Aave is a decentralized, open-source, non-custodial liquidity protocol that permits customers to earn curiosity on cryptocurrency deposits, in addition to borrow property via sensible contracts.
Aave is attention-grabbing (pardon the pun) as a result of curiosity compounds instantly, moderately than month-to-month or yearly. Returns are mirrored by a rise within the variety of AAVE tokens held by the lending celebration.
Other than serving to to generate earnings, the protocol additionally gives flash loans. These are trustless, uncollateralized loans the place borrowing and reimbursement happen in the identical transaction.
Property on Aave as of three/7/21 (supply: aave homepage)
The next article explores Aave’s historical past, providers, tokenomics, safety, how the protocol works, and what customers must be cautious of when utilizing the Aave platform.
How Does Aave Work?
The Aave protocol mints ERC-20 compliant tokens in a 1:1 ratio to the property provided by lenders. These tokens are generally known as aTokens and are interest-bearing in nature. These tokens are minted upon deposit and burned when redeemed.
These aTokens, reminiscent of aDai, are pegged at a ratio of 1:1 to the worth of the underlying asset – that’s Dai within the case of aDai.
The lending-borrowing mechanism of the Aave lending pool dictates that lenders will ship their tokens to an Ethereum blockchain sensible contract in trade for these aTokens — property that may be redeemed for the deposited token plus curiosity.
atokens on Aave
Debtors withdraw funds from the Aave liquidity pool by depositing the required collateral and, additionally, obtain interest-bearing aTokens to signify the equal quantity of the underlying asset.
Every liquidity pool, the liquidity market within the protocol the place lenders deposit and debtors withdraw from, has a predetermined loan-to-value ratio that determines how a lot the borrower can withdraw relative to their collateral. If the borrower’s place goes under the edge LTV stage, they face the chance of liquidation of their property.
Humble Beginnings as ETHLend
Aave was based in Could 2017 by Stani Kulechov as a decentralized peer-to-peer lending platform beneath the title ETHLend to create a clear and open infrastructure for decentralized finance. ETHLend raised 16.5 million US dollars in its Preliminary Coin Providing (ICO) on November 25, 2017.
Kulechov, presently serving additionally because the CEO of Aave, has efficiently led the corporate into the listing of top 50 blockchain projects printed by PWC. Aave is headquartered in London and backed by credible traders, reminiscent of Three Arrows Capital, Framework Ventures, ParaFi Capital, and DTC Capital.
ETHLend widened its bouquet of choices and rebranded to Aave by September 2018. The Aave protocol was formally launched in January 2020, switching to the liquidity pool mannequin from a Microstaking mannequin.
So as to add context to this evolution from a Microstaking mannequin to a Liquidity Pool mannequin, Microstaking was the place everybody utilizing the ETHLend platform. Whether or not one is making use of for a mortgage, funding a mortgage, or making a mortgage provide, they needed to buy a ticket to acquire the rights to make use of the appliance, and that ticket needed to be paid within the platform’s native token LEND. The ticket was beforehand a small quantity pegged to USD, and the full variety of LEND wanted assorted based mostly on the token’s worth.
Within the liquidity pool mannequin, Lenders deposit funds to liquidity swimming pools. Thus creating what’s generally known as a liquidity market, and debtors can withdraw funds from the liquidity swimming pools by offering collateral. In case the debtors turn out to be undercollateralized, they face liquidation.
Aave raised one other 4.5 million US dollars from an ICO and 3 million US dollars from Framework Ventures on July eighth and July fifteenth, 2020.
Aave Pronunciation
Aave is often pronounced “ah-veh.”
Aave’s Merchandise and Companies
The Aave protocol is designed to assist individuals lend and borrow cryptocurrency property. Working beneath a liquidity pool mannequin, Aave permits lenders to deposit their digital property into liquidity swimming pools to a wise contract on the Ethereum blockchain. In trade, they obtain aTokens — property that may be redeemed for the deposited token plus curiosity.
Debtors can take out a mortgage by placing their cryptocurrency as collateral. The liquidity protocol of Aave, as per the newest out there numbers, is greater than 4.73 billion US dollars robust.
Flash Loans
Aave’s Flash loans are a sort of uncollateralized mortgage choice, which is a novel function even for the DeFi house. The Flash Mortgage product is primarily utilized by speculators in search of to make the most of fast arbitrage alternatives.
Debtors can immediately borrow cryptocurrency for a matter of seconds; they need to return the borrowed quantity to the pool inside one transaction block. In the event that they fail to return the borrowed quantity inside the similar transaction block, your complete transaction reverses and undo all actions executed till that time.
Flash loans encourage a variety of funding methods that sometimes aren’t potential in such a brief window of time. If used correctly, a person may revenue via arbitrage, collateral swapping, or self-liquidation.
Price Switching
Aave permits debtors to modify between fastened and floating charges, which is a reasonably distinctive function in DeFi. Rates of interest in any DeFi lending and borrowing protocol are normally unstable, and this function gives another by offering an avenue of fastened stability.
For instance, for those who’re borrowing cash on Aave and count on rates of interest to rise, you may change your mortgage to a set price to lock in your borrowing prices for the long run. In distinction, for those who count on charges to lower, you may return to floating to cut back your borrowing prices.
Aave Bug Bounty Marketing campaign
Aave gives a bug bounty for cryptocurrency-savvy customers. By submitting a bug to the Aave protocol, you may earn a reward of up to $250,000.
Aave Tokenomics
The utmost provide of the AAVE token is 16 million, and the present circulating provide is a little bit above 12.4 million AAVE tokens.
Initially, AAVE had 1.3 billion tokens in circulation. However in a July 2020 token swap, the protocol swapped the present tokens for newly minted AAVE cash at a 1:100 ratio, ensuing within the present 16 million provide. Three million of those tokens had been saved in reserve allotted to the event fund for the core crew.
Aave’s worth has been pretty unstable, with an all-time excessive of $559.12 on February 10, 2021. The bottom worth was $25.97 on November fifth, 2020.
Aave Safety
Aave shops funds on a non-custodial sensible contract on the Ethereum blockchain. As a non-custodial challenge, customers keep full management of their wallets.
Aave governance token holders can stake their tokens within the security module, which acts as a kind of decentralized insurance coverage fund designed to make sure the protocol towards any shortfall occasions reminiscent of contract exploits. Within the module, the stakers can danger as much as 30% of the funds they lock within the module and earn a set yield of 4.66%.
The protection module has garnered $375 million in deposits, which is arguably the most important decentralized insurance coverage fund of its variety.
AAVE Token Worth
Aave emerged as one of many fastest-growing tasks within the Summer time 2020 DeFi craze. Originally of July 2020, the full worth locked within the protocol was simply above $115 million US {dollars}. In lower than a 12 months, on February 13, 2021, the protocol crossed the mark of 6 billion US dollars.
Closing Ideas: Why is Aave Necessary?
Aave is a DeFi protocol constructed on robust fundamentals and has pressured different rivals in the DeFi space to bolster their worth propositions to remain aggressive. Options reminiscent of Flash loans and Price switching provide a definite utility to lots of its customers. The challenge presently permits borrowing and lending in 20 cryptocurrencies.
Aave is vital as a result of it reveals how ripe the DeFi house is for disruption with new modern options and the way a lot room there’s to develop.
Seeking to see how Aave compares to a different rapidly-growing DeFi challenge? Take a look at our information on Aave vs. Compound.
