Aave is an Ethereum-based lending protocol. It provides options of lending, borrowing, and gaining interest in crypto without intermediaries. The platform has its native token AAVE, due to which users can govern it.
The foundation of Aave, ETH Land
Aave changed a lot since its foundation in November 2017. Then Stani Kulechov and a team of engineers launched ETHLend in an ICO. The goal was to allow users to give cryptocurrencies on credit and borrow them, building peer to peer cooperation. One side would post a loan request, and another make an offer.
The project initially named ETHLend, had success, raising $16.2 million in the ICO. The firm sold 1 billion units of its AAVE cryptocurrency - then known as LEND.
ETHLend didn't use pooling stores but matched lenders and borrowers in a peer-to-peer fashion. In 2018 the firm faced major problems because of little supply of liquidity and the trouble of pairing claims with offers. These headed to bear market.
In the created circumstances, the team decided to modify the underlying system. They renovated the protocol, renaming it Aave in 2018, and brought it out at the beginning of 2020. ETHLend became a subsidiary of Aave.
How does Aave work?
Like its original version, Aave offers Ethereum users to get loans or receive returns by lending out their crypto assets. Currently, it enables depositing and borrowing of 19 assets. DAI, USDC, TUSD are the three leading assets on the chart.
The main difference is that Aave is a trading platform running on an algorithm. Loans are provided from a liquidity pool, while ETHLend matched borrowers to lenders. Depending on the pool’s liquidity and the demand to borrow, interest scales vary. When there's a high demand for borrowing, free liquidity volume is low, and as a result, interest prices increase. Depositors make more income in this case. On the contrary, when there are plenty of free assets to supply, the interest percentages fall. It is possible in Aave to draw out loans in another asset than stored.
Given the fact that the prices of crypto assets are volatile, Aave executes a liquidation technique. This means if the collateral granted by a user goes down than the collateral value index defined by the contract, the algorithm may liquidate it. It is important to take into account all the risks before placing capital into the protocol.
Obtaining flash loans on Aave
Aave's popularity is growing. One option that it is known for, is enabling flash loans. This type of loan is uncollateralized. It offers to borrow a large number of crypto assets without providing collateral. Technology is formed mainly for developers and other users with some technical skills. The condition is they must repay the amount within a single Ethereum transaction.
How does the system work, and what will happen if the borrower doesn't return the loan?
Aave flash loan process takes place through a single Ethereum transaction. The operation code requires completing all the commands or they will become null. So, the borrower must pay back the money until the proceeding closes, or the contract will be a default.
There are three steps in flash loans:
- A user borrows assets from one of Aave’s lending pools
- The conditions of the deal are fulfilled on the Ethereum blockchain
- The user must pay back the taken amount plus Aave’s 0.09% loan service fee
The deal is a success when all these steps are properly done. In the case when the borrower fails to complete the third step, all commands are canceled. This means he doesn't get any assets above all.
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LEND's transformation to AAVE
The platform Aave has its native token with the same name. It was created as the LEND token didn't work in the way the developers needed. One disadvantage was that LEND owners could not influence the rules the Aave protocol was applying.
Then, the team decided that LEND would be switched to a new coin named AAVE, which would equal 100 LENDs. Aave is an Ethereum-powered ERC-20 token. The token owners can stake AAVE in the Safety Module and earn Safety bonuses.
The Safety Module serves as a means against an unexpected loss of funds. This can happen as a result of smart contract issues, low market liquidity, or oracle failure. In case it occurs, 30 percent of staked tokens are used to cover the deficit. Safety rewards are limited to 400 AAVE’s per day. The token also allows considering and voting on the upgrades. The users can vote to change Aave rules or policies. One AAVE equals one vote.
Aave has a unique place in the DeFi industry. The protocol offers a lot of benefits. Among them are fixed-rate deposits, enhanced stable borrow rate, private markets, and gas optimizations. The protocol provides high security protecting clients from black swan risks (unexpected events).
However, it has also some drawbacks like limited liquidity and that credits except for flash loans are often over collateralized.
Aave is still developing. Its mission is to provide an alternative to the traditional banking system to a larger number of people. Aave will present more developments in the future, and the community waits for new innovative solutions from it.