Aave In Focus: Exploring Mechanics Of New Leading DeFi Protocol
Aave is a decentralized finance (DeFi) protocol that allows people to borrow and lend cryptocurrencies without the need for traditional financial intermediaries such as banks. Users can earn interest by depositing cryptographic assets into Aave’s liquidity pool or borrow by collateralizing cryptographic assets. A unique feature of Aave compared to other DeFi lending platforms is its offering of a product called “flash loans,” which allows users to borrow and repay within a single transaction without any collateral, particularly useful for executing complex trades without capital.
What is AAVE
The Aave protocol is an unmanaged protocol for liquidity providers and borrowers. Aave boasts some of the largest market sizes and loan pools in the blockchain world and has become a household name among cryptocurrency and blockchain experts.
Aave simplifies and instantiates the process of borrowing digital assets and earning interest. In addition to loans, users can also obtain flash loans from its DeFi lending market. These flash loans are uncollateralized and incur a fee; however, the maximum amount of such loans typically remains low.
A diversified and impressive list of stakeholders ensures good platform governance and positive contributions. This enhances the community experience, especially for beginners or relatively new users. The platform also provides aTokens (Aave interest-bearing tokens), indirectly helping users earn through liquidity mining. With Aave, interest can be earned on various stablecoins such as aUSDT, aDai, and more.
Aave is developed on the Ethereum blockchain, using smart contracts to automatically execute lending agreements, thus ensuring the transparency and security of the system. Aave also introduced a unique governance mechanism, allowing users holding its native token AAVE to vote on the platform’s future development direction, achieving a decentralized management style.
The Aave protocol was created in 2017 by Aave CEO Stani Kulechov. Initially inspired by the Ethereum blockchain, it used LEND as its token. After its initial public offering, it raised over $16.2 million.
Since its establishment, Aave has made significant progress and is one of the leading platforms in the exponentially growing decentralized finance (DeFi) sector.
The transparency philosophy of digital financial systems (based on blockchain) and the completely open infrastructure have driven its creation and success. Aave has brought some unparalleled features and functionalities to the market, rapidly rising and gaining a larger market share. Throughout its development, the Aave protocol has also started various experiments in the decentralized finance sector.
How Does Aave Work?
Aave is foundational for the borrowing of digital assets and cryptocurrencies. The protocol can be used to borrow or lend cryptocurrencies, then return the interest. Although the protocol charges for flash loans, transaction fees for certain tokens are free.
Some assets have stable interest rates, which is one of the advantages of scalability and usage. Aave supports over 15 types of crypto assets, although not all assets can be used as collateral when applying for crypto loans. These assets include (but are not limited to) ETH, ETHlend, etc.
How to Use Aave?
Users can easily lend or borrow funds without completing any KYC (Know Your Customer) process. To access an Aave account, a wallet needs to be connected to the platform. They need to choose the wallet they are using, and once connected to the Aave account, users can use the functionalities provided by the protocol.
New users can create a cryptocurrency wallet and connect to the protocol. When registering with Aave, users must fill in basic contact information and register on the platform. The list of supported wallets comes directly from the Ethereum mainnet or Polygon mainnet. The platform does not support other options, as it was initially launched for the Ethereum blockchain.
Features
With its unique features and the unparalleled benefits it brings to individuals on the platform, the Aave protocol ranks among the highest.
Aave offers instant lending, one of the most beneficial characteristics of the protocol. To maintain a secure environment, transactions must be done with correct details, reducing the chances of errors. Being open-source by nature, the protocol code is open to developers who wish to use the protocol in their own way and still gain all the benefits and functionalities that come with it.
Aave also benefits users who frequently conduct large amounts of financial transactions.
The functionalities and advantages of the Aave protocol are vast and plentiful. Most of the platform’s functionalities are immediately operable without users needing to complete KYC. Unique features like instant fund transfers and flash loans increase possibilities and improve the experience. Some cryptocurrencies have stable interest rates, making the process of paying interest easier to manage.
