Aave (AAVE)-banner-imageCoin Reviews

Aave (AAVE)

Project Name: Aave

Project Ticker: AAVE

Website: aave.com

Twitter Account: twitter.com/AaveAave

Whitepaper: Click here for the whitepaper.

A. What Is Aave?

Aave is an Ethereum-backed decentralized finance (DeFi) platform that allows users to lend and receive various cryptocurrencies. This system, where users who want to lend can borrow from pools by depositing cryptocurrency in pools, earn interest income, and users who want to borrow in exchange for interest in the same way, can borrow from pools against collateral (and in some cases without any collateral), is maintained with smart contracts. In this way, it eliminates the intermediary role of traditional financial institutions and introduces an innovative finance framework.

B. What Does Aave Offer?

Aave is the lending protocol with the widest range of collateral on the market. It allows users to transact with a total of 23 different digital assets, including WETH, Aave, WBTC, LINK, USDC, and DAI. With a total of $5.82B worth of staked assets, it is the 4th largest platform after Maker, Compound, and Uniswap. With its high liquidity and unique technologies, it has become one of the most preferred lending platforms by surpassing its competitors in the market.

Provided that they pay interest, users can borrow from Aave by depositing a certain amount of cryptocurrency as collateral. The amount borrowed is usually less than the collateral. However, users get an amount of aToken equivalent to the assets they deposit as collateral, which allows users to earn interest income and protect the value of their assets. The interest paid by the user (APR -annual percentage rate-) is higher than the interest he earns (APY -annual percentage yield-). Thus, the deposited collateral is protected, and users can borrow a different cryptocurrency than they deposit as collateral. Users who lend on the platform also receive interest income (APY).

With this service, Aave has three major advantages compared to other platforms: Flexible interest rates, flash loans, collateral swapping, and a wide range of collateral options.

Flexible Interest Rates

Interest rates in many lending protocols, such as Aave, are determined by the liquidity in pools and the demands of borrowers. When demand increases, liquidity decreases and interest rates increase for both lenders and borrowers.

This type of interest rate is called a variable interest rate. However, variable interest rates cannot always provide the best interest rates for users. For that, Aave allows users to opt for stable interest rates. The stable interest rate is calculated by averaging the interest rates of the last thirty days on assets, offering users a less volatile and less risky alternative. The stable interest rate is also available on other platforms, but Aave allows users to choose stable or variable interest rates. Users can choose the interest rate model that suits them best.

Flash Loans

Flash loans, which is Aave’s biggest innovation, are loans that users can take out without collateral. In this type of loan, the borrowed amount must be repaid within a certain time limit. Borrowed amount and the transactions that can be made with the borrowed amount are considered a single transaction on the same block. A user can only use the amount he borrowed in on-chain transactions. If the borrowed amount is not repaid within the given period, all the transactions made with this amount are rejected. If paid, the transactions are recorded in the block and considered valid.

Many of the financial services offered in the crypto ecosystem are digitized and advanced applications of the services offered in traditional finance. However, flash loans were invented by Aave and are specific to decentralized finance (DeFi) and are not found in traditional finance. This type of debt, which is taken by paying a transaction fee of 0.09%, is used for arbitrage, to finance other debts and to change the type of collateral deposited, most notably yield farming, that is, to obtain interest income by lending.

Wide Range of Collateral Options

Aave accepts the widest range of collateral types in the DeFi, allowing users to borrow popular cryptocurrencies as well as income-generating tokens such as Uniswap LP tokens.

Collateral Swapping

With collateral swapping in Aave V2, users can convert the assets that they lend or even collateralize into another asset. Thus, when users are concerned about a possible drop in the price of the cryptocurrency they have collateralized, they can convert the amount they have collateralized into stablecoins or less risky assets to avoid losses and take safer long positions.

