You are reading an excerpt from our free but shortened abridged report! While still packed with incredible research and data, for just $40/month you can upgrade to our FULL library of 60+ reports (including this one) and complete industry-leading analysis on the top crypto assets.
Becoming a Premium member means enjoying all the perks of a Basic membership PLUS:
- Full-length CORE Reports: More technical, in-depth research, actionable insights, and potential market alpha for serious crypto users
- Early access to future CORE ratings: Being early is sometimes just as important as being right!
- Premium Member CORE+ Reports: Coverage on the top issues pertaining to crypto users like bridge security, layer two solutions, DeFi plays, and more
- CORE report Audio playback: Don’t want to read? No problem! Listen on the go.
Primary Use Case
The Aave protocol’s main function is to provide completely open-source, non-custodial liquidity markets for DeFi users. Aave is considered a non-custodial market as non-custodial entities require no account and users hold the rights to their crypto that’s been deposited.
In centralized exchanges (CEXs) like Coinbase, Binance, and Kraken, these are considered custodial entities as it requires a KYC (Know Your Customer) verification to establish an account, and the exchanges themselves control the crypto that's deposited or purchased on the platform.
Aave Protocol counters custodial entities by emphasizing truly decentralized banking. However, it isn’t a replacement for centralized exchanges, which serve as onramps for the fiat economy to cross into the crypto economy. Instead, Aave is a crypto-based, decentralized bank that rivals commercial banks such as Chase, Wells Fargo, and others.
In addition, a borrowing and lending protocol, like Aave, has the following advantages over a conventional lender:
- Transparency: Loan liquidation prices, collateral quantities, borrow rates, and interest rates are totally accessible to the user, enabling anybody to verify balances onchain.
- Automatic enforcement: The protocol smart contracts handle repayment schedules, interest payments, and liquidations automatically with no bias or preferential treatment to anyone.
- Speed: Loans are collateralized promptly, allowing consumers to borrow immediately and without waiting, unlike traditional lenders.
- Yield: By lending crypto assets for interest, users can generate yield on borrow demand.
Secondary Use Cases
Aave protocol offers many different uses and options to interested DeFi users. Outside of lending/borrowing markets, Aave also has built-in functionality to support the following use cases:
- Governance
- Staking
- Token Swapping
- Undercollateralized Loans (Flash loans)
The Aave protocol is similar to MakerDAO as it's also established as a decentralized autonomous organization (DAO). Governance is facilitated through the native token AAVE, which allows token holders to make proposals and participate directly in the management and development of the protocol.
Aave operates through this premise by providing incentives to secure borrow/lending markets and overall protocol liquidity. These incentives include concepts like earned interest, which is when a user deposits crypto in exchange for a pre-determined interest rate. These rates are subject to change depending on the type of cryptoasset being deposited or borrowed as well as the overall utilization rate.
When users have deposits on Aave (consisting of at least one deposited asset), users may participate in on-chain swaps between different cryptoassets. Aave currently supports over 25 different cryptoassets, including stablecoins and units of account like DAI, USDC, or USDT for enhanced connectivity and operability.
Q3 2024 Staking Proposal
AAVE is considering introducing significant changes to its staking mechanism, fee structure, and safety module. This section delves into the details of the AAVEnomics proposal, examining its potential impacts on AAVE token holders and the broader DeFi ecosystem. The analysis covers the status and timeline of the proposal, modifications to the staking mechanism, enhancements to the safety module, and the broader ramifications of these changes.
Status and Timeline
Currently, the AAVEnomics proposal is in the preliminary "temperature check" phase, which gauges community sentiment. Should the proposal encounter minimal opposition, it will progress to a snapshot vote conducted off-chain. Importantly, even if the proposal passes this vote, the implementation of the fee switch will not be immediate. Certain prerequisites must be met before activation, ensuring a smooth and orderly transition.
AAVE Staking
One of the most notable changes in the proposal is the overhaul of the AAVE staking module. Previously, stakers faced a slashing risk of up to 30%, which will be eliminated entirely, reducing the risk to zero. Despite the removal of slashing, a lockup period of 20 days will still apply. Staking rewards will be generated from revenue captured through borrowing activities and the GHO stablecoin. AAVE Finance service providers will use excess revenue to repurchase AAVE tokens on the secondary market, which will then be distributed to stakers. This mechanism aims to create a more attractive and secure staking environment for AAVE token holders.
