Aave has introduced a blockchain-based alternative to the traditional lending and borrowing industry. The users need to sign a huge number of documents when taking a loan from a bank or a financial institute. Furthermore, they need to show some assets as collateral when getting a loan from a traditional institute.
Still, their application may get rejected if they don’t have a reasonable credit score. Aave enables anyone to lend and borrow money through its platform.
What is Aave?
Aave, formerly known as ETHLend, is an Ethereum-based protocol designed to help individuals and businesses that are interested in lending or borrowing money in a decentralized environment.
The lenders can lock their cryptocurrencies into liquidity pools to earn some reward whereas the borrowers can borrow stablecoins and other cryptocurrencies by locking a certain amount of crypto tokens as collateral.
Aave network consists of Aave protocol, liquidity providers, Aave token holders, programmers, and Defi wallet partners. Aave network is designed to improve capital flow within the Defi ecosystem.
aTokens – aTokens are minted when a user deposits a cryptocurrency in the platform. The users can complete the payment process through these tokens without worrying about gas approvals. These tokens are burnt when the user redeems the deposited amount.
Credit Delegation – Aave has created a Credit Delegation vault where depositors can lock their crypto tokens to earn additional funds. They need to sign an agreement on the OpenLaw application to delegate the line of credit to someone they trust. Thus, they can earn interest on their investment without borrowing directly.
Trading Functionalities – The liquidity providers can grow their investment by taking long and short leveraged positions. Similarly, the users can access margin trading through their collateralized assets.
Rate Switching – The borrowers can switch between fixed and variable interest rates to skip the interest rate volatility.
Governance – Aave token holders can participate in the decision-making process by delegating their votes to other addresses.
Aave Brief History
Aave was launched by Stani Kulechov in 2017. Kulechov started working on the project during his studies in Helsinki. Kulechov identified the lack of loan applications on Ethereum and decided to launch a project that could support lending and borrowing without dealing with the centralized authorities.
The company raised around $16.2 million by selling 1 billion tokens during an initial coin offering in 2017. It was initially introduced as ETHLend and was renamed Aave in September 2018. LEND token holders receive 1 Aave token for 100 LEND tokens. As a result, the total supply dropped to 18 million Aave tokens.
The company introduced Aave 2.0 version with new features including gas optimization, liquidity mining, and credit delegation.
Why Would Users Need to Borrow Cryptocurrencies?
The crypto-token holders can use their borrowed tokens for arbitrage. They can buy them from one exchange at a discounted price and sell them at another exchange where the token is trading at a higher price.
In most cases, the users need a high amount of cryptocurrency for this process because the differences tend to be minor. Similarly, the users can buy additional amounts of cryptocurrencies using the borrowed tokens. And they can return the borrowed amount after selling the additional tokens at a higher price.
How Does Aave Work?
Aave enables users to earn interest on their crypto holdings by depositing their crypto tokens into liquidity pools. Aave protocol releases loans through an advanced algorithm rather than connecting the lenders to borrowers.
The interest rates are determined depending on the supply and demand. If the assets are decreasing in a liquidity pool, the network will raise the interest rate so that the lenders may add more tokens to the pool. Similarly, the interest rates are dropped when all the assets are not used from the pool.
The borrowers need to deposit more crypto tokens as collateral when they’re borrowing from the network. The network can use the collateral to recover the loan and interest amount if the user didn’t return the loan within the given timeframe. It also helps with managing the volatility of the crypto market.
Lending – Aave has set up liquidity pools on Uniswap and Balancer where lenders can deposit crypto tokens to earn interest. The lenders can quickly redeem their funds from these platforms.
Borrowing – The borrowers need to lock 50%-75% more crypto tokens as collateral when borrowing from the platform. The collateralized assets are automatically liquidated if the borrower fails to maintain the collateralization ratio.
aTokens – The network releases an equal amount of aTokens depending on the crypto tokens deposited by the lender or borrower. The users can transfer and trade these tokens for free. Thus, they can access a wide range of cryptocurrencies within the network without owning them.
Flash Loans – The users can get flash loans within 13 seconds. These loans are supposed to be repaid within a single Ethereum transaction. The users need to pay a 0.09% fee for these loans. Flash loans can be used for arbitrage, self-liquidation, collateral swapping, generating trading profits, and refinancing loans.
Aave is the native token of Aave platform that can be used for several purposes. With a circulating supply of 13.9 billion tokens, it has a market cap of $974 million. It’s ranked among the 50 best cryptocurrencies in terms of market cap. It has a maximum supply of 16 billion tokens that will be released over time.
Aave is a blockchain-based loaning platform where individuals can lend and borrow money without dealing with a centralized authority. It eliminates several restrictions of the traditional loaning industry. But over-collateralization is a serious issue that prevents most people from using this platform.
If you need more information about how Aave works, feel free to get in touch with us.