What is Aave? What is Aave used for? How does Aave work? Read on to find answers to all such questions.
Decentralized finance or DeFi is making news everywhere in the crypto space for all the right reasons. Many new DeFi solutions are presenting exclusive counterparts to conventional financial services such as lending, borrowing, and trading. AAVE is one of the notable examples of DeFi solutions tailored for helping users in lending, borrowing, and earning interest on all crypto assets without any intermediaries.
As decentralized lending and borrowing protocol, Aave has gained considerable attention in the DeFi and crypto space recently. You must be interested in finding out more about Aave and its definition and background. The following discussion offers you a detailed impression of the fundamentals of the Aave protocol and its native token. You can find out the answer for “what is Aave” and how it works alongside an overview of its features.
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Definition of Aave
One of the first things you would ask while learning about Aave is “what is Aave?” and the answer gives the perfect foundation to explore its fundamentals. It is a decentralized finance or DeFi protocol that enables people to lend and borrow cryptocurrency without the involvement of any decentralized intermediaries. Users can earn interest when they lend on the platform and pay interest upon borrowing.
Based on the Ethereum blockchain, Aave is basically an open source DeFi protocol featuring a system of smart contracts. The smart contracts support the management of all crypto assets by a distributed network of computers. Therefore, AAVE users don’t have to rely on a specific institution or individual for managing their funds. Users can trust only the fact that the code of the smart contracts will run as intended.
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What is Aave Used For?
The definition of Aave presents a certain extent of clarity on the functionalities of Aave. However, many people want credible answers for “what is Aave used for?” and the responses extend beyond the simple tasks of lending and borrowing. At the most basic level, Aave software supports the development of lending pools. The lending pools can enable users to borrow or lend almost 17 different cryptocurrencies, including Ether, Brave Attention Token and MANA.
Borrowers have to post some form of collateral before borrowing on Aave, just like many other decentralized lending systems based on Ethereum. In addition, it is also important to note that borrowers can take a maximum loan of up to the value of collateral posted by them.
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Background of Aave
The next important aspect for understanding AAVE would refer to the history of the DeFi protocol. Aave is basically a for-profit company, which started off in 2017. The founder, Stani Kulechov, started the Aave protocol in 2017, based in Switzerland. Initially, the platform was termed ETHLend and raised almost $16.2 million in the first initial coin offering (ICO) it launched in 2017. During this time, the protocol sold almost 1 billion units of the native cryptocurrency, known as LEND, in the initial stages of the protocol. Subsequently, the Aave team held the remaining 300 million units of Aave crypto token.
ETHLend was considerably different from Aave in the fact that it did not focus on pooling funds. On the contrary, it deviated from common Aave examples you can find today and emphasized matching lenders and borrowers in a peer-to-peer fashion. The Aave protocol we know today got its name in 2018, and the name “Aave” took over the DeFi world by storm.
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Working of Aave
The best approach for a broader understanding of “what is Aave used for?” would focus on developing a clear idea about its working. Aave has been developed over the Ethereum network, which serves as the foundation for a wide range of emerging DeFi solutions. The tokens on the Aave network also use Ethereum for processing transactions, thereby qualifying as ERC-20 tokens.
In addition, the Aave protocol leverages a decentralized autonomous organization or DAO as the choice of the governance model. One thing is quite clear about Aave that people holding AAVE tokens only have the privileges for operations and governance of the protocol. Now, let us dive deeper into the working of the process of lending on Aave.
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Lending in Aave
One of the foremost replies for “what is Aave used for?” is lending. In the case of traditional financial services, you would have to visit a bank or any other financial institution with massive amounts of liquid cash. Such types of institutions would ask you for collateral or some form of guarantee on a loan. For example, the title of an automobile itself would be the collateral for a car loan. You have to pay the principal back to the bank or financial institution along with interest every month. However, AAVE is completely different as it is all about DeFi.
Decentralized Finance or DeFi does not include any banks as smart contracts take their place. Smart contracts are basically computer codes for automating transactions like selling a specific token upon reaching a specific price. They take on the heavy lifting in financial services and remove the intermediaries from savings accounts, asset-trading and futures contracts. In simple words, DeFi ensures that you can easily avail a loan in crypto from other people rather than banks.
However, you could not ignore the collateral in DeFi systems, and the collateral, in this case, would be other crypto tokens. In addition, the volatility of cryptocurrency also calls for implementing over-collateralization. So, you have to put up higher collateral than the amount you want to borrow in a different cryptocurrency. If the price falls down and the amount in the collateral does not cover the borrowed amount, then your collateral is liquidated.
Aave presently 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.
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Liquidity Pools in Aave
One of the most significant factors in understanding “what is Aave” would obviously bring liquidity pools into the equation. In the initial days of DeFi, users had to find another individual on the platform ready to offer a loan. Both the parties had to agree on the price and conditions of the loan for completing the transaction. However, Aave examples show how things have changed considerably since then. The new approach to DeFi bypasses the concept of peer-to-peer lending and introduces the pool-to-peer lending approach. So, what are these pools, and how do they work in Aave?
Users deposit their crypto in liquidity pools, which the Aave protocol can lend out. Any individual depositing tokens into the pool are known as a liquidity provider. They receive new aTokens in return for offering liquidity to the protocol. The aToken holders would receive a share in the flash loans on the Aave platform alongside the interest on concerned aTokens. If you are thinking of depositing tokens in a pool with surplus liquidity, you won’t get more returns. However, if you are depositing in a pool that needs it, then you can have a chance of making more.
Features of Aave
The final aspect to understand Aave in detail would refer to the features offered in the protocol. One of the foremost things you have to notice in the features of Aave refers to the tokens on the platform. While liquidity providers receive aTokens, 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 for a discount on the transaction fees.
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 offer the opportunity for borrowing crypto without any collateral. However, borrowers have to repay the loan within the same transaction. The loan transaction reverses back if borrowers don’t return the funds within a specified time.
Another striking 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.
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Bottom Line
The rise of DeFi has been a prominent highlight, especially with the growth of web 3.0 trends. Decentralization is taking over, and Aave crypto lending protocol shows the potential of DeFi to transform finance. The protocol bridges the gap between borrowers and lenders and takes out the 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 define the terms and conditions of the loans, such as interest rates and time for repayment. In addition, the AAVE token also drives value for the protocol in general by serving an important role in its governance. You can discover more about Aave protocol with detailed learning resources on DeFi right now.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!
