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Aave: The Ascent of Decentralized Finance
Aave is a decentralized lending system that allows clients to borrow, lend and earn interests on their crypto assets without middlemen. Instead, Aave runs on the Ethereum blockchain and is designed to manage transactions via a distributed network of computers that run its administrative software.
Aave clients sidestep intermediary institutions to manage their funds and rely on codes that underlie the software. At its heart, Aave makes the creation of lending pools possible and enables its clients to borrow or lend in over 17 different crypto assets such as Ethereum, MANA, and BAT.
The borrowing procedure on Aave is like other decentralized lending systems; the client has to post collateral and then borrow an amount equal to the collateral’s worth. Thereafter, the borrower will receive funds in the form of a token (called aToken), which is pegged to the value of other crypto assets.
Aave Pros & Cons
Pros
Great range of inventive decentralized finance products
A wide range of cryptocurrencies to lend/borrow from
Competitive rates
One of the most sophisticated forces in the Defi industry
Instant and collateral-free Flash Loans
Cons
The platform is not beginner-friendly
It may not be attractive for potential investors
Less accessible than other forms of cryptocurrencies
Aave Ratings
Supply
- Total: 12,337,954 AAVE
Network Speed
- Rating: Medium
- Transactions time: 5 minutes
- Confirmations: 10
- Transaction rate: Unknown
Disbursement
- Rating: High
- Reason: Aave is a strong contender in the Defi market. Its assets are considered the largest in value among its rivals. Through the utilization of collaterals, Aave offers a large range of services such as lending/borrowing and Flash Loans. Moreover, it works with a wide variety of cryptocurrencies.
Developer Engagement
- Rating: High
- Reason: Aave has high developer engagement. The company allows users to actively participate in shaping its rules/policies by voting. They are continually upgrading their system, and through their governance forum, integrate proposals of their customers/clients into their future plans.
Liquidity
- Rating: Medium
- Reason: AAVE’s value is determined by its utility and finite supply. Since Aave uses collateral, it guarantees a certain amount of liquidity. But due to its complex nature and the limited amount of interest thereof, the risk exists that potential investors/customers could steer clear of this decentralized finance system, hence, limited assets.
Aave Overview
Aave is a company launched in 2017 by Stani Kulechov in Switzerland. The company was initially called ETHLend and raised $16.2 million in its first round of coin offering in 2017. In the same year, the company sold about 1 billion units of its cryptocurrency, originally called LEND but later changed to AAVE. Also, Aave held 300 million remaining units of “AAVE” for its team.
The creative concept of ETHLend was to create a peer-to-peer environment for matching lenders and borrowers. Aave later allowed its users to obtain cryptocurrency loads or earn profit by lending out their assets.
Aave is an algorithm-driven money market, meaning instead of individually matching borrowers and lenders, loads are offered based on an available pool.
Aave utilizes an over-collateralization policy. The value of the collateral you provide should be higher than the amount of loan you take out. The catch is cryptocurrencies are volatile, and if the value of your assets falls under the ratio specified by the company, your collateral can be liquidated.
Aave makes use of two types of tokens: LEND tokens for borrowers and aTokens for lenders. Tokens are issued to lenders who provide liquidity on the platform, and their value always remains constant to the value of deposited tokens. In addition to these tokens, lenders are also rewarded by Annual Percentage Yield or APY as a form of interest. Borrowers are also provided with a number of benefits. If they use native LEND tokens as collateral, they receive a discount; and they need not pay any transaction fees if they receive their loans in LEND.
Advantages of Aave
Flash loans are among Aave’s most impressive features (requiring no collateral). A Flash loan is an instant loan that should be repaid within the same transition that it was borrowed. Aave requires borrowers to pay a fixed sum; that is, they should return the original amount plus approximately one percent of the amount borrowed. Since Flash Loan transactions are processed in a short period of time, they don’t really work for conventional borrowers; instead, they are often used for Yield Farming and arbitrage.
Aave determines the borrowing interest rate is via the “utilization rate” of the deposit pool. This means when all or most assets in the pool are loaned out. They offer higher interest rates to incentivize clients to provide more assets. And when all available assets remain unutilized, interest rates plummet to encourage borrowing.
What makes Aave especially powerful is its policy of taking out loans in a different cryptocurrency than what clients deposit. For example, if you deposit Ethereum, you can take out a loan in stablecoins (like Tether, True USD, etc.).
Another feature that makes Aave unique is the “rate switching” option. This feature allows users to choose between a variable or fixed interest rates. Rate switching becomes especially important when considering the unpredictable nature of cryptocurrencies. Aave’s rate switching model has led to high growth demand for stable-rate loans. It should be noted that stable rates are not completely fixed; indeed, they are more resistant to market fluctuations.
Recently Aave introduced an Ethereum-based ERC-20 token coin named AAVE. AAVE operates based on a Safety Module protocol, preventing the system from experiencing a capital shortage. When there aren’t sufficient assets to pay back lender deposits, AAVE tokens saved in the safety module are sold to cover the deficit.
Disadvantages of Aave
Over-collateralization is Aave’s biggest problem. This policy means that customers must lock up crypto assets worth much more than the amount they want to borrow. The lending systems that require a large amount of capital to grant loans are capital inefficient, making them unsuitable for ordinary users who most need decentralized finance.
Another negative aspect of Aave is low-interest rates, making it less appealing to potential investors, especially those looking for liquidity mining or yield farming opportunities. Thus, investors cannot get much value for their investment, in turn harming the entire ecosystem.
Aave Frequently Asked Questions
Aave is the Finnish word for ghost. The company was originally called ETHLend but later changed to Aave. The name suggests that the company is committed to providing new, imaginative, and intriguing technologies and services.
Aave allows you to earn from lending your crypto assets. Your borrowed deposits will yield 3.63% annual interest. Also, depositing your AAVE tokens in the Safety Module protocol earns you an annual reward of 4.46%.
AAVE is the central token for Aave Protocol governance. With AAVE tokens, you can take part in the management of Aave software. AAVE tokens are mined by application-specific integrated circuit (ASIC) miners. These tokens are used for governance, as incentives, and as a mitigation tool.
The total number of AAVE tokens is 16,000,000. Currently, over 12 million are in circulation.
Like Aave, Uniswap is a decentralized liquidity protocol in which lenders/buyers can cooperate in an open financial market. Also, like AAVE tokens, in Uniswap, your deposits will be rewarded with a Uniswap Liquidity Provider Token (UNI). Both these tokens are powered by Ethereum, and neither of them is managed by central facilitators. They are quite similar.
Aave money market runs on Ethereum blockchain, and like other Ethereum-based decentralized landing systems, users must provide collateral to borrow money.
