Aave

What is Aave?

Aave is a non-custodial DeFi protocol that provides customers with a range of financial services in a decentralized environment.

Aave is the Finnish word for "ghost," and this choice of the name is supposed to underscore the protocol's idea of a clear and open ecosystem in the DeFi segment.

Founded in 2017 by early crypto adopter Stani Kulechov, Aave was originally rolled out as ETHLend (LEND) as a response to a lack of lending apps based on the Ethereum network.

At a time when the DeFi segment was still in formative stages, ETHLend offered users a chance to lend and borrow ETH-based tokens, as well as earn on rate fluctuations in the crypto sphere.

In 2018, ETHLend was rebranded as Aave.

Aave basics

It is essentially about unlocking liquidity for the decentralized finance segment. Aave gives all crypto users a chance to earn interest on crypto deposits or borrow against their virtual coins, transforming their funds into an active state.

Aave enables users to borrow and lend in about 20 cryptocurrencies. One of Aave's most prominent products are "flash loans," the DeFi industry’s first uncollateralized loan solution.

However, the ability to take a loan without collateral comes with a tradeoff: flash loans have to be paid back within the same financial operation, which means that they are issued only for a few minutes or even seconds.

Still, flash loans are useful for arbitrage, collateral swapping or debt swapping.

In addition to flash loans, Aave offers traditional lending and borrowing. Users can provide crypto to the protocol, collecting an interest, or borrow against their assets.

When a user deposits funds to the protocol, they receive ERC-20-standard protocol tokens (aTokens) in exchange, which can be exchanged back for the original assets at any time.

Basically, aTokens are interest-bearing derivative tokens that are minted upon deposit and burned upon withdrawal. aToken’s value is pegged to that of the corresponding deposited asset at a 1:1 ratio.

All interest collected on borrowing tokens on Aave is distributed between aTokens holders.

AAVE token

AAVE is the native governance token of the protocol. AAVE tokens are based on the ERC-20 standard and designed to be deflationary.

The latter means that in the event of a shortfall in the DeFi protocol, staked tokens would be used as the last-resort collateral.

In late October 2021, AAVE’s price today was around $307 with a $4,055,590,463 market cap and a circulating supply of 13,191,488.31, according to Coin Market Cap.

The highest AAVE price was $666 (this all-time high was reached on May 18, 2021). As of late October 2021, AAVE took 42th place on the list of digital assets on Coin Market Cap.

The main function of the AAVE token is governance. Users can buy AAVE and vote on proposals that define the direction of the protocol’s development.

AAVE tokens can also be used for fee reductions when using the Aave protocol.

AAVE has a maximum supply of 16 mln tokens, with 3 mln tokens set aside for protocol development and held in an ecosystem reserve contract.

In addition, AAVE is a deflationary asset, meaning that tokens are "burnt" - or removed from circulation - after they have been used to pay fees on the Aave protocol.

In late October 2021, AAVE’s market cap was $3.9 bln, according to CoinMarketCap.

AAVE tokens are available on a number of exchanges, including Binance, Huobi Global, Mandala Exchange, OKEx and FTX.

What risks are involved in using Aave?

No DeFi platform could be viewed as totally risk-free. The Aave platform is not an exception. The most common risks relevant to Aave include smart contract risks - or risks of vulnerabilities in the protocol code - and a risk of liquidation. The latter means that if the value of a user’s collateral for borrowing assets declines substantially, the collateral could be liquidated, and the user will lose the funds.