Aave is a lending protocol, which made a breakthrough in DeFi with flash loans. How does the Aave protocol work? What is Aave crypto token needed for? Read our Aave crypto review and guide!
Key Takeaways
- Aave is a lending protocol that maintains a pool from which users can borrow cryptocurrencies and deposit liquidity. Alternatively, advanced users can use flash loans with the condition to repay it within a block time;
- The native token of the Aave protocol is AAVE. The tokens back the security of the protocol;
- Aave is governed by a DAO, in which AAVE holders vote for Aave improvement proposals proportionally to their stake.
What is Aave?
Traditional banks historically match people seeking to lend and people seeking to borrow. In the decentralized world of crypto, however, one would not rely on an entity such as a bank to do this.
With the launch of Ethereum and the popularization of smart contracts, it became possible to build a protocol that would serve as a similar matchmaker. Thus, lending protocols were invented, and Aave is one of them.
Lending protocol Aave is open-source and non-custodial, and it lets users earn interest on deposits or borrow assets. The interest rate on borrowed funds can be stable or varied.
Let’s imagine Alice wants to lend some crypto money and Bob wants to borrow. In Aave’s case, they will not be interacting on a peer-to-peer basis but Alice will contribute what she has into the pool, and Bob will take what he needs from it.
The smart contract governs the rates for both lending and borrowing. Depending on the constitution of the pool at the moment, they change: for example, if there is less DAI relative to other coins, lending it into the pool will generate a higher annual percentage yield (APY).
Since there is no centralized authority, to take out a loan users would have to provide collateral, sometimes in an amount exceeding the borrowed sum. Aave uses over-leveraging, too, but it came up with another way to have users repay what they borrowed.
Flash Loans
A flash loan is an uncollateralized loan that ends in a single transaction through a smart contract. How does it work?
The condition for a flash loan is to repay the loan as soon as it is issued — within the block time. If the condition is not met in time, the transaction is reversed and the capital is returned to the lender.
One of the upsides to using a flash loan is that the smart contract bundles two or more transactions, which saves on network fees. Savvy users can use flash loans to earn on arbitrage: since Aave pools liquidity, users can trade assets while keeping the premium.
History and Team behind Aave
Aave was previously called ETHLend, and its scope was a peer-to-peer lending protocol on Ethereum. Even this simple premise was enough to raise $16.2 million in an ICO in 2017.
As the platform grew and switched to a liquidity pool model with a wider choice of currencies, it rebranded to Aave (Finnish for “ghost”) in 2020. The Aave Protocol was launched in 2020, taking the DeFi sector by storm with its flash loan opportunities.
ETHLend and Aave were envisioned and led by Stani Kulechov. The company has several offices, mainly in London and Berlin.
What is AAVE?
| Blockchains | Ethereum, xDai, HECO, Polygon, Fantom, Avalanche, Solana, BNB Smart Chain |
| Total Value Locked (at the time of writing) | $8.13B (#2) |
| ICO Price | $0.0162 |
| Emission Type | Deflationary (Non-programmatic burn) |
| Total Supply | 16,000,000 AAVE |
In an ETHLend ICO, one billion LEND ERC20 tokens were created and distributed with 23% going to the team and founders.
In July 2020, as a part of the rebranding migration, LEND was swapped to AAVE in a 100:1 ratio. With three million AAVE reserved by the team, 1.3 billion LEND corresponded to 16 million AAVE.
AAVE tokens support various blockchains but all versions are secured by Proof-of-Stake. This creates an emergency mechanism for the protocol called Safety Module, in which as a last resort measure, the staked tokens can be used as collateral.
What is AAVE Crypto Used For?
Since AAVE tokens act as backup collateral, there has to be a strong incentive to keep them staked. Aave Protocol offers fees generated by the protocol as a reward for staking AAVE.
The Aave protocol governance is twofold: anyone can receive a vote proportional to their liquidity share in the pool concerning it. A layer above the pool governance is protocol governance, which is reserved only for AAVE coin holders.
This is not to mention that AAVE is supported in other DeFi protocols and can be lent and borrowed in other protocols. Compound, Instadapp and yearn.finance offer markets to earn APY on AAVE tokens.
Comparison with Similar Projects
Compound is another DeFi protocol focused on lending. Originally based on Ethereum, it offers 18 markets (or assets) to lend or borrow in. Aave offers 32 markets on Ethereum alone, and the markets overlap significantly (i.e. the majority of available assets on Compound are present in Aave, too).
This means, we can try to compare Compound and Aave lending rates:
| Compound | Aave | |||
| Supply APY | Borrow APY | Supply APY | Borrow APY | |
| USDT | 2.07% | 3.62% | 1.86% | 1.34~11.26% |
| ETH | 0.03% | 2.51% | 0.58% | 1.67%~5.35% |
Due to Aave having variable interest rates, the higher bound of the possible APY is much higher.