Aside from the advantages, the Aave protocol carries some risks. Liquidation is one of them. Users are evaluated on a score called the health factor, formed by the amount they have received and the amount they have deposited as collateral. If the value of the collateral decreases or the value of the debt received by the user increases compared to the collateral, a part of the user's debt is liquidated. Another user can pay an amount of up to 50% of this debt and receive a certain percentage of the collateral deposited as a reward. Liquidation is a risk that must always be considered in the Aave protocol. Therefore, to minimize this risk, a user should deposit a higher collateral than the amount he receives or pay a part of his debt. Users should always check their health factors after borrowing money and try to keep their health factor number high.

C. Aave's Technology

Aave is an open-source protocol that works with smart contracts created on the Ethereum network. The most important contract is the LendingPool contract, which executes deposits, borrowing, repayment, collateral exchange, and flash loans in the Aave protocol. There are also contracts such as LendingPoolAddressesProvider contract, LendingPoolAddressesProviderRegistry contract, Stable and Variable Debt Tokens contract for the management of tokenized debts, and many additional contracts.

aToken transactions are carried out with a contract. aTokens are interest-bearing tokens that are generated and distributed to lending users and burned when the borrowed amount is withdrawn. This is how payment is made to lending users. The value of aTokens are always equal to the value of the deposited assets.These tokens can be stored, transferred, and traded. The revenue from these tokens is distributed directly to users' wallets.

For borrowers, this process is carried out similarly through interest-bearing debt tokens, which are generated when the debt is borrowed and burned when the debt is repaid. There are two types of debt tokens, stable interest tokens and variable interest tokens.

D. The Aave Team & Company

Aave was founded in 2017 by Stani Kulechov as ETHLend, but due to market stagnation in 2018 and the shortcomings of the protocol, its name was changed to Aave, which means ghost in Finnish. Aave underwent a serious transformation and returned to the market as we know it today in 2020. It was initially a platform based on decentralized peer-to-peer lending, but when it was renamed Aave, it fully transitioned to the liquidity pool model.

In 2020, Aave managed to raise a total of $25M from investors such as Blockchain.com Ventures, Standard Crypto, and Blockchain Capital.

E. Aave's Digital Asset Economy

The native token for the project is AAVE, which was initially introduced as LEND and later took its current name in the late 2020s as a result of the community's vote. AAVE, an ERC-20 token, is also the system's governance token, so token holders can participate in voting and have a say in changes to the protocol, meaning they can manage the protocol.

The token, which was initially offered as LEND and distributed 1.3 billion units, amassed a sum of $16.2M. 23% of these tokens are reserved for the founding and development team. As a result of the 1:100 token exchange in 2020, the total supply is set at 16 million units, and 3 million units will be held in reserves. A total of 12,486,095 Aave is in circulation in the market, and Aave’s total market cap reached $4.872B at the time of writing.

This token is used to borrow or lend on the platform, and its circulation is controlled through token burns, depending on the number of locked tokens. Locked Aave tokens can be used as collateral in case there is an issue with the protocol.

F. Aave's Collaborations

In November 2020, Aave announced that the Aave token would be distributed as a reward in Axie Infinity, and that Aave token holders would be able to earn exclusive Aave NFTs in the game and use them as special characters.

Also in November 2020, Aave announced that it was investing in Singapore-based Pixelcraft Studios, and as a result of their collaboration, a game called Aavegotchi was being developed, which is similar to Tamagotchi, where NFTs could be collected. The game, which will be powered by the Aave protocol, will be managed by a mechanism called AavegotchiDAO and will work with the GHST native token.

In February 2021, Aave announced that it was working with Balancer to develop Balancer V2 Asset Manager. With this application, extra earnings will be generated by lending unused assets in Balancer V2 pools to Aave.

G. Evaluation of Aave

Aave is a popular platform with a wide range of crypto assets that users can borrow. With the Aave governance token, it strengthens its decentralized nature by involving users in protocol management and improving this mechanism all the time.

The ability to choose variable or stable interest rates and swap collateral are great advantages for users. It can also be useful when users want to avoid or minimize losses due to price volatility. As we have mentioned, flash loans are an innovation that can unlock the potential of decentralized finance. Despite the risks, flash loans are of great importance in terms of facilitating the participation of users without capital in the crypto economy and enabling them to profit by taking advantage of the opportunities of the ecosystem.