Aave is one of the largest credit protocols in the DeFi space with its current TVL standing at $12.24B and market cap at $1.7B. Also known as “the lending platform of tomorrow”, Aave is a pioneer in the lending ecosystem, one that revolutionized borrowing and lending by providing equal access to finance for all users.
The protocol has come a long way since its initial launch in 2017, reaching several milestones and upgrades – Aave V1 grew to $1B+ in size just 6 months after launch, introducing 5 different products and services, and Aave V2 now supports 25+ different cryptocurrencies. As a pioneer, Aave has continuously proven itself a committed organization to innovation and decentralization – its ecosystem and community are expected to only further grow from this point onwards.
Aave is an open source, non-custodial money market protocol built on the Ethereum blockchain – it enables users to borrow and lend from liquidity pools in the absence of a centralized intermediary. Aimed at tackling the limitations of centralized finance players, Aave runs purely on smart contracts with all assets and systems managed by its network of nodes.
The protocol first emerged as ETHLend back in 2017, debuting as a peer-to-peer lending platform. In 2018, ETHLend was renamed to Aave, a Finnish term for “ghost”. As a symbol of empowering innovation and imagination, the term represents the transparency and open infrastructure the platform offers its users. Alongside the name change came an alteration to the original peer-to-peer model – it was replaced with a decentralized liquidity market protocol, where users could interact with pooled funds instead of with other individuals. This increased the efficiency and accessibility of borrowing and lending, leading to the meteoric rise of Aave after its official mainnet launch in January 2020.
True to decentralization, the protocol is operated and governed by a DAO, composed of $AAVE token holders. $AAVE is the native token of the protocol – it can be used for voting and governance rights, but also as collateral for borrowers of the platform. Incentives such as bypassing borrowing fees or fee discounts are available for those who post collateral using $AAVE.
Today, the protocol supports more than 25 different cryptocurrencies and provides 5 different products and services to its users: Aave Lending, Aave Pocket, Aave Gaming, Aave Custody and Aave Clearing. CEO and founder Stani Kulechov, has stated that Aave will continue to power its existing products including new ones aimed at targeting the millennial and Gen Z market.
Simply put, Aave is an algorithmic money market where users can acquire cryptocurrency loans or earn interest by lending their crypto assets. Lenders can deposit their funds to the liquidity pool, where in return they receive aTokens – this represents the underlying deposited token (pegged to a 1:1 ratio) plus accrued interest. The aTokens can be freely stored, traded or transferred, and can take the form of stablecoins as well which effectively means you can earn interest on stablecoin deposits. In the case of capital shortage, Aave’s Safety Module which stores excess $AAVE will automatically sell portions of the tokens to cover any deficits.
Borrowers on the other hand, take away from the liquidity pool in exchange for posting cryptocurrency collateral. To counteract the volatility of crypto, all taken loans need to be overcollateralized, meaning borrowers need to post collateral at a higher amount to what they wish to borrow. This collateral rate is dependent on the type of asset borrowed – for example, $ETH has a rate of 75%, meaning loans will be 75% of their posted collateral. Users are provided a collateralization ratio for each type of crypto asset, which is used as a threshold for liquidation. A differentiating factor of borrowing on Aave is that you can gain exposure to different cryptocurrencies without actually owning them – so borrowers can post $DAI as collateral when borrowing $ETH.
Interest rates for both lenders and borrowers are calculated based on utilization – meaning, the more assets that are used in a liquidity pool, the higher interest rates for lenders to receive. This is to incentivize lenders to add additional liquidity to the pool. On the other hand, if assets in a liquidity pool are not being used, interest rates are low to incentivize borrowers to take loans. Simply put, interest rates for lenders and borrowers are determined by supply and demand dynamics.
Following the integration between Aave and Hex Trust in 2021, aTokens are supported within Hex Safe which enables institutional investors to safely and securely hold the tokens within a fully licensed and insured custody platform. Through our DeFi module, customers can also lend and borrow a range of digital assets directly from their Hex Safe accounts.
There are several factors that differentiate Aave from other decentralized applications which offer similar products.
First, Aave is the pioneer of flash loans - or automated loans in which the principal amount must be returned within one Ethereum block transaction, plus a 0.09% fee. This concept allows those with large capital to seize arbitrage opportunities for example, providing additional ways to maximize profits.
Second, Aave offers flexibility with interest rates, giving users the option to choose and change between stable and variable interest rates. Stable interest rates are averaged out to reduce volatility whereas variable interest are algorithmically calculated based on the supply and demand within a particular liquidity pool. This gives users the autonomy to decide how much risk or reward they undertake.
Aave has consistently remained at the forefront of innovative technology and shown strong commitment to decentralization. Challenges such as high transaction fees on Ethereum have cultivated its multichain strategy – the platform’s services officially expanded to Avalanche and an integration with Solana is rumored to be in the works. Aave is also building new products at a rapid pace such as the permissioned lending service Aave Arc which adds to a broader fully regulated DeFi ecosystem, meeting the requirements for traditional finance to participate in the decentralized world.