What is Aave Crypto Protocol Criticized For?
The flagship feature of Aave, flash loans, is its biggest point of contention. Soon enough it turned out that flash loans can be used to exploit flawed protocols.
Widely known flash loan attacks include bZx, Cream Finance, and Harvest Finance. These three separate examples caused a total loss of $78 million.
How does a flash loan attack work? Since there are different protocol peculiarities and vulnerabilities, there are different ways to perform those.
With bZx exploits, the lender was fooled into believing that the loan had been repaid by pushing the USDC price slightly above its peg with market manipulation. The Cream Finance exploit was even more complex, involving several protocols, and it boiled down to an engineering error.
By now, flash loans are offered by other protocols like dYdX and Uniswap, but the first implementation belongs to Aave. Some might argue that in the bigger picture, this invention served as a way to improve the overall security of DeFi protocols.
What is Aave’s Future?
Aave strives to make the governance process as decentralized as possible, so there is no definite roadmap for the future. The propositions for protocol improvement (that AAVE holders can vote on) can be viewed on the official forum.
In some of the most viewed suggestions, there are a Risk DAO proposition and the Treasury topic. The DAO will organize community members to audit the protocol and reward them for it, while in the Treasury topic, the community reviews the latest report.
If you want to keep an eye on the Aave crypto news, it can be found in the official social media: for example, Telegram or Twitter.
Aave on Social Media
Collateralized Staking and Flash Loans on protocols like @AaveAave will eventually replace mortgage and more of the traditional banking “system” in the future. I believe that once people understand the power of DeFi and it becomes more mainstream, this will change the world. 🧵
— 💤 (@wussoxbt) May 26, 2022
Crypto influencer SlothCEO shared their vision of the future of flash loans. They are sure in time DeFi lending can replace traditional finance and change the world, no less.
Aave 1-day social + market activity 📈
— LunarCrush (@LunarCrush) May 23, 2022
Price: $104.5 +13.91%
Social engagement: 1.81M +59.35%https://t.co/FHyErkkOeZ$aave #aave pic.twitter.com/WA84Y8d0rY
Analytics service LunarCrush shared the data on Aave: their social activity, meaning mentions on social media and engagement, peaked through the surge.
$AAVE is MARCHING 📈https://t.co/7VnD18znPo@AaveAave #aave #defi #flashloans
— Nomics/ (@NomicsFinance) May 24, 2022
One week chart attached: pic.twitter.com/AFcdiMpqEc
Another analytics service highlights the rally of AAVE. Despite the market dipping, it keeps consistently rising.
How to store AAVE?
As a popular ERC20 token, AAVE can be stored in most wallets that have support for Ethereum tokens. For example, Metamask lets you utilize useful integrations and employ AAVE in DeFi.
The ChangeHero team recommends the Exodus wallet for the utility or a hardware wallet Trezor for extra safe storage. Instant swaps are available in both, and the best rates for it are provided by ChangeHero.
How to exchange AAVE with ChangeHero?
Now that you know more about Aave, you can easily swap it with 200+ other assets with ChangeHero!
- Choose the currencies on the home page, amounts, and the type of exchange. Provide your wallet address in the next step and check the amounts;
- Double-check the provided information, read and accept the Terms of Use and Privacy Policy;
- Send in a single transaction the sum of the cryptocurrency you will be exchanging. Fixed Rate transactions have a 15-minute limit;
- All done? Now we are doing all the work: checking the incoming transaction and doing the exchange as soon as it arrives.
The Best Rate transactions will use the rate current to the time when your funds arrive. The Fixed Rate will use the rate at the time of step 1;
- As soon as the exchange has been processed, your AAVE is on the way to your wallet.
Customer support is available 24/7 in the chat on the website or through the email: [email protected].
Conclusion
Aave single-handedly revolutionized the DeFi sector with flash loans. Useful integrations and diverse markets make it one of the best protocols that DeFi has to offer.
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FAQ
What is Aave?
Aave is a lending protocol based on ten blockchains with smart contract support. The flagship feature of Aave is flash loans: uncollateralized loans that have to be repaid immediately.
What is an AAVE coin?
The native token of the Aave protocol is AAVE, necessary for voting on governance proposals. AAVE can be staked for a return but in case of an emergency, staked AAVE will be used as collateral.
How does Aave work?
Aave offers a peer-pool-peer model to match lenders and borrowers. The smart contract adjusts the annual percentage yield on loans and deposits according to the demand,
What is the future of Aave crypto?
Aave is governed by its community; they discuss proposals on the forum before voting on-chain and introducing changes to the protocol, minor and major alike.
