What is Aave?

Aave (AAVE) is a DeFi (Decentralized Finance) protocol which offers the possibility to lend and borrow crypto. Such a protocol is often characterized by publicly available smart contracts built on the Ethereum network. There are currently 20 cryptocurrencies available on the Aave-platform, each with their own liquidity pool. These liquidity pools are fundamental to the platform. You could view it as a piggy bank, where lenders deposit their crypto into, for borrowers to take them out on a loan. Borrowers have to offer a collateral to ensure the lender getting back his crypto. This collateral is also offered in the form of cryptocurrencies. As is common with loans, the borrower pays interest to the lender. With Aave, the borrower can choose between a stable interest rate or a variable interest rate, where the stable interest rate is usually higher. It‘s also possible to get a flash loan with Aave. A loan with no need for collateral where the loaned amount with an extra of 0.09% interest gets repaid within the same Ethereum block. On average, an Ethereum block takes 13 seconds. If it doesn‘t get repaid, the whole transaction gets reversed, so Aave and the lenders aren‘t exposed to the risk of default. An example of a use case for flash loans is when arbitrage opportunities arise. In such a case, there is a price difference on two different exchanges for the same cryptocurrency. A flash loan can be used to take advantage of this.

Aave offers the option of two different interest rates: stable and variable. The variable interest rate is determined by an algorithm. This algorithm follows the basic economic principle of supply and demand. For example, an increase in demand for certain crypto causes an increase in interest and vice versa. The stable interest is the average of the interest rates of the relevant crypto over the past 30 days. This can be seen when borrowing and lending on the Aave platform. You can also switch between the two types of interest rates during a loan against payment of a small amount of ETH gas.

You can use Aave (AAVE) in different ways. The simplest is to deposit crypto in a liquidity pool and earn interest. You can also use Aave to borrow cryptocurrencies, where it is important to note that you must ensure that your collateral remains above a certain value. If your collateral falls too far, it will automatically be sold to repay your loan. A collateral of 50% to 75% of your loan is usually required. If the price of your collateral falls or the price of what you borrow rises, your loan could be liquidated. Finally, there is an option on flash loans, where no collateral is required. This option is mainly reserved for the more experienced crypto traders

DeFi protocols have become an indispensable part of the crypto industry since the summer of 2020. With a TVL (“Total Locked Value”) of more than $ 11.22 billion at the time of writing across all DeFi projects, there is stiff competition for Aave. Aave's two main competitors are Compound (COMP) and Maker (MKR), where the TVL of Compound and Aave are almost equal, Maker is about twice as big. However, Aave distinguishes itself with its flash loans and the option to switch between fixed and variable interest. The latter can be useful in a volatile, decentralized market. Aave is also the first DeFi lending protocol, previously known as ETHLend. This gives them the “first-mover advantage”, so they benefit from the fact that their name was first established in the world of Decentralized Finance.

Aave, and its predecessor ETHLend, were founded by Stani Kulechov, with the launch of ETHLend's first main net in 2017. Kulechov holds a Master's degree in law from the University of Helsinki and has been programming since childhood. ETHLend's token sale event in 2017 raised $ 16.2 million to invest in the project. The company currently employs 26 people and is looking for more. The AAVE token was also not created until later. The previous LEND token is currently undergoing a migration to AAVE.