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What is Aave?
Aave is a decentralized lending protocol that allows users to borrow or lend money without having a third-party like a bank.
This allows regular people to also participate as lenders and earn interest while they lend out cryptocurrencies or real world assets.
Aave means “ghost” in Finnish
It was established in 2017 and started off being built on the Ethereum network. Later, it expanded to other networks such as Avalanche, Harmony and Fantom.
The people who decide governance actions are part of a DAO (Decentralized Autonomous Organization) and vote using the native token, AAVE.
Quick Facts
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Aave allows lending and borrowing without having to go through a bank.
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Aave uses pool-to-peer instead of peer-to-peer
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Aave was known as ETHLend before rebranding.
What is Decentralized Finance (DeFi)?
Decentralized Finance have been increasingly popular in the past few years and Aave is a rather popular DeFi token in the past years.
But, what is DeFi?
Before we look into decentralized finance, let’s first look at what centralized finance is.
Banks and brokerage firms are centralized financial institutions. They are currently what consumers rely on to obtain loans, deposit money and transfer payments.
However, these institutions are also the middlemen who gatekeep average people from being able to take out a loan or have a bank account because they set their own terms that consumers have to adhere to.
Decentralized Finance has no middleman.
The protocols are smart contracts written in code which is trusted. There is no human intervention when it comes to transactions, borrowing or lending because of the peer-to-peer systems.
Individuals keep their assets secure in a wallet and can transfer it out at any time as long as an internet connection is available with DeFi.
Some benefits of DeFi include:
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Accessibility
Anyone can make transfers without needing a bank account across the world.
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Security
Smart contracts run the protocol. The codes are open source and can be reviewed however wallet identities are not revealed. Blockchains are also secure and immutable so the risk of theft is reduced.
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Autonomy
Banks have no power with DeFi and thus, we are also not exposed to risks such as adversity of bankruptcy that may occur with institutions like banks.
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Opportunities
You can be a lender through DeFi protocols like Aave which allows income generation to be limitless.
How Does Lending Work on Aave?
Before the rebranding, Aave was known as ETHLend which was a peer-to-peer lending decentralized platform where lenders are able to set their own terms and conditions for lending out cryptocurrencies.
In return , the borrower will have to provide collateral for taking out the loan. When the borrower does not pay the loan, the lender will be able to receive their collateral in exchange.
However, the peer-to-peer lending system caused some issues which were mainly liquidity and dependency on individual lenders.
They switched to Aave to incorporate the use of smart contracts and liquidity pools to address this concern.
With Aave’s pool-to-peer concept, the lender deposits their tokens into a liquidity pool and receives aTokens interest. The “a'' refers to AAVE token. So if you deposit DASH into a liquidity pool, you will receive aDASH.
The interest rates may differ depending on supply and demand. Some tokens such as USDC may have a shortage of liquidity because they are often borrowed. This would mean depositing in a USDC pool will rake up more interest as compared to a pool with a surplus of liquidity.
Essentially, if a protocol is in desperate need of a particular token, depositing those tokens into the liquidity pool is your best bet for a higher interest rate.
How Can You Borrow From Aave?
Aave uses a concept called overcollateralization which means you will have to put in a higher amount of collateral when borrowing as a backup, in case of default on the loans. In this case, the volatility of cryptocurrencies is a valid reason as to why Aave uses overcollaterization.
When you borrow from Aave, the loan-to-value ratio is 80%. This means that if you put 10 ETH equivalent to $8000 as collateral, you will be able to borrow $6400 in ETH or in other assets such as stable coins.
Borrowing a volatile cryptocurrency is much more riskier than borrowing in stable coins and there is a risk of your collateral when it hits a liquidity threshold.
So why borrow?
There are quite a few reasons as to why borrowing might be a good idea. For instance, you may need to buy a vacuum cleaner but you don’t have cash on hand.
Quick Loans
For instance, you may need to buy a vacuum cleaner but you don’t have cash on hand.
You have some ETH so you use it as a collateral and get a loan at a lower interest rate and get it. You can always cover this expense with your income the following month.
