Aave is an open source decentralized liquidity protocol without a custodian that allows users to earn interest on cryptocurrency deposits and lend assets through smart contracts.
Aave is Interesting (excuse the pun) because interest is compounded instantly rather than monthly or annually. The return is reflected in an increase in the number of AAVE tokens held by the lending party.
Not only does the protocol help in generating income, but it also offers flash loans. These are trustworthy, unsecured loans where borrowing and repayment are made in the same transaction.
Assets on Aave from 07.03.21 (source: aave homepage)
The following article discusses Aave’s history, services, tokenomics, security, how the protocol works, and the precautions that users should be careful when using the Aave platform.
How does Aave work?
The Aave protocol mint ERC-20 compliant tokens at a 1: 1 ratio to the assets provided by lenders. These tokens are known as aTokens and are inherently interest-bearing. These tokens are minted when you deposit and burned when redeemed.
These aTokens, such as B. aDai, are tied in a 1: 1 ratio to the value of the underlying asset – that is Dai in the case of aDai.
The Aave credit pool’s lending mechanism requires lenders to send their tokens to an Ethereum blockchain smart contract in exchange for these aTokens – assets that can be redeemed for the token on deposit plus interest.
atokens on Aave
Borrowers will withdraw funds from the Aave liquidity pool by posting the required collateral and will also receive interest-bearing aTokens that represent the equivalent amount of the underlying asset.
Each liquidity pool, the liquidity market in the log from which lenders and borrowers withdraw deposits, has a predetermined credit-to-value ratio that determines how much the borrower can withdraw relative to their collateral. If the borrower’s position falls below the LTV threshold, they run the risk of liquidating their assets.
Humble beginnings as ETHLend
Aave was founded in May 2017 by Stop Kulechov as a decentralized peer-to-peer credit platform under the name ETHLend to create a transparent and open infrastructure for decentralized financing. COALING raised $ 16.5 million in its Initial Coin Offering (ICO) on November 25, 2017.
Kulechov, who also currently serves as Aave’s CEO, has successfully added the company to the list of Top 50 blockchain projects published by PWC. Aave is Headquarters in London and supported by credible investors like Three Arrows Capital, Framework Ventures, ParaFi Capital, and DTC Capital.
ETHLend expanded its range and was renamed Aave by September 2018. The Aave protocol was officially introduced in January 2020 and switched from a micro-staking model to the liquidity pool model.
To add context to this move from a micro-making model to a liquidity pool model, micro-making was where everyone used the ETHLend platform. Regardless of whether a loan was applied for, a loan was funded or a loan offer was made, a ticket had to be purchased in order to obtain usage rights for the application and that ticket had to be paid for in the platform’s native LEND token. The ticket was previously a small amount pegged to USD, and the total number of loans required varied depending on the value of the token.
In the liquidity pool model, lenders deposit funds in liquidity pools. In this way, a so-called liquidity market is created and borrowers can withdraw funds from the liquidity pools by providing collateral. If borrowers are undercollateralised, they face liquidation.
Aave picked up another $ 4.5 million from an ICO and $ 3 million by Framework Ventures on July 8th and 15th, 2020.
Aave pronunciation
Aave is usually pronounced as “ah-veh”.
Aave products and services
The Aave protocol is designed to help people borrow and borrow cryptocurrency assets. Aave operates on a liquidity pool model and enables lenders to deposit their digital assets into liquidity pools under a smart contract the Ethereum blockchain. In return, they receive aTokens – assets that can be redeemed against the deposited token plus interest.
Borrowers can take out a loan by providing their cryptocurrency as collateral. Aave’s liquidity log is more than, based on the latest available figures $ 4.73 billion strong.
Flash Loans
Aave’s flash loans are a type of unsecured loan option that is unique even to the DeFi space. The Flash Loan product is mainly used by speculators who want to take advantage of quick arbitrage opportunities.
Borrowers can borrow cryptocurrency instantly within seconds. You need to return the borrowed amount to the pool within a transaction block. If you do not return the borrowed amount within the same transaction block, the entire transaction will be canceled and all actions taken up to that point will be reversed.
Flash loans encourage a wide range of investment strategies that are typically not possible in such a short window of time. When used properly, a user can benefit from arbitrage, collateral exchange, or self-liquidation.
Rate switching
Aave allows borrowers to switch between fixed and floating rates, which is a pretty unique feature in DeFi. The interest rates on any DeFi credit and credit history are usually volatile, and this feature offers an alternative by providing a path of solid stability.
For example, if you borrow money from Aave and expect interest rates to rise, you can convert your loan to a fixed rate to protect your borrowing costs for the future. On the other hand, if you expect interest rates to fall, you can switch back to floating to reduce your borrowing costs.
Aave Bug Bounty Campaign
Aave offers a bug bounty for users who are familiar with cryptocurrency. By submitting a bug to the Aave log, you can earn money a reward of up to $ 250,000.
Aave tokenomics
The maximum supply of the AAVE token is 16 million, and the current circulation supply is just over 12.4 million AAVE tokens.
Initially, AAVE 1.3 billion Tokens in circulation. In a token swap in July 2020, the protocol swapped the existing tokens at a ratio of 1: 100 for newly minted AAVE coins, resulting in a current offer of 16 million. Three million of these tokens were held in the reserve allocated to the development fund for the core team.
Aave’s price was quite volatile, with an all-time high of $ 559.12 on February 10, 2021. The lowest price was $ 25.97 on November 5, 2020.
Save security
Aave stores funds for an unsecured smart contract on the Ethereum blockchain. As a non-custodial project, users retain full control of their wallets.
Holders of Aave Governance tokens can use their tokens in the security module, which acts as a kind of decentralized insurance fund to secure the protocol against false events such as contract exploitation. In the module, the stakers can risk up to 30% of the funds blocked in the module and achieve a fixed return of 4.66%.
The security module has raised $ 375 million in deposits, which is arguably the largest decentralized insurance fund of its kind.
AAVE token price
Aave became one of the fastest growing projects in the DeFi craze of summer 2020. In early July 2020, the total value set in the protocol was just over $ 115 million. In less than a year, on February 13, 2021, the log passed the mark of $ 6 billion.
Final thoughts: why is Aave important?
Aave is a DeFi protocol that is built on solid foundations and has forced other competitors to do so the DeFi room strengthen their value propositions to stay competitive. Features like flash credit and rate switching provide a special utility for many users. The project currently enables borrowing and borrowing in 20 cryptocurrencies.
Aave is important because it shows how ripe the DeFi room is for disruption with new innovative features and how much room there is to grow.
Want to see how Aave compares to another fast growing DeFi project? Read our guide to Aave vs. Compound.
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