Aave is open-source and also provides a Git repository for developers. This leaves room for new functionalities and areas of expansion. The lack of anti-money laundering measures makes the process faster.
Aave Pay is another highly convenient feature, allowing European residents to quickly remit money (in exchange for cryptocurrency) in fiat currency.
How to Buy Aave?
Purchasing and storing Aave digitally has become a straightforward task through various available platforms. Individuals need to register on a platform of their choice. Once logged in, users can verify their accounts. Verified users can buy Aave by adding fiat deposits (paying for Aave with fiat currency). Users can purchase Aave (AAVE) through their respective exchanges.
Aave is not compatible with every hardware wallet (or technically, not every wallet supports its native token). To store Aave tokens, one must use a wallet compatible with the Ethereum blockchain, which also applies to software wallets.
How to Borrow on Aave?
To borrow on Aave, users need to meet certain criteria. Borrowers seeking a loan (other than flash loans) must deposit collateral to be locked in. The amount of collateral provided by the borrower must exceed the relative amount of their loan. Funds are withdrawn from the liquidity pool.
In case of a default, the platform can sell the locked terms to recover the revenue. This process is automated, ensuring the liquidity pool remains positive. For more detailed information on borrowing rates, click here.
Lending on Aave
Aave has many lending pools where people can earn interest through their digital assets. The decentralized nature of the loans makes the lending process seamless, unlike traditional institutions, which often become a limiting factor.
The platform ensures the safety of lenders’ assets through reserves held by Aave. These reserves add a buffer against market volatility and crashes. Interested lenders can connect their Ethereum wallets to the platform and then select the assets they wish to lend.
After entering the amount of assets to lend, users’ funds become part of the respective asset’s liquidity pool, from which they can earn interest.
Loan Interest Rates
While some assets on Aave indeed have stable interest rates, the interest rates for most remaining assets are variable and may be subject to market fluctuations. Users can switch between these two types of rates according to the current ratio, to reduce overall interest rates.
One thing to remember is that each switch will incur Ethereum gas fees. The website displays real-time interest rate fees for different rates of assets. Due to the fluctuation of variable rates, they may ultimately be higher or lower than the stable rates.
Aave Pay
Aave Pay maximizes the convenience of the platform. Aave Pay allows European users to immediately send funds to other accounts in fiat currency (for their cryptocurrency).
Flash loans can be obtained from the platform and used to make payments in fiat currency to any institution (without the need to sell or declare their crypto assets).
What are aTokens?
aTokens are the platform’s native interest tokens. An aToken refers to “Aave interest-bearing tokens” that can be minted or digitally mined on the platform. These aTokens can be exchanged or lent to borrowers.
aTokens have free transaction costs and can accrue interest in real-time. aTokens also have the added advantage of being at a 1:1 ratio with their underlying assets.
Security of Aave
The team behind the protocol appears to prioritize security as their primary task. Continuously checking for vulnerabilities and auditing the protocol are ways to ensure its security.
As an open-source protocol, regulation of the underlying code is open. The team also tries to inform users of their security updates through blogs. Managing keys further aids in the platform’s security and governance. The Aave protocol has been able to secure real-time information flow for about 54 cryptocurrencies.
To provide very enticing incentives for reporting errors, the team also offers rewards of up to $250,000 if the reported errors and vulnerabilities happen to be critical.
Customer Support
To increase support, the team is reportedly developing a governance protocol expected to be as revolutionary as flash loans. To contact the team, users can choose from different channels of team communication. These channels include email, Discord, Twitter, Instagram, Telegram. Despite having a large user base, Aave is still known for its timely customer service.
Bottom Line
Aave is an excellent protocol for advanced users and also offers some truly unprecedented features and benefits for both high-capacity and low-capacity users. For those familiar with the intricacies of cryptocurrency-based lending, the simple and instantaneous lending protocol makes it a wise choice.
As the cryptocurrency market matures and expands, Aave has become an indispensable part of the crypto economy, offering a new, decentralized way of financial services.