What Is Aave? All You Need to Know About AAVE

What Is Aave (AAVE)?

At a time when blockchain technology started to evolve at a very high pace and to be studied with particular attention, many people understood its high potential and began developing decentralized solutions designed to open doors to many opportunities. In 2017, the Ethereum blockchain popularized smart contracts, which are the basis of DeFi. Since then, other blockchains have also implemented smart contracts, most of which are developed to allow more direct and democratic access to various financial services. The advent of decentralized finance (DeFi) was undoubtedly the key event in this paradigm shift. Lending and borrowing, the core offerings of the traditional financial system, became an integral part of the crypto ecosystem. However, those were now conducted in a decentralized manner wherein the parties involved in a transaction can deal directly with each other without an intermediary or a financial institution through smart contracts. Aave’s DeFi protocol was one of the pioneers in the industry.

Aave is a for-profit company founded by Stani Kulechov in 2017, while he was still a law student in Helsinki. Despite his unusual educational background in comparison to most founders in the blockchain sector, he gained experience in web development and financial applications. Studying Ethereum and its smart contracts, Kulechov began to look for a way to automate legal agreements without a need to involve third parties (such as lawyers), coming to conceive the development of a platform for decentralized loans that can connect lenders and borrowers in a peer-to-peer manner. This project was first called ETHLend, but was later changed to Aave.

At the beginning of his business, this mechanism was very slow, because it used to match lenders and borrowers with a peer-to-peer system, which took a long time. In fact, this caused a lack of liquidity, which in conjunction with a bear market, led the project to lose traction. Finally, with the appearance of the first automated peer-to-contract protocols and liquidity pools, the liquidity problem was solved enabling the borrowers and lenders to finally interact with a smart contract. The Aave project has therefore managed to gain momentum again: it arrived at the implementation on the Ethereum mainnet in 2020, subsequently the LEND code was migrated into AAVE token, and finally Version 2 of the protocol was released.

AAVE is one of DeFi’s most innovative lending platforms. To date, it is one of the most used in the entire industry, and it has recently come to hold up to 23 billion assets within its protocol. Aave has many coins available, is characterized by high security, and has recently adopted layer 2 solutions to increase its performance.

How Does Aave Work? Collateralized Loans Mechanism and Flash Loans

As already mentioned, AAVE was born as a platform for requesting and giving loans, by linking lenders and borrowers through a robust and security-audited system of smart contracts.

Lenders act as liquidity providers, so they lend liquidity to the platform by depositing funds in the various liquidity pools. The lender receives interest payments based on the amount of time he or she lends funds out for, and rates are subject to vary based on market conditions. Everyone can decide to withdraw funds at any time. Once the deposit has been made, the platform gives the possibility to ask for loans and therefore, it allows the lender to become a borrower.

Borrowers must deposit collateral that is worth at least the same amount as the cryptocurrencies they intend to borrow. Aave allows users to take out loans in a different cryptocurrency than they deposited. Once they have done so, they receive an equal amount of aToken pegged to the value of another asset (for example, borrowed ETH would be called aETH). The longer the loan is held, the more interest will be owed on it. Because the cryptocurrency market is volatile, Aave has adopted a liquidation process that is triggered in the event that the value of the collateral falls under the collateralization rate defined by the protocol. If this happens, the collateral deposited by the user is fully liquidated.

A feature that has made Aave very attractive, especially for traders, is the possibility of obtaining non-collateralized loans, called flash loans. The protocol uses the liquidity that is in excess to allow users of loan funds and repay them, along with a 0.09% fee, within the same block (the same transaction). If the borrower does not pay, the entire transaction is canceled and the loan does not take place. All this can be done by exploiting the finalization times of a block in the chain: if the block has not yet been registered on the blockchain, the transaction (in this case the flash loan) is automatically reversed. In this way, neither the borrower nor the Aave protocol runs any risk. Flash loans are very useful for traders who operate with the so-called arbitrage, as it allows them to make profit margins on the price disparities between different exchanges.

To protect the entire mechanism on which Aave rests its foundation, a safety device has been set up, that is called the Safety Module. There is a smart contract-based deposit pool that has AAVE tokens within it, in which all holders can participate by depositing their funds in exchange for incentives. The main role of the Safety Module is to protect the protocol against unexpected loss of funds (Shortfall Events), which are events in the Aave Protocol causing a state of deficit for the liquidity providers. If any of these events happen, the AAVE in the Safety Module will be sold for the assets needed to cover the deficit.

Source: aavenomics

What Is the AAVE Token?

AAVE is an ERC-20 token powering the Aave network. Its maximum supply is 16 million units, of which 14.1 (88%) are already in circulation (September 2022). In the beginning, when the DeFi project was called ETHLend, the token was called LEND. Subsequently, following the rebrand to Aave in 2020, the token LEND migrated to AAVE. As part of the migration, AAVE were redeemable at a rate of 100 LEND per 1 token.

The AAVE token has two main functions: utility token and governance.

AAVE holders can stake the token to contribute to the security of the protocol, which rewards them with the same tokens. In addition, borrowers that use the native token as collateral for their loans pay less fees than usual.

Regarding the governance function, each AAVE holder is entitled to participate in the voting process. In fact, because Aave is also a DAO (Decentralized Autonomous Organization), it means that some decisions regarding the protocol are delegated to the holders of the token. These voters can propose and vote on changes, which can affect the system parameters and Safety Module. In this governance system, one AAVE is equal to one vote.

Aave Ecosystem

Aave is a project that has certainly inspired many others in the DeFi industry. It is also one of a kind, as well as one of the first DeFi projects ever created. Aave does not have any ‘parallel’ projects, but has recently expanded its interoperability by integrating other networks to its platform.

The most important integration is the one with the Polygon network, launched in 2021. Polygon is a layer 2 sidechain from Ethereum that was conceived with the aim of improving the chains it relies on and increasing its scalability. Polygon moves in parallel and independently from Ethereum, but occasionally comes into contact with it through checkpoints, thus allowing Ethereum network to control its operation. In a nutshell, Polygon and Ethereum networks work together without the former slowing down the functionality of the latter.

The Layer-2 Polygon allows Aave application to be more efficient in terms of scalability, significantly increasing the number of TPS (Transactions Per Second) and drastically reducing the cost of gas fees. This allowed the platform to attract more capital. In fact, the sidechain will allow users to tap into Polygon Aave marketplace to trade token MATIC and additional assets including WBTC, WETH, and stablecoins. In addition, the integration features a ’bridge’ so that assets can be exported to Polygon’s sidechain.

Is AAVE a Good Investment?

Aave is one of the best performing and simplest DeFi platforms that exist today. The amount of volumes within this DApp could potentially increase, as it consists of a user-friendly interface and is considered to be very secure, thanks to the fact that it relies on the Ethereum blockchain and is protected by its large safety deposit fund (the Safety Module). In addition, the security of the platform is guaranteed by numerous companies that have audited it. In fact, 17 IT security companies have participated in the control of Smart Contracts on the platform to decree their security.

The fact that Aave can integrate with other blockchains can only increase the number of users in the future, as the Polygon integration demonstrated, which has decreed a conspicuous increase in volumes within the system.

How to Own AAVE?

One way to own AAVE is to go through a centralized crypto exchange, so the first step is to create a Gate.io account and complete the KYC process. Once you have added funds to your account, check out the steps to buy AAVE on the spot or derivatives market.

News on Aave

According to a tweet by Aave protocol posted on September 9th 2022, the plan to compensate Aave company members for their hard work with $ 16.28M has been green-lit. The funding will be made up of a combination of AAVE tokens, Dai (DAI), Tether (USDT), USD Coin (USDC), and others. The compensation refers to the work done by the developers to build the V3 of the Aave protocol, which will focus on increasing capital efficiency whilst limiting risks for the protocol.

The announcement of this update made an impact on the crypto-community with some crypto-whales taking notice. In fact, the number of ‘whale’ addresses in AAVE has recently increased. 55% of the AAVE coins are currently held by addresses with from one thousand to one million tokens, which is a very interesting figure for the future.

Useful References

For the latest updates about Aave, you can visit:

• The official website
• Twitter
• Discord
• GitHub
• Telegram

Take Action on AAVE

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