The borrowing amount is indefinite with cheaper interest rates. You don’t even need a bank to get a loan!
You can also borrow for unexpected expenses like a small medical fee or sudden investment opportunities.
Arbitrage
Other reasons some may get a loan is for arbitrage.
Arbitrage is the purchase and selling of the same asset in different markets to profit from tiny differences in the asset prices in the different markets. Crypto traders buy an asset like DASH from one exchange and then quickly sell it on another exchange for a higher price.
The price difference is often minimal which is why more cash is needed to make a significant profit.
A way to do this is by using the Aave’s flash loan system. However this type of loan is a little more technical to execute.
The point is to borrow the crypto assets without collateral but ensure that it is returned to the liquidity pool within one block transaction.
What Is The AAVE Token Used For?
The AAVE token is generally used as a governance token. AAVE token holders can vote on the direction of Aave by staking the tokens. One AAVE token is equal to one vote.
You can also use AAVE tokens as collateral when borrowing which actually brings in some benefits. Borrowing using AAVE allows you to bypass some borrowing limits and even encounter discounts on fees.
The Founder of AAVE Hails From The Happiest Country In The World
Finland is often quoted as a happy country as it is known for having the cleanest air and the world’s best education system.
Stani Kulechov, founder and CEO of Aave was born in Helsinki, Finland, and had mentioned that his country’s strengths include education and innovation. This can be seen with Nokia and Linux’s success.
Stani hinted at the open-source nature of Linux which is very similar to the decentralized protocol Aave he had created which is permissionless, open and collaborative.
Stani had studied law and graduated from the University of Helsinki in 2020 with a Masters in Law.
Despite the surprising choice in his education, he was always interested in web development especially around finance. However, web development was his passion and something he had learned on his own.
Stani mentioned in an interview that he was always somehow close to software, stating that his brother used to tweak linux kernels for fun.
The combination of law and programming peaked his interest. It all started when he was looking for a way to automate legal agreements and ended up discovering Ethereum and its smart contracts. He said that it was a revelation because with the implementation of smart contracts, the code is immutable which means you can even get rid of lawyers.
This is when Stani introduced ETHLend which is a peer-to-peer platform for decentralized loans which later rebranded into Aave. The main difference was that lenders interacted with smart contracts instead of other people which made the process more efficient and cheaper because there were no constant gas fees for payments.
Stani never expected Aave to grow as big as it has become and it shows that Stani is definitely not someone to be underestimated.
How Do I Buy AAVE
1. Open an online account
Open an account with an exchange that supports AAVE such as :
2. Open a wallet
Select a cryptocurrency wallet that will allow you to store your AAVE tokens. There are two types of wallets which are hardware and a software wallet.
Since AAVE is an ERC-20 token, you have a few options when it comes to wallets:
3. Buy the AAVE tokens
Fund your brokerage account in the exchange of your choice with fiat dollars. Once this is done, simply decide how many AAVE tokens you want to purchase. Place your order and wait for the exchange to fill your order. The tokens will be in your wallet if it is connected to the platform you are buying the tokens from.
Final thoughts on AAVE
Aave is a great project that aims to help the average Joe bypass the bank to obtain loans and lend money in a safe and secure way.
The reality is that 1.7 billion people around the world do not have a bank account. That is 21% of the world’s population. Through decentralized platforms, people do not need to have a bank account to receive, transfer, lend or borrow money as this is entirely peer-to-peer.
Aave aims to fix this issue. In addition, peer-to-pool lending requires the use of smart contracts and puts trust on these codes instead of people. The codes are immutable and thus, it could be safer than centralized banks.
If you’re looking to invest in Aave, price predictions should not be what you seek. Prices are hard to estimate and given the volatile nature of cryptocurrencies, buying Aave for price action may be risky.
However, do consider the future of finance when it comes to Aave as the technology is set to revolutionize the way we look at the banking system as a whole. Aave is a great option for people looking for a true DeFi space that allows them to borrow and lend crypto assets as they see fit.