Aave is one of the leading decentralized finance (DeFi) protocols on the market, allowing users to easily borrow and lend over 20 different crypto assets. Leveraging the age-old financial practice of lending and borrowing, the platform empowers users to manage their assets in a decentralized manner.
The Aave token also allows users to vote on the platform’s direction and future Aave protocol developments. Aave token holders are granted voting rights based on their holdings.
What is Aave?
Created in response to the rising demand for decentralized money markets, Aave has successfully and firmly positioned itself in the top 10 biggest DeFi markets. Based on the Ethereum blockchain, the protocol allows users to lend and borrow a wide range of cryptocurrencies, from altcoins to stablecoins.
Native to the platform, the AAVE token acts as both a utility token, providing discounts for fees, and a governance token.
By placing digital assets into specific liquidity pools within the Aave protocol, lenders earn interest. Those who need money can use crypto as collateral to take out a flash loan from these same pools.
The decentralized lending protocol was launched in November 2018 under the name ETHLend (with LEND tokens) but later underwent a rebranding after losing traction in the 2018 crypto bear market. After revamping the concept of decentralized crypto lending, the Aave team relaunched the protocol under the name Aave. Aave means ghost in Finnish.
Who created Aave?
Aave was created by Stani Kulechov and a team of developers. Stani Kulechov was disappointed with the lack of lending applications available on Ethereum, so he and a team of developers took it upon themselves to create a space to lend and borrow cryptocurrencies. This project occurred before decentralized finance was even an idea, and launched following an ICO in November 2017.
Kulechov is a self-taught programmer who went to law school after high school and began programming in his teenage years. He is also an early blockchain adopter. The CEO announced that he intended to rebrand ETHLend as Aave in order to provide additional services beyond just ETH lending, incorporating the greater crypto assets market.
How does Aave work for Aave users?
The Aave protocol uses an algorithm that automatically enables loans from the platform's liquidity pools, instead of individually matching each lender to a borrower. On the Aave network, lenders can deposit their cryptocurrency into liquidity pools and in turn earn interest based on the amount deposited.
These interest rates are then paid to the lenders depending on the number of assets being used in the pool. For instance, if all the assets are being utilized, the interest rates are higher as this will provide greater incentive to lenders and more deposit options for Aave borrowers. If utilization is low, the interest rates are lower, attracting more borrowers. Borrowers and lenders are mutually dependent.
Aave loans require users to make a deposit in the form of collateral that is higher in value than the amount they are borrowing. If borrowed assets are not returned within the given timeframe, lenders will take possession of the collateral.
Aave employs a liquidation procedure in the event that the collateral value falls below the collateralization rate established and determined by the Aave protocol. Flash loans are also available, allowing borrowers to borrow money without putting up any assets as long as they pay for the interest fee known as one-block.
What are AAVE tokens?
AAVE is an ERC-20 token that acts as a backstop for the Aave protocol, protecting the system from having a shortage of capital. Known as the "Safety Module", AAVE is sold for assets to cover the deficit if there isn't enough cash in the DeFi protocol to cover lenders' money. Only AAVE deposited in the module will be liquidated. To encourage deposits, a regular yield is paid out in AAVE.
The second major application for Aave is protocol governance. Holders of the cryptocurrency can discuss and vote on Aave Improvement Proposals, which may be implemented if accepted by a specified number of AAVE token holders. This covers altering the money market parameters as well as managing funds in the ecosystem reserve, similar to other governance cryptocurrencies. Each AAVE equals one voting right for Aave holders.
The Aave system uses fees paid on the platform to buy back AAVE tokens and remove them from circulation. Approximately 80% of the fees paid are used for this burn purpose, while 20% are used to incentivize lenders. Aave has a limited supply of 16 million units.