AAVE: A Decentralized Automated Cryptocurrency Bank on Ethereum and a Blue Chip DeFi Token

By 2sats | 2sats | 10 Jan 2022

*obligatory not financial advice*


What is Aave?

Aave is a decentralized finance protocol that allows its user to lend and borrow crypto assets in a decentralized way. You can think of it as a decentralized crypto bank that is automated by smart contracts. It isn't the only project that offers this service but it is the biggest of its kind and many investors including institutions have faith in it and are investing in Aave. The protocol initially launched as ETHLend in 2017 but they have rebranded when they switched from a direct loan relationship between lender and borrower to a liquidity pool based system.

The protocol allows its users to deposit tokens to earn interest on them. After they deposited their tokens they can also use them as collateral to take 80% its value as a loan in another supported asset. The borrowers need to pay their loan back with interest if they want their collateral back and the providers of the borrowed tokens are earning this interest as reward.

You are probably thinking that such a loan is useless if you already have enough other cryptocurrencies, but if you expect your token to rise in value you wouldn't want to sell it, by taking a loan you could get the liquidity you need without selling anything. This can also be used to short a token by taking a loan in a crypto you think will fall in value, selling it immediately and then eventually buying it back for a cheaper price to pay the loan back.

However, such loans can be risky because if the value of your collateral falls too low and is at risk of not covering your debt, the protocol will automatically sell your collateral and use it to pay your loan back for you. You will not have to pay back the debt anymore after that, but you lose your collateral forever.




The interest rates depend on how many tokens are deposited and how many are borrowed. The more demand there is for borrowing a cryptocurrency, the higher the interest rates will go and the less of the supply is borrowed the lower the rate becomes. The rates are variable for suppliers but borrowers can choose to take their loan with a fixed or variable interest rate.

Aave also offers its liquidity for FlashLoans that allow you take an uncollateralized loan that you have to pay back instantly. This seems useless but you can take advantage of that for leveraged arbitrage trading. If USDC is trading on a slightly higher price on the ETH/USDC trading pair on Uniswap than on Sushiswap, then you can take a FlashLoan in ETH to buy USDC on Sushiswap and then sell it on Uniswap for ETH to pay back the loan and keep the profit. Performing such a trade requires some serious programming skills and can't be done by everyone.

Aave is not the only lending protocol or even the first one. Compound, Venus, and many more offer the same, but Aave is definitely the most popular project of its kind and has also launched on multiple other smart contract blockchains like Avalanche and Polygon. Even institutions like Blockchain Chapital or DeFi Chapital are investing in it. Many people consider Aave to be a "blue chip" cryptocurrency.



The AAVE Token

Aave has a governance token with the same name. The holders can vote on proposals to add support to new assets and change some parameters.
The project originally had a token called LEND that had a supply of 1,300,000,000 tokens, 77% were sold to investors and 23% was kept by the developers. When the token got replaced, the holders could swap their LEND for AAVE at a rate of 100:1.

3,000,000 AAVE were set aside in the ecosystem reserve that is used to distribute the token to lenders and borrowers. In total, AAVE has a max supply of 16,000,000. The supply is mostly circulating and went to early investors, the actual users are sadly getting a rather small part of the supply.

Aave runs on multiple smart contract blockchains and has a lot of liquidity. The value of the token mostly depends on how well the crypto and DeFi market performs. The token is not some sexy moon-shot with a low market cap, but it’s a rather safe crypto investment and is currently far away from its ATH in May 2021.

AAVE is supported by every major crypto exchange like Binance and Coinbase. It can be held in any Ethereum wallet like MetaMask.





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