Aave stands as one of the largest cryptocurrency lending protocols, with its AAVE token boasting a higher market capitalization than competitors like Maker or Compound. Here’s how it works.
Key Takeaways
- Aave is a decentralized lending protocol enabling users to lend or borrow cryptocurrencies without intermediaries.
- Users deposit digital assets into "liquidity pools", which serve as the protocol’s loanable funds.
How Aave Works
Aave is a DeFi (Decentralized Finance) protocol facilitating crypto and real-world asset (RWA) loans without traditional intermediaries. Lenders earn interest; borrowers pay interest.
Originally built on Ethereum, Aave has expanded to other blockchains like:
- Avalanche
- Fantom
- Harmony
Governed by a DAO (Decentralized Autonomous Organization), Aave is managed by AAVE token holders.
Fun Fact
Before rebranding to Aave, the project was called ETHLend, developed by a team led by Finnish law student Stani Kulechov.
How Loans Work on Aave
Unlike traditional banks, Aave uses smart contracts to automate lending. Key features:
Collateral Requirements
- Borrowers must provide crypto as collateral.
- Due to crypto volatility, loans often require overcollateralization (e.g., $750 collateral for a $500 loan).
Liquidation
- If collateral value drops below the borrowed amount, assets are liquidated to cover the loan.
Asset Pools
- Supports 30+ Ethereum-based assets (e.g., USDC, DAI).
- Offers real-world asset (RWA) pools (e.g., real estate, freight invoices) via Centrifuge.
Why Borrow Crypto?
Arbitrage Opportunities
- Profit from price differences across exchanges.
Flash Loans
- Borrow without collateral, execute trades, and repay instantly in the same transaction.
👉 Discover how flash loans revolutionize DeFi trading
How Liquidity Pools Operate
Deposit Assets
- Users deposit crypto into pools, receiving aTokens (e.g., deposit DAI → receive aDAI).
Earn Interest
- Interest rates fluctuate based on pool demand.
Example:
- High-demand pools offer higher lender yields.
- Low-demand pools offer lower borrower rates.
Risks and Challenges
Crypto Transfers
- Requires moving crypto onto Aave (no fiat on-ramps).
Liquidation Risks
- Aave’s Safety Module (AAVE token pool) acts as a backup capital source.
The AAVE Token
- Governance: Holders vote on protocol upgrades.
Utility:
- Collateral for higher borrowing limits.
- Fee discounts for borrowers.
- Trading: Available on Binance, Huobi Global.
Did You Know?
Legacy LEND tokens were swapped 100:1 for AAVE to grant voting rights.
Aave’s Future
GHO Stablecoin
- Proposed overcollateralized stablecoin (similar to Maker’s DAI).
- Revenue from GHO loans would fund Aave’s DAO.
Lens Protocol
- Aave’s decentralized social media platform on Polygon, storing content as NFTs.
👉 Explore DeFi innovations with Aave
FAQs
Q1: Is Aave safe to use?
A: While audited, Aave carries risks like smart contract bugs or collateral liquidation.
Q2: How do I start lending on Aave?
A: Deposit supported crypto into a liquidity pool via Aave’s app.
Q3: What’s the advantage of flash loans?
A: They enable collateral-free arbitrage but require repayment in one transaction.
Q4: Can I borrow fiat on Aave?
A: No—only crypto and RWAs (e.g., invoice-backed loans).
Q5: How are interest rates determined?
A: Algorithmically adjusted based on pool supply/demand.
Q6: What chains support Aave?
A: Ethereum, Avalanche, Polygon, and more.
This guide simplifies Aave’s complexities while highlighting its DeFi leadership. For deeper dives, consult Aave’s official docs or community forums.