In 2009, nobody expected that Satoshi Nakamoto’s creation would inspire a myriad of other crypto projects. However, the emergence of DeFi in 2017 gave crypto a fresh breath of air and started attracting new cash inflow. In turn, many devs came up with a new, more complex and automated alternative to traditional banks – borrowing and lending protocols.

The same year ended with the release of the first-of-its-kind protocol– ETHLend, now known as AAVE. Disappointed by the DeFi options back then, Stani Kulechov created the first decentralized non-custodial liquidity market protocol.

However, the numerous hacks of Ethereum-based DeFi protocols like Cream Finance raised doubt over the now-old lending platforms. The massive inflow of cash and investors put the limelight on more advanced blockchains and smart contract platforms.

Perhaps, one of the most promising blockchains on the list is Cardano. The Alonzo hard fork started its smart contract era back in September 2021. Consequently, this gave the green light to advent borrowing and lending platforms like Aada Finance.

Background on the Ethereum’s scaling issues

In 2021, the crypto world saw a groundbreaking inflow of VC and retail investor money. Indeed, the altcoin season caused a considerable increase in the commissions on the Ethereum network. Unfortunately, ETH’s fees went far beyond the usual expectations.

The problem became evident when people started paying more gas fees than their NFT price. When the DeFi-protocol and yield farming started booming, Ethereum’s mere 30 TPS caused even more scaling issues. Layer 2 scaling solutions are yet to provide viable technical alternatives. As a result, many users had to decide to deal with the network congestion or switch to a more scalable platform.

Cardano’s proposed solution

Historically, every blockchain faces a trilemma. Typically, it includes decentralization, security and scalability. While Bitcoin and Ethereum offer high decentralization and security, they aren’t very good at scaling. Cardano aims to solve the issue by providing a financial system to developing countries in Africa, Asia and Eastern Europe.

Indeed, many people criticize the philosophy of slow-paced development and audit by the IOHK foundation behind the Cardano protocol. Still, adding real-world use cases to an entirely new target market outlines an entirely new path. What’s more, the upcoming Hydra scaling solution aims to deliver a mind-melting 2.5 million transactions per second.

Let’s not forget about the Mary hardfork, which introduced native tokens. In essence, this makes all on-chain tokens equal to the ADA coin. In turn, they don’t need smart contracts to mint or move around. Ultimately, this feature will allow payments in native tokens and also keep the gas fees low.

Account-based lending vs UTXO-based lending

Indeed, Aada holds high promises with its innovative NFT-bonds strategy. Its primary aim is to facilitate the interaction between borrowers and lenders in NFT. On the other hand, AAVE already offers its community what Aada strives to have – large liquidity pools with a market cap hovering around 4 billion dollars.

However, both protocols use entirely different lending methods – account-based and UTXO-based. In this regard, choosing either of the platforms will come with its specific pros and cons. Therefore, making an informed decision would require you first to understand the basics of how each method interpolates in the crypto world:

AAVE’s Account-based lending

Firstly, account-based chains like Ethereum and EOS are the first layers to bring lending protocols to existence. In this sense, AAVE uses a primitive technology that represents coins as balances within a wallet or an account. Typically, this method allows control through a private key or a smart contract.

As already mentioned, account-based chains are way simpler than UTXO in treating user balances. In a way, they are similar to traditional bank accounts. Perhaps, the primary difference here is that the user doesn’t have to send their entire balance and receive change. If the user has 10 ETH in a wallet and wants to send only 3.25 ETH, the ending balance would be 6.75 ETH.

Applying this method to AAVE’s workflow translates into a Decentralized Autonomous Organization (DAO). Initially, the platform allowed users to lend ERC20 tokens to borrow ETH. Later on, the old ETHLend rebranded into AAVE and started expanding to other blockchains. Also, the platform implemented flash loans, which allow users to borrow crypto without submitting collateral beforehand.

What are the pros and cons of account-based protocols like AAVE?

Pros:

• The first-mover advantage with high TVL;
•  Offers diverse DeFi products, including flash loans;
• No KYC requirements;
• AAVE token holders have the right to vote on changes;
• AAVE continues to evolve through partnerships and new technologies like Layer-2 scaling.

Cons:

• The protocol has only five admin keys, which can compromise security;
•  Low-interest rates;
• The protocol has high collateralization requirements;
• Hard to use for first-timers.

Aada’s UTXO-based lending

First and foremost, UTXO stands for “Unspent Transaction Output”, the direct opposite of the account-based accounting method. Perhaps, its primary and most unique feature is that UTXO chains’ protocols don’t employ accounts or wallets. Instead, they store all coins as an “unspent transaction output” list. In other words, the term represents the amount of output a user can spend in the future.

To put it simply, each UTXO can serve like a bill or coin, which one can use in various combinations. For example, you can divide a $50 UTXO into five $10 bills, ten $5 bills, etc. Regardless of the case, you’ll still have $50. While a single wallet can comprise infinite UTXOs, you can’t divide them, meaning you’ll often overpay and receive change.

When it comes to the Aada’s innovative NFT-bond strategy, the protocol serves as an intermediate between the lender and borrower. This method sets a new relationship between the two participants in an NFT. Whenever a user makes a deposit or borrows assets using the Aada protocol, the platform mints an NFT bond that serves as proof.

Typically, anyone holding the non-fungible token can redeem the deposit. In other words, the user can transfer the ticket for someone else to bail. Ultimately, you can interpret the protocol’s role as signing a contract between the two via an NFT bond.

What are the pros and cons of Aada?

Pros:

•  The protocol uses a more advanced UTXO-based chain;
• An innovative NFT-bond strategy;
• Any deposit is in the form of an NFT-bond, which the original user can transfer to someone else;
• Governance features like voting and AIP;
• Aada implements a dynamic voting threshold that optimises the efficiency of the DAO;
• Higher total returns in terms of transaction fees.

Cons:

• Aada is a brand new project with low TVL;
•  The Cardano UTXO-based model is yet to prove itself against network congestion and hacking.

Final Thoughts

To conclude, both Cardano and Ethereum offer completely different development paths. Indeed, Cardano has ambitions to deliver ultimate scalability and real-world use cases to horizons that crypto hasn’t touched yet. Still, the IOHK Foundation is yet to reap the fruits of its academic peer-review strategy.

On the other hand, the natural Ethereum killer is ETH 2.0, introducing new mechanisms on the blockchain. Most importantly, it aims to solve the scaling issues of its predecessor. Still, it hasn’t come out to prove it’s a worthy heir to the throne.

Perhaps, there’s much more to see from AAVE and Aada, too. While the first is an already-developed platform with many applications, Cardano’s lending protocol brings an innovative approach to the market. To some, AAVE’s first-mover advantage is crucial. However, projects like Aada have the leverage of implementing new ideas.

Whatever the case, it’s more than evident that the DeFi world is still in its genesis. At the same time, it’s rapidly evolving, gradually increasing its TVL. In the end, it’s only a matter of time for innovators to outperform and dominate the DeFi landscape.