Successor to ETHLend, Aave is a decentralized lending and borrowing protocol.
Initially built on the Ethereum blockchain, the Aave protocol is now present on several of the largest blockchains, including Polygon, Avalanche, Arbitrum (ARB price) and Optimism.
AAVE is the third protocol with the highest Total Value Locked (TVL), i.e. the amount of funds invested. This makes AAVE one of the major representatives of decentralized finance (DeFi). Aave, for lending and borrowing cryptos Decentralized finance (DeFi) has enabled the rise of lending through decentralized peer-to-peer applications.
Aave (« ghost » in Finnish) is one of the main players in this trend, and notably makes it possible to earn interest on loans without the need for oversight by central authorities.
Aave offers loans to those who request them via its liquidity pool, which is a sort of basket of cryptos managed by the protocol.
Nearly twenty crypto-assets are accessible today, with billions of dollars in outstandings, including stablecoins such as DAI, USDC, TUSD, USDT (see USDT price) but also crypto-assets such as Ether (ETH), CRV, MKR, LINK or even Wrapped Bitcoin (WBTC), etc.
All these assets operate on the Ethereum blockchain or its derivatives.
The wealth of assets available shows the importance of the protocol within the DeFi ecosystem, and why it is regularly touted as one of its leaders. Discover AAVE live
Aave’s forerunner was ETHLend, founded in 2017.
At the time, Stani Kulechov, a Finnish serial entrepreneur and father of the project, launched the protocol via a $16.5 million ICO (Initial Coin Offering).
The initial idea was to promote the lending and borrowing of cryptos on the Ethereum blockchain at a time when DeFi was still in its infancy.
Unfortunately, the financial crisis of 2018 dragged the market towards the abyss, threatening the existence of the project, which also had to cope with a lack of liquidity.
This prompted Stani Kulechov and his team of developers to substantially revise the protocol and propose a « V2 », which would become Aave in 2020.
From 2018 to 2019, the team took advantage of the bear market to re-examine its proposal.
A second public ICO of $25 million in July 2020, carried out with structures such as Blockchain Capital, Standard Crypto and Blockchain.com Ventures, finally consolidated Aave’s dominant position within decentralized finance.
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Aave’s operation is relatively simple: users deposit funds, and receive a return in the form of interest.
Other users can borrow these funds, and must pay interest to do so.
Interest rates for both deposits and borrowings are calculated according to supply and demand: the more a liquidity pool is used, the higher interest rates will rise.
It should be noted that borrowers must provide collateral in crypto-assets in order to secure their loan.
Their position can be liquidated automatically if the value of the collateral becomes insufficient in relation to the borrowings made. Aave: fixed or variable rates One of Aave’s original features is that borrowers can choose between fixed or variable interest rates.
The advantage?
To choose according to the assumed evolution of the market, so as to have the best possible position.
Fixed rates offer borrowers a degree of security, since they will not change in the event of high market volatility.
Variable rates, on the other hand, are more attractive if loan demand declines.
Of course, fixed rates are higher, since they take into account an element of risk.
When we talk about Aave, we’re referring both to the protocol that manages all the rules governing the system, and to its eponymous token: the Aave token.
Based on the ERC-20 standard, it has several uses:
- It’s a low-cost way to obtain Aave services, etc,
- It gives holders the right to take part in votes to improve the protocol.
- It can be « stowed » in a Safety Module, which serves to insure the funds deposited on the protocol by investors, particularly in the event of liquidity problems.
In return, the funds in the Safety Module generate rewards for depositors.
Decentralized governance The Aave protocol is horizontal.
In this sense, voting by participants is of the utmost importance, as the protocol is extremely dynamic, and the decisions taken serve to establish development strategies or integrate modifications into the protocol.
The proposals made by the community can therefore be numerous: adding new cryptos to the platform, increasing or decreasing staking rewards, overhauling the protocol’s revenue distribution, etc.
As with most governance tokens, 1 AAVE entitles the holder to 1 vote.
As one of the oldest representatives of decentralized finance, Aave has had time to develop and offer its users an extremely secure product.
The protocol code is regularly audited to test the platform’s robustness and resilience.
To date, the AAVE protocol has never been compromised.
Aave is also a money-making protocol.
The delta between depositors’ and borrowers’ interest rates is recovered by the platform and corresponds to its revenue.
Few decentralized finance projects have such a model, which ensures a real source of income for the platform.
The community is also extremely active, whether on Reddit, Medium or Twitter… Last but not least, Aave’s dynamism extends beyond the simple world of cryptos, as the company has invested in video game studio Pixel Craft, which is behind AaveGotchi, a community project based on the Tamagotchi concept using NFT, and which will soon evolve on the Polygon blockchain.
