What is Aave?

Aave is a DeFi (decentralized finance) lending protocol that has risen to prominence recently. Aave allows users to lend, borrow and earn interest on their cryptocurrencies, all without the need for an intermediary.

Aave was founded by Stani Kulechov in 2017. Originally known as ETHLend, the lending protocol was updated and rebranded as Aave in 2020.

How does Aave Work?

The Aave protocol is built on the Etheruem blockchain. Instead of relying on an intermediary to manage assets, the protocol uses smart contracts (i.e. code that is programmed to execute if particular criteria are met). Therefore users rely solely on the execution of the code (which is open source), rather than one centralized intermediary, such as a bank or lending institution.

Lending Pools

Aave works using the concept of “lending pools”. Assets are deposited to these pools, and lenders and borrowers are matched algorithmically.

Interest rates are set based on the utilization of the lending pool. In simple terms, this means that if most of the assets in the pool are loaned, the interest rate will be high in order to attract more lenders. Conversely, if most of the capital in the pool is not being used, the interest rate remains low.

Overcollaterization

Like other cryptocurrency lending protocols and platforms, users have to use their crypto as collateral. Loans involving cryptocurrency are over collateralized, meaning borrowers have to put up more collateral than they wish to borrow. For example, if you own USDT and wish to borrow 5000 worth of bitcoin at 150% collateralization, you would have to collateralize the loan with 7500 of USDT,

There is also a risk of liquidation when using a DeFi lending protocol like Aave. If the value of your collateral falls below the “collateralization ratio”, you risk it being liquidated.

aTokens

Aave interest-bearing tokens (aTokens) are minted when users deposit their crypto. ATokens are pegged 1:1 to the value of underlying assets, which are loaned out to borrowers, ATokens accrue interest in real-time for depositors.

Flash Loans on Aave

Aave also provides users with a unique type of uncollateralized loan – called a “flash loan”. Flash loans allow users to borrow instantly, without collateral. However there is one condition – the liquidity must be returned to the pool within one transaction block. When this doesn’t occur, the transaction is reversed.

Users may want to use flash loans for reasons such as arbitrage, collateral swapping or self-liquidation.

Flash loans are an advanced concept and you have to have experience as a developer to take advantage. In case you’re interested, the documentation is available here.

What is the Aave Token?

The native token of the protocol is an ERC-20 token (meaning that it is built using Ethereum).

Holders of the Aave token can discuss and vote on proposals regarding the future of the protocol. In addition, the token is used to create a “Safety Module”, which is essentially a backup pool that is liquidated when there isn’t enough capital to cover lenders’ funds. Users receive yield as a reward for depositing their Aave to the Safety Module.

Learn more about Decentralized Lending

Aave is only one of many cryptocurrency lending platforms. Cryptocurrency lending can either be centralized or decentralized. You can read more about the different types of crypto lending here.

Where to buy the Aave Token

If you’re interested in investing in or trading the Aave token, it’s available on a number of cryptocurrency exchanges, including Binance.