In the amazing growth of the various DeFi protocols in the first half of 2020, many new tokens made it into the top 100 by market capitalization.
In this new article of my new: “Easy & Short Cryptocurrencies Made Accessible” section, I want to introduce you in the Aave world.
Aave is a decentralized non-custodial money market protocol where users can participate as depositors or borrowers. Depositor provide liquidity to the market to earn a passive income, while borrowers are able to borrow in an overcollateralized or undercollateralized fashion.
The Aave project began under the name of ETHLend in 2017, when the crypto market was still quite calm and in January 2020, the project was bought by Aave.
Aave takes care of creating a marketplace where you can borrow and lend cryptocurriencies. The protocol is open source, which means that anyone can view and propose changes to the source code. It is also non-custodial, tokens remain in the possession of the user.
Are you curious to know the meaning of Aave?
Aave is a Finnish word that translated means “ghost” in English. Why the ghost? Because it represents Aave’s mission: create a transparent and open infrastructure for decentralized finance (DeFi).
The advantage of a non-custodial approach is that the risk of fraud and bankruptcy of the intermediary is eliminated. The disadvantage is that the rates offered to those who offer their currencies are much lower than a custodial platform.
The unique feature of Aave is the possibility for the borrower to choose between a fixed and variable interest. Usually, non-custodial platforms like Compound only offer a floating rate, while custodial ones like BlockFi only offer a fixed one. The choice between variable and fixed rates is similar to that in a mortgage.
The floating rate tends to be lower than the fixed rate but can go up or down over time. A strong propensity for variable interest mortgages played a role in the collapse of the real estate markets in 2007: statistically, the interest paid is lower, but there may be prolonged periods in which interest reaches very high levels.
Now I want to take a concrete example with DAI.
Do you want to know more about DAI? Find my latest article here (https://www.publish0x.com/easyshort-cryptocurrencies-made-accessible/e-and-s-makerdao-a-locomotive-for-the-decentralized-finance-xnlrxmk).
Right now, it is possible to lend DAI at 2,71% annualized interest. On the other side, it is possible to borrow DAI with a variable interest (5,12% at the moment), or at a fixed rate of 7,03%.
This choice allows borrowers to decide whether they want to limit their risk with a fixed rate or try to minimize their costs with a variable one. Of course, both choices have pros and cons.
The DeFi world was created to insert a series of components typical of traditional financial markets in a decentralized way within the crypto world. One of the characteristics of stocks and bonds is that they offer a yield (dividends and coupons respectively). Owning crypto, however, doesn’t allow you to earn a return, the only source of income is the capital gain, or increase in the value of the token. In a protocol like Aave, cryptocurrencies owners can offer them on loan in exchange for an interest rate.
In most cases speculators are the borrowers. Here is an example.
Let’s say I think that ETH price will increase against USD. I can buy more ETH or I can borrow USD by pledging my ETH. If I’m right, I earn, if I am wrong, the value of my loan increases up to a moment where it is automatically closed making me lose money. Easy.
Why should I choose Aave?
Aave protocol has been audited and secured. The protocol is completely open source and it allows anyone to interact with the user interface client, API or directly with the smart contracts on the Ethereum network. Being open source means that you are able to build any third-party service or application to interact with the protocol and enrich our product.
AAVE token is used as the center of gravity of Aave protocol governance. AAVE is used to vote and decide on outcome of Aave Improvement Proposