Why is everyone talking about Aave? The concept of borrowing against crypto assets to earn interest on your holdings is not new. In fact, there are many crypto-based lending platforms out there that allow you to borrow from other investors.
Recent data from Footprint found that the number of crypto lending platforms has increased by over 263% since December 2020, with a record total locked value (TVL) of $48.44 billion.
Among these platforms, Aave has emerged as a major market player in terms of TVL, outranking its closest competitors, Compound and MakerDAO. As of today 1/05/22 Aave shows 26,824,578,600 dollars on its platform.
This article will take an in-depth look at what Aave is, how it works, and why people use it.
What is Aave?
Aave is a decentralized finance (DeFi) system that allows users to lend and borrow cryptocurrencies without a centralized intermediary. They gain interest when they lend and pay interest when they borrow. All of this is done without a third party managing the transactions, welcome to DeFi.
The Aave, interacts with multiple blockchains,the Aave coin asset runs on the Ethereum blockchain and is an ERC-20 token. This token is an innovative contract solution that allows these assets to be controlled by a distributed computer network executing its program.
This implies that Aave participants do not have to rely on a certain institution or individual to handle their assets. They merely need to believe that the code will run as intended.
How Aave works: lending and borrowing on the protocol
The non-custodial lending program allows users to take part as borrowers or depositors. Before users can transact, the protocol requires lenders to deposit their funds into liquidity pools from which borrowers can borrow. This allows depositors to earn passive income from their locked funds. It also allows borrowers to access the amount they need in an undercollateralized or overcollateralized manner. Each pool puts aside assets as reserves to protect against volatility. These reserves guarantee that lenders may withdraw their cash at any time.
Aave is open-source, audited, and secure, which means that lenders and borrowers may communicate through the user interface client, the API, or directly with the Ethereum smart contracts. It supports about 20 cryptocurrencies, including ETH, BAT, and MANA; however, not all coins may be utilized as collateral.
Before you can borrow funds, you need to put up collateral that is more than what you want to borrow. When you use the Aave protocol, you must keep a ratio above 1. If you don’t keep to this ratio, your funds will get liquidated and you will be at zero. The idea here is to keep a safe ratio if you are borrowing.
Users get interest-bearing tokens (called aTokens) no matter what they do with the collateral they put up for either lending or borrowing.
Aave also has liquidity pools built upon other DeFi platforms such as Balancer, Polygon, and Uniswap to handle any liquidity concerns, allowing customers to withdraw their cash when they are ready.
Why people use Aave: added-on advantages.
Aave comes with several benefits that make it stand out from the crowd. Here are some of the most important ones:
Flash Loans are a new idea that Aave didn’t copy from any other protocol. The financial world has never seen anything like this before, as it pushes DeFi beyond its limits. Flash loans let people borrow money quickly while keeping the reserve pool safe at the same time. Users can use it for arbitrage, self-liquidation, collateral swapping, and many other things.
Interest Rate Switching
Aave uses an algorithm to change the interest rate based on demand and supply. For example, when less money is available to borrow, the interest rate rises, and depositors make more money. This DeFi protocol enables consumers to choose between fixed and variable interest rates to make sure they get the best loan rate possible.
Many types of DeFi collateral are available at Aave, including DAI, ETH, BAT, MKR, SNX, USDT, LINK, MANA, USDC, and LEND. Others include USDT, sUSD, KNC, LINK, BUSD, wBTC, ZRX, and TUSD. (this list may change)
Different Aave platforms and markets
ETHLend became “Aave” in 2018. The ETHLend peer-to-peer lending architecture required users to communicate through smart contracts, but connecting lenders and borrowers proved difficult. So Aave proposed a decentralized liquidity market protocol.
The novel approach featured liquidity pools, where users may engage with pooled assets rather than individual users. It also brought additional innovations like “flash loans” and “aTokens” as a mechanism to unlock funds previously locked up in DeFi.
Aave v2 launched in December 2020 as an upgrade to Aave v1. The update included extra capabilities like collateral swaps and batch flash loans.
Smart contracts have been streamlined along with the additional functionality, resulting in reduced transaction costs than in version 1. The AAVE token is unaffected by the AAVE v2 update, and AAVE v1 continues to function as a parallel protocol.
Due to the high transaction costs associated with the Ethereum network, Aave has explored multichain methods and developed a framework for cross-chain lending. In March 2021, the Aave protocol was incorporated into the Ethereum Layer 2 solution Polygon, where costs are much cheaper.
In October 2021, the Aave protocol was successfully moved to the Avalanche blockchain. By the end of the month, the protocol had a value of $5 billion. Additionally, creator Stani Kulechov said that Aave would be expanding to the Solana Blockchain soon.