A Comprehensive Guide to Aave and Its Lending Protocol

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Aave is a notable blockchain name in the field of decentralized finance, which has gained traction in 2021 and 2022. It is an open-source protocol for non-custodial lending and borrowing of crypto. Lenders can earn interest on their deposits, and borrowers can use cryptocurrencies as collateral to borrow a variety of altcoins and stablecoins.

Let’s take a better look at the lending protocol and AAVE token below.

cryptocurrency coins graph

The concept behind Aave

Aave is most accurately described as a network of loan pools. Participants place funds they are looking to lend into a liquidity pool. Then, while obtaining a loan, borrowers may draw from these pools. The lender may trade or transfer these tokens as they see fit.

Aave issues two types of tokens to support this process:

  • aTokens, which are provided to lenders so that they can collect interest on deposits
  • AAVE tokens, which are Aave’s native tokens

This cryptocurrency also offers its holders a variety of benefits. AAVE borrowers who obtain loans denominated in the token, for instance, are not charged a fee.

AAVE owners who pay a fee in AAVE can view loans before they are made available to the general public. Additionally, borrowers with AAVE as collateral can borrow slightly more.

Aave’s use case

While it’s not hard to understand what Aave is, it’s used for much more than basic lending and borrowing. At its most fundamental level, Aave software facilitates the creation of loan pools. The lending pools allow users to borrow or lend nearly 17 cryptocurrencies, such as Ether, Brave Attention Token, and MANA.

Similar to numerous other Ethereum bot lending platforms, Aave requires borrowers to provide collateral before receiving a loan.

Additionally, it is vital to understand that borrowers can obtain a loan up to the value of the collateral they submit.

The lending protocol

Traditionally, in order to obtain a loan, you would need to visit a bank or other financial institution and get approved. In exchange for the loan, the bank will require collateral. You then make monthly principal and interest payments to the bank.

DeFi is different. There is no financial institution; instead, there are smart contracts that do all the hard work. These contracts are computer instructions that automate transactions, such as selling if the price of a token hits a specific level.

DeFi eliminates intermediaries in asset transactions, futures contracts, and savings accounts. This implies that you can borrow cryptocurrency from individuals rather than financial institutions. However, you are still required to provide collateral.

In a DeFi system that attempts to be fiat-free, this means dealing with tokens of other cryptocurrencies.

cryptocurrency coins dollars

Aave and its roots

The second essential component for comprehending AAVE is the history of the DeFi protocol. Aave is a for-profit enterprise that was founded in 2017. Stani Kulechov established the Aave protocol in 2017. Initially known as ETHLend, the company launched its first initial coin offering (ICO) in 2017 and raised almost $16.2 million.

During this time, the system sold about one billion units of its native cryptocurrency, known as LEND, in its early phases. Subsequently, the Aave team retained the remaining 300 million Aave tokens.

ETHLend was significantly different from Aave in that it did not emphasize the pooling of funds. In contrast, it varied from conventional Aave instances found today and emphasized peer-to-peer matching of lenders and borrowers.

In 2018, the Aave protocol received its name, and the term “Aave” caught the DeFi world by storm.

Flash loans

Aave is distinctive in that it offers instant, collateral-free loans via flash loans, a form of credit primarily designed for software developers.

Under the terms of a flash loan, the principal amount must be repaid in a single Ethereum transaction. The transaction is reversed if the loan is not returned to the pool on time. This ensures the security of the reserve pool’s funds, and no one takes a risk. 

The code safeguards the payback mechanism regardless of its intended use, thereby contributing to the system’s overall security. This function also enables users to borrow and lend money without the need for a third party.

Aave and ETH merge

Aave’s DAO has passed a proposal to continue running on Ethereum’s improved proof-of-stake platform. It proposed not implementing any Ethereum forks from other groups that would arise from The Merge, including a hypothetical proof-of-work (POW) split.

Conclusion

Aave is continually expanding its DeFi ecosystem. The Aave community approved a proposal to deploy GHO, the network’s own stablecoin, in July 2022.

The plan to establish GHO as an overcollateralized stablecoin pegged to the U.S. dollar and backed by a diversified set of crypto-assets was supported by 99.9% of voters.

So, if you were looking for an interesting crypto investment opportunity, definitely consider Aave.

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