AAVE in focus, one of the strongest DEFI players

AAVE in focus, one of the strongest DEFI players

By Austras | Crypto in focus | 9 Nov 2021


Back in 2017 when crypto was slowly starting to get popularity, there was a distinct lack of features that one could find in traditional banks. That was a lending and borrowing feature that would allow users to make use of their crypto. Later in the year the feature ETHlend went live, one that we now know as AAVE.

Background

The man behind AAVE is known as Stani Kuchelov, who was disappointed in the offerings from the DEFI scene back in 2017. He created a small project that would make use of crypto and offer loans to users, this gathered attention and a community started to build around it. ETHlend launched where borrowers could lend crypto on a p2p basis, the LEND token went live with an ICO raising over 16 million dollars for the platform's launch. With a bit of time, the protocol got a hefty pool of crypto, so much so that it switched over from a p2p system to a pool based lending service to make use of the liquidity. Shortly after a governance option was added to the platform and community decided to migrate the LEND tokens over to a new token for rewards and governance, named AAVE on a 100:1 basis.

The protocol is now heavily reliant on the community to make changes and operate as any and all changes need to go through a governance voting round and then having final approval from a DAO that holds the admin keys for the platform. AAVE has manged to grow a very large pool of funds and offer a good list of options for investors to borrow, lend or earn on their holdings.

Network

AAVE's protocol is entirely open source and ungradable through the use of admin keys, which are planned to be in full control of the public and governance. Speaking of governance, there's frequent rounds of questions and proposals that the community can vote through. Upon a proposal passing the general vote, 3 of the 5 admin key holders need to approve and implement the code change, then it goes live. 

The network functions in several parts, mainly smart contracts, that are run on-top of Ethereum & Polygon (recently also added the protocol on top of Avalanche). Users can freely move their AAVE between different blockchains. The old token is simply burned and a new one is minted at the destination blockchain. Chainlink is oracle provider and keeps prices updated, one of the features based on this is the stable & variable interest rates, which are adjusted based on market conditions. 

One feature that provides security for the protocol is the safety module. Users can stake their AAVE to the safety module and earn rewards. The staked AAVE is used as a cushion to protect against shortfall events. Shortfall events are the case of liquidity or a severe error that could cause a risk for the liquidity in the protocol. The staked AAVE would be used to protect against this and provide temporary relief until the shortfall event can be addressed. How this protection is conducted and what classifies as a shortfall event is decided through governance proposals.

Use case

AAVE can be used to stake, borrow or lend your crypto, as well as their iconic "flash loans". AAVE supports several underlying assets that can be accessed no matter which underlying blockchain you're using. All loans users can take are collateralized, so to speak, you are borrowing money you have but don't want to sell, this crypto you borrow is also someone else's that you borrow, if you can't pay it back with interest your collateral is liquidated. Any loans or actions on the protocol incurs a fee, 80% of which is burned and 20% that is given to liquidity providers.

One core feature that AAVE has had since its launch is "flash loans", they are the same as traditional loans, but the loan needs to be paid back in the same block transaction. Flash loans serve the benefit that it doesn't need any collateral, as it is paid back instantly, if the loan is not paid back it never takes place and the transaction is rendered null. This is mainly used by developers as paying back the loan within the same block transaction is close to impossible normally. An example is that one takes a DAI flash loan, close a Maker ETH vault (the dollar backing for your borrowed DAI), open a new Maker vault but for USDT, and pay back the DAI. Thus, you change your ETH backed DAI to USDT without needing to pay back your backing.

AAVE today

The protocol has had a very good reputation for a hefty amount of time, mainly thanks to its commitment to security and decentralisation. It is frequently audited on its protocol security and has kept a very high score since start, never releasing any production code without heavy code reviews. The protocol is built as a very basic and standard idea, but it's executed very well. AAVE has the benefit of being one of the first DEFI platforms offering its loan solutions, which gave it time to build up a community. The team behind it is very respected and have worked together with the community to give away more control to the users of the protocol rather than the developers. 

AAVE seems to have a promising future. There is still some downsides with the platform being more difficult to use than traditional banking that most common investors are used to. There's also the fact that their 5 admin keys is held by Aragon DAO, and having 5 members that only need 3 of them to make protocol wide changes can make you feel a bit uncertain, still, the project has been doing everything correct.

Pros:
  • Old and important player in the DEFI-scene
  • Good and varied DEFI products, flash loans
Cons:
  • Only 5 admin keys
  • Hard to make use of fully

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Austras
Austras

Product manager & tutor, love learning & teaching others. || https://cointr.ee/dorfel


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