platform along with interest on the corresponding aTokens. If you plan to place tokens in a pool with excess liquidity, you will not get more profit. However, if you invest tokens in a pool that needs them, then you have a chance to earn more.
One of the main things about the features of the project relates to tokens on the platform. While liquidity providers receive aTokens tokens, AAVE’s own token plays an important role in the DeFi lending protocol. The Aave cryptographic token offers various advantages for holders. For example, people borrowing a token will not have to pay a transaction fee for receiving loans in denominated tokens. In addition, borrowers using AAVE as collateral also get the opportunity to get a discount on the transaction fee.
The next unique feature of Aave as an open source DeFi protocol is the ability for users to earn interest in real time. In addition, flash loans on Aave also provide an opportunity to borrow cryptocurrency without any collateral. However, borrowers must repay the loan as part of the same transaction. If the borrower does not return the funds within a certain time, the transaction is refunded.
Another striking feature of the Aave crypto-lending protocol is the ability to switch rates. The protocol supports borrowers switching between fixed and floating interest rates. As a result, it helps to reduce borrowing costs. With a diverse product portfolio spanning various fields such as technology, gaming and finance, the Aave protocol is also the most diverse lending pool in the DeFi space at the moment.
The rise of DeFi has become a notable event, especially with the rise of Web 3.0 trends. Decentralization is taking over, and the Aave crypto-lending protocol demonstrates the potential of DeFi to transform finance. The protocol eliminates the gap between borrowers and lenders and removes intermediaries.
People with crypto assets can deposit their assets into liquidity pools on the protocol and create a pool of funds for borrowers. Smart contracts determine the terms of loans, such as interest rates and repayment time. In addition, the AAVE token also increases the value of the protocol as a whole, playing an important role in its management.