What is Aave?

Aave is a decentralised, non-custodial money market protocol. With AAVE, depositors provide money to the market to earn passive income, while borrowers can borrow in an over-collateralised (perpetually) or under-collateralised fashion. This next-generation protocol was the first to allow users to lend, borrow, and earn interest on crypto assets. No broker is needed when using Aave since the whole system runs autonomously using smart contracts on the Ethereum blockchain. Its native token is AAVE, which is a governance token.

A brief history of Aave

Stani Kulechov launched Aave in 2017 as ETHLend, one of the first lending applications based on the Ethereum blockchain. Rather than establishing direct contact between lenders and borrowers, Aave includes both parties via liquidity pools, diversifying possibilities, and automating the process. Aave offers borrowers not just traditional over-collateralised loans but also flash loans.

Aave raised US$16.2 million in an initial coin offering (ICO) to fund the development of a decentralised peer-to-peer lending network. When they shifted to a liquidity pool approach, they renamed it Aave. In 2020, Aave introduced the Aave Protocol, an open-source, non-custodial liquidity protocol that allows users to earn interest on deposits and borrow assets. That year, Aave became the second DeFi protocol to reach US$1 billion in total value locked (TVL), reaching that milestone on 16 August 2020. The platform’s TVL increased to as much as US$19.4 billion on 26 October 2021. As of mid-May 2022, Aave logged more than US$8 billion in TVL.

Aave makes an effort to address some of the most urgent challenges with conventional loan businesses. The project's principal purpose, like with other DeFi projects, is to transform centralised financial services into their decentralised alternatives. Banks would lend funds and earn interest in a typical loan situation. Even if they are lending your money, you will never have access to lucrative interest returns—everything changes in the Aave ecosystem. Anyone may lend their crypto to other users in a trustless and permissionless way. The interest you earn by lending your assets is sent straight into your network wallet. Therefore, Aave contributes to changing the peer-to-peer lending industry while spawning an entire DeFi sector with the same ambitions.

How Aave Works

Aave has transitioned from a decentralised P2P lending strategy (direct loan relationship between lenders and borrowers, similar to ETHLend) to a pool-based strategy. The lenders provide money by depositing cryptocurrencies in a pool contract.

Simultaneously, users can borrow funds from the pool by providing collateral in the same contract. Loans are not required to match individually; instead, they depend on the pooled funds and the borrowed amounts and collateral. This enables instant loans with attributes based on the pool's current state.

Users will also be able to change the structure of their interest rate. Aave allows you to choose between stable and variable rates at any time. Variable rates fluctuate in response to liquidity pool demand. In contrast, an asset's 30-day interest rate average is based on stable rates.

AAVE tokens govern the Aave protocol. Features include proposing, voting on, and agreeing on new additions, features, assets, and protocol settings. Furthermore, the Aave platform burns AAVE tokens dependent on the fees collected by the protocol.

Aave also implements yield-bearing assets known as aTokens, which are burned based on the withdrawal and the deposit rate into Aave. The aTokens are pegged to the asset that the user deposits, and users are free to trade these tokens as they see fit.

What is Aave used for?

Depositors may offer liquidity to the Aave protocol using their AAVE tokens or other cryptocurrencies in exchange for passive income based on market borrowing demand. Lenders pay borrowers interest. The annual percentage yield (APY) may vary amongst pools. Depositors get 0.09% of the total volume of flash loans.

Borrowing may be useful for covering unexpected expenses, leveraging profits, or capitalising on prospective investment opportunities. Borrowers must only pay a minor interest rate to lenders in exchange.

Developers may use Aave's rich liquidity pools to deploy their products, particularly leveraging features like leveraged yield farming. Aave is now available on DeFi Swap. Users can swap AAVE, be Aave liquidity providers to earn fees, and boost their yield by up to 20x when staking CRO.