Aave is a decentralized finance (DeFi) protocol that allows users to lend their cryptocurrencies for interest and borrow both crypto and real-world assets. Originally built on the Ethereum blockchain, it has expanded to other blockchains like Avalanche, Fantom, and more.
While traditional banks rely on credit and background checks to determine loan approvals and amounts for their clients, Aave places funds in the hands of smart contracts, meaning that all transactions are automatically pushed through by the platform’s code.
When lenders deposit crypto into the protocol, it gets sent to a “liquidity pool” which is then used to fill its borrower’s requests. If you’re unfamiliar, a liquidity pool is a bucket of cryptocurrencies locked in a smart contract used to facilitate the exchange of tokens. Thus, lenders deposit crypto into the pools and borrowers borrow crypto from them.
The AAVE token can be staked on the platform for interest and used for governance of its Decentralized Autonomous Organization (DAO). It also provides users with perks such as lower fees on the platform.
The platform is unique in that it originated the use of “flash loans,” uncollateralized loans that need to be paid back within one block transaction. These can be used when a user finds an opportunity to buy a token, immediately sell it for a profit, and return the borrowed funds.
AAVE ESSENTIALS
- AAVE is the native ERC-20 token for the Aave DeFi protocol, which allows users to lend and borrow cryptocurrencies within the platform.
- Holders can stake AAVE for interest, vote on protocol updates, and use the token to pay lower fees on the platform.
- With its suite of services that includes secure lending and borrowing, flash loans, and staking, Aave is a platform that is used by many DeFi enthusiasts today.
Who created Aave?
Aave was founded by Stani Kulechov who, during his time studying law at the University of Helsinki, became interested in Ethereum and the ways that it could disrupt traditional finance. In 2017, he released the decentralized application (dapp) ETHLend, raising $16.2 million in an initial coin offering (ICO) for its LEND token. ETHLend allowed users to post loan requests and offers, acting more as a community tool than the automated service that exists today.
ETHLend overhauled its product and rebranded to Aave in 2020, migrating from the LEND token to AAVE in the process. As part of the migration, AAVE were redeemable at a rate of 100 LEND per 1 token.
Since then, the team raised over $32 million from some of the top VCs in the blockchain space, including Blockchain Capital and Standard Crypto.
What does Aave mean?
Aave means “ghost” in Finnish and has become known as the protocol’s mascot. The ghost icon is also often seen on twitter bios by those who work on the protocol.
How does Aave work?
The loaning and borrowing process
Aave links lenders and borrowers through a robust system of smart contracts, allowing users who want to deposit their crypto and gain interest to connect with borrowers in a trustless manner.
When lenders lock their crypto on the platform, it is stored in a public, security-audited smart contract on the Ethereum blockchain. This contract functions as a liquidity pool, from which the platform’s borrowers receive their funds.
The lender receives interest payments based on the amount of time they lend their funds out for, and rates are subject to vary based on market conditions. They are free to remove some or all of their crypto whenever they choose to.
In order to take out a loan, borrowers must deposit collateral worth the same amount as the crypto they wish to borrow. Once they have done so, they receive an equal amount of aToken pegged to the value of another asset (for example, borrowed ETH would be called aETH). Interest is built into the aToken’s code so that the protocol knows how much is owed when the borrowers wish to pay their loan back. There is no set time limit in which borrowers have to repay their loans, but the longer that a loan is held, the more interest will be owed on it.
Additionally, the protocol calculates a “health factor” that represents the safety of the deposited asset versus the asset borrowed. Once the health factor falls below 1, the borrower’s collateral becomes in danger of liquidation, in which Aave repossesses the posted collateral.
Staking
Users can stake their tokens through the protocol’s dapp to help ensure the safety of the protocol. Staked AAVE is deposited into the Safety Module, a smart contract meant to cover a Shortfall Event (liquidity deficit) within the platform. This type of complication could arise from a smart contract issue, the failure of a collateralized asset, or the malfunction of the Oracle system that the platform uses to determine the pricing of its assets.
In return, stakers receive stkAAVE equal to their staked position, a token that can be used in other dapps and accrues rewards in AAVE. If they wish to unstake their funds, they can only do so after the seven day cooling period from when they start staking.
Flash Loans
Aave is the first DeFi lending protocol to provide flash loans, a system where users can loan funds and repay them, along with a 0.09% fee, within the same block. Flash loans are automatically reversed if they are not paid back within the same block and are thus not recorded in that block’s ledger.
Flash loans are useful in arbitrage situations, for example, allowing users to benefit from the variability of interest rates across platforms and take a large loan of uncollateralized capital with which to make an instant trade.
Of note, no collateral is required for flash loans.
How is the AAVE token used?
AAVE is an ERC-20 token that can be staked by users to provide security to the protocol, rewarding them in the process. Further, borrowers that use the native token as collateral for their loans pay less fees than those who lock other cryptocurrencies into the platform.
AAVE also functions as a governance token for the DAO and can be used to vote on proposals like which new tokens to add to the protocol, add functionality to the platform, and more. There are multiple DAOs within the main organization, allowing holders to participate in grant programs, risk assessment, and more.
Token distribution
There is a total supply of 16 million tokens. Out of these, 13 million are available on the market. The remaining 3 million are allocated to a reserve controlled by the DAO used to promote the growth of the platform.
The protocol also uses revenue from platform fees to buy AAVE and burn the tokens, bringing them out of circulation.
How to buy AAVE
You can buy the Aave coin on Bitstamp. Sign up for a Bitstamp account and start trading AAVE today!
Disclosure: Bitstamp is licensed to engage in virtual currency business activity by the New York State Department of Financial Services.