Aave’s Focus Is On Creating A Transparent And Open Infrastructure

About Aave

Aave (AAVE) is a lending system that allows users to lend, borrow, and earn interest on crypto assets. The platform is a decentralized money market protocol where users can participate as either borrowers or lenders. Here, borrowers can borrow cryptocurrencies by paying variable interest rates. At the same time, the lenders provide liquidity to the market to earn passive income in the form of interest. In simpler words, Aave is a decentralized finance (DeFi) lending platform that creates an open and transparent system that works without the involvement of any intermediaries. 

Running on the Ethereum blockchain, the Aave protocol aims to simplify the borrowing and lending of cryptocurrencies. The Aave protocol is essentially a system of smart contracts that manages the funds and enables instant loans. As per the whitepaper, the protocol algorithmically decides the interest rates for borrowers and lenders on its own. For borrowers, the protocol calculates the interest rate based on the funds available in the pool and the amount of funds the borrower requires. For lenders, the interest rate is calculated based on the earn rate and withdrawals at any time.

The whitepaper indicates that the Aave platform brings two key innovations to the lending ecosystem. Firstly, it provides stable interest rates that help borrowers do financial planning. Secondly, the other unique feature of Aave is the availability of flashloans. Flash loans are where the users don’t require any collateral and can quickly get approvals. Collateral is a valuable asset pledged as security for the repayment of a loan. Moreover, these flash loans are instantly settled and can be used by the borrowers for arbitrage opportunities.

AAVE is the native token of the Aave platform. This ERC-20 token is the platform’s cryptocurrency and is primarily used as a governance token. The token is used for voting and deciding the outcomes of the platform’s Aave improvement proposals (AIPs)—proposals to improve the platform. Additionally, the token offers an advantage that users who deposit AAVE as collateral can get a transaction fee discount, and the users who borrow the AAVE are not charged any fee. Aave is a Deflationary Token, and almost 80% of the fee collected by the system is used to burn AAVE. Burning is a process where a fraction of tokens are sent to a wallet with no private key. Hence the tokens are subsequently lost forever. Token burning is done in order to reduce token availability and increase the token value.

How Does Aave Work?


Aave is perhaps best described as a system of lending pools. 

Participants deposit funds they wish to lend, which are then collected into a liquidity pool. Borrowers may then draw from those pools when they take out a loan. These tokens can be traded or transferred as a lender wishes. 

To facilitate this activity, Aave issues two types of tokens: aTokens, issued to lenders so they can collect interest on deposits, and AAVE tokens, which are the native token of Aave. 

The AAVE cryptocurrency offers holders several advantages. For instance, AAVE borrowers don’t get charged a fee if they take out loans denominated in the token. Also, borrowers who use AAVE as collateral get a discount on fees. 

AAVE owners can further look at loans before they are released to the general public if they pay a fee in AAVE. Borrowers who post AAVE as collateral can also borrow slightly more.  

Flash Loans

Aave allows certain loans, called “flash loans,” to be instantly issued and settled. These loans require no upfront collateral and happen almost instantly. 

Flash loans take advantage of a feature of all blockchains, which is that transactions are only finalized when a new bundle of transactions, known as a block, is accepted by the network.

Adding each new block takes time. On Bitcoin, that interval is roughly 10 minutes. On Ethereum, it’s 13 seconds. An Aave flash loan therefore takes place in that 13-second period. 

The flash loan works like this: A borrower can request funds from Aave, but they must pay back those funds, and a 0.09% fee, within the same block. If the borrower doesn’t do this, the entire transaction is cancelled, so that no funds were ever borrowed. 

As a result, Aave doesn’t take a risk and neither does the borrower. 

A borrower may wish to use a flash loan to take advantage of trading opportunities or maximize profits from other systems built on Ethereum. It’s possible to swap different cryptocurrencies in an automatic way using flash loans to generate trading profits.  

Note: Flash loans have been combined to execute attacks on lending systems built on Ethereum, sometimes successfully stealing hundreds of thousands of dollars worth of deposits. 

V3 On Testnet

Aave V3 is Now Available on Seven Public Testnets

Recently, Aave Governance voted in favor of a proposal to implement V3 of the Aave Protocol, which brings updates and new features to the Aave smart contracts. Today, Aave V3 has been deployed across seven testnets and is available to try here

Aave V3 is the result of continuous iteration, community feedback, and ecosystem growth. V3 builds upon the strong foundational elements of the Aave Protocol (e.g., aTokens, instant liquidity, stable rate borrowing, etc.) while introducing exciting improvements such as increased security and further enhanced decentralization.

The latest features, such as Portal, create new use cases and opportunities for innovation from the community. Now is the time for builders, developers, teams, and community members to start testing V3, and integrating and further expanding the Aave ecosystem!  

Let’s dive into what this major milestone brings:

V3 Features

The release of V3 will make the Aave Protocol one of the most advanced, secure, and efficient DeFi protocols across the ecosystem. V3 offers greater capital efficiencies, increased security, and cross-chain functionality, while facilitating increased decentralization across the protocol and throughout the ecosystem. Some of these new features include:

High Efficiency Mode : Allows borrowers to extract the highest borrowing power out of their collateral;

Isolation Mode :  Limits exposure and risks to the protocol from newly listed assets by only permitting borrowing up to a specific amount;

Risk Management Improvements : Provides additional protection for the protocol through various risk caps and other tools;

L2-Specific Features : Designs specific to Layer 2 networks to improve user experience and reliability;

Portal : Allows assets to seamlessly flow between Aave V3 markets over different networks (note that this feature will only be available on the main network deployment);

Community Contribution : Facilitates and incentivizes community usage through a modular, well-organized codebase;

Gas Optimization: Gas costs of all the functions are reduced by around 20-25% across the board!

Aave’s Risk Framework

With billions of locked assets, Decentralised Finance (DeFi) has boomed in recent years. Aave Protocol launched on Ethereum mainnet in January 2020, now among the top money markets for depositors and borrowers.
The industry has been forming industry standards to manage the risks emerging from the hyper connected ecosystem. Aave V2 holds security at its core with audits by Consensys Diligence, CertiK and Certora as detailed in Security & Audits.
The following documentation analyses the fundamental risks of the protocol and describes the processes in place to mitigate them.
An Aave Market Risk Assessment, has been produced by the quantitative modelling team of Gauntlet Networks. Aave V1, V2 and the Safety Module have been stress tested via agent based simulation. The simulations show the model is currently able to remain solvent under extreme market conditions, showing appropriate risk management. As a result, Gauntlet Network provided some parameter suggestion to further reduce the risk of insolvency.
 

How Many AAVE (AAVE) Coins Are There In Circulation?


Circulation is linked to the total value locked on Aave, as tokens are burned whenever the protocol gathers fees.

An initial coin offering was held in November 2017, where $16.2 million was raised by selling one billion AAVE tokens at a rate equivalent to $0.0162 a piece. At the time, 23% of AAVE tokens were assigned to its founders and project.

AAVE tokens have been built based on the ERC-20 standard, and they are designed to be deflationary. In the event of a shortfall in the DeFi protocol, staked tokens would be used as collateral as a last resort.

In July 2020, Aave unveiled plans to hold a token swap. This means that the 1.3 billion AAVE tokens in circulation would be swapped for the newly minted AAVE cryptocurrency at a ratio of 1:100, creating a total supply of 16 million AAVE. (Three million of this would be held in reserve.)

How Are New AAVE Tokens Created? 

Staking in Aave means depositing one’s AAVE tokens within the protocol. The staking is done on the platform to act as a mitigation tool in case of a shortfall event. During a shortfall event, the protocol uses 30% of the assets locked in staking to cover the deficit. As an incentive to supply liquidity to the pool, the protocol rewards the liquidity providers. 

The protocol rewards 550 new AAVE tokens per day to be split between the stakers in the proportion of their contribution to the platform. Staking of AAVE can be done by heading over to the Aave app’s staking section and connecting to the respective wallet.

Working Of Aave

The best approach for a broader understanding of “what is Aave used for?” would focus on developing a clear idea about its working. Aave has been developed over the Ethereum network, which serves as the foundation for a wide range of emerging DeFi solutions. The tokens on the Aave network also use Ethereum for processing transactions, thereby qualifying as ERC-20 tokens. 

In addition, the Aave protocol leverages a decentralized autonomous organization or DAO as the choice of the governance model. One thing is quite clear about Aave that people holding AAVE tokens only have the privileges for operations and governance of the protocol. Now, let us dive deeper into the working of the process of lending on Aave. 

Lending in Aave

One of the foremost replies for “what is Aave used for?” is lending. In the case of traditional financial services, you would have to visit a bank or any other financial institution with massive amounts of liquid cash. Such types of institutions would ask you for collateral or some form of guarantee on a loan. For example, the title of an automobile itself would be the collateral for a car loan. You have to pay the principal back to the bank or financial institution along with interest every month. However, AAVE is completely different as it is all about DeFi. 

Decentralized Finance or DeFi does not include any banks as smart contracts take their place. Smart contracts are basically computer codes for automating transactions like selling a specific token upon reaching a specific price. They take on the heavy lifting in financial services and remove the intermediaries from savings accounts, asset-trading and futures contracts. In simple words, DeFi ensures that you can easily avail a loan in crypto from other people rather than banks. 

However, you could not ignore the collateral in DeFi systems, and the collateral, in this case, would be other crypto tokens. In addition, the volatility of cryptocurrency also calls for implementing over-collateralization. So, you have to put up higher collateral than the amount you want to borrow in a different cryptocurrency. If the price falls down and the amount in the collateral does not cover the borrowed amount, then your collateral is liquidated. 

Aave presently has pools for more than 20 Ethereum-based assets, including stablecoins such as USD Coin, Tether, Gemini dollar, DAI, and Tether. Some of the other pools also include BAT, Uniswap, and Chainlink. 

Liquidity Pools in Aave

One of the most significant factors in understanding “what is Aave” would obviously bring liquidity pools into the equation. In the initial days of DeFi, users had to find another individual on the platform ready to offer a loan. Both the parties had to agree on the price and conditions of the loan for completing the transaction. However, Aave examples show how things have changed considerably since then. The new approach to DeFi bypasses the concept of peer-to-peer lending and introduces the pool-to-peer lending approach. So, what are these pools, and how do they work in Aave?

Users deposit their crypto in liquidity pools, which the Aave protocol can lend out. Any individual depositing tokens into the pool are known as a liquidity provider. They receive new aTokens in return for offering liquidity to the protocol. The aToken holders would receive a share in the flash loans on the Aave platform alongside the interest on concerned aTokens. If you are thinking of depositing tokens in a pool with surplus liquidity, you won’t get more returns. However, if you are depositing in a pool that needs it, then you can have a chance of making more. 

Features Of Aave

The final aspect to understand Aave in detail would refer to the features offered in the protocol. One of the foremost things you have to notice in the features of Aave refers to the tokens on the platform. While liquidity providers receive aTokens, the native AAVE token has a significant role in the DeFi lending protocol. The Aave crypto token offers various advantages for holders. For example, people borrowing the token would not have to pay the transaction fee for taking out loans in denominated tokens. In addition, borrowers using AAVE as collateral also get the chance for a discount on the transaction fees.

The next unique feature of Aave as an open source DeFi protocol is the ability for users to earn interest in real-time. In addition, flash loans on Aave also offer the opportunity for borrowing crypto without any collateral. However, borrowers have to repay the loan within the same transaction. The loan transaction reverses back if borrowers don’t return the funds within a specified time. 

Another striking highlight in the features of the Aave crypto lending protocol is the facility for rate switching. The protocol supports borrowers in switching between fixed and floating interest rates. As a result, it can help in reducing borrowing costs. With a diverse portfolio of products covering various domains such as technology, games, and finance, Aave protocol is also the most diverse lending pool in the DeFi space right now. 

Aave Reviews: Pros And Cons

Pros

Cons

 Huge lending pool available for various digital assets. Not as user-friendly as some of the alternatives.
 Offers more features for digital lending/borrowing. A small list of supported e-wallets.
 Stable interest rates for some of the crypto assets. Lacks high incentives for users to lend or borrow.
 Flash loans, a revolutionary feature of DeFi, is available that requires no KYC. Flash loans have been exploited by hackers in the past.

Aave logo - Cryptocoinzone

Should You Invest In AAVE?

Investors who believe that decentralized lending will continue growing may find AAVE crypto appealing.

Owning AAVE gives users special privileges on the Aave platform, as noted above, including discounts on transactions and fees. And because Aave is one of the biggest DeFi lenders, AAVE has high liquidity.

In terms of stability, longevity, and commitment to innovation, the Aave platform continues to be one of the largest in the DeFi space.

That said, investing in crypto requires a deep familiarity with how various platforms, tokens, and coins work, and the potential risks involved. Unlike the markets for stocks and bonds or even ETFs, which are long established and highly regulated, the crypto markets are relatively new, largely unregulated, and rapidly evolving. While this presents many possible opportunities for investors and traders, there are no guarantees of positive outcomes, given the volatility of this space.

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