AAVE is a decentralized finance application that allows peer-to-peer lending using cryptocurrencies as the asset for trading. It can support up to 24 different cryptocurrencies (as of writing). All transactions are executed on an Ethereum blockchain using smart contracts.
Source: Medium
Stani Kulechov founded AAVE in the beginning of 2020. An earlier model of the application was developed by Kulechov and his team in 2017 called ETHLend. ETHLend had a peer-to-peer method of matching its users. However, it eventually ran into problems with liquidity and matching lenders and borrowers. ETHLend shut down in 2018, and Kulechov’s team started overhauling the project in 2019. ETHLend eventually became AAVE.
It gets its name from the Finnish word for ghost. In line with that, it has a ghost mascot and icon. Kulechov and his team decided to name their project after a ghost because all transactions are done anonymously.
How does it work?
AAVE uses a peer-to-smart contract method to match its lenders and borrowers. Lenders deposit their cryptocurrencies into smart contracts, which group them into liquidity pools. These liquidity pools have reserves to act as hedges against the volatile prices of cryptocurrencies. It then uses an algorithm to match borrowers to liquidity pools and let them access the smart contract. It also has a liquidation threshold that covers for the collateral that the borrowers used so that the lenders do not lose their money.
Source: Medium
Borrowers can borrow up to 70% of the collateral locked value from the liquidity pool. They are over-collateralized to minimize the risks in cryptocurrencies’ volatility. Unlike traditional banking, AAVE does not have a locked time to pay off collateral. It also has a unique feature called interest rate switching. Borrowers can switch between fixed, variable, or floating rates depending on the market conditions at any time. In other words, it offers flexible interest rates to borrowers.
Another unique feature that AAVE offers is flash loans. Flash loans are loans charged at a low fee of 0.09% interest. It has no collateral to be offered. However, there are strict payment rules and a short time limit for the borrower to pay back the loan. Lenders are able to earn from these flash loans.
AAVE Tokens
AAVE has two tokens, the aToken and the AAVE token. The aToken is an interest-earning token that has a 1:1 rate with its underlying asset. For example, 1 ETH token is equivalent to 1 aETH token. These aTokens are also used by lenders to earn income.
The AAVE token is an Ethereum-based (ERC-20) token that can be used for three things. It can be used as a governance token for the AAVE platform. It can also be used to earn rewards when staked. Lastly, borrowers that use AAVE tokens as their collateral get discount fees on the platform. AAVE tokens are burned when users pay fees on the platform, making it a deflation token. There is a limited supply of AAVE tokens. 12 million tokens are currently in circulation (as of writing), and there is a total supply of 16 million tokens.
Source: Crypto.com
AAVE is one of the largest decentralized finance platforms. It has a goal of open and transparent peer-to-peer lending and borrowing money market. Like all decentralized finance platforms and markets, users do not need to register and have their assets assessed in order to take out a loan. It also cuts out the middlemen in traditional banking. As the cryptocurrency market continues to grow larger, platforms like AAVE are some of the avenues that people can use to grow their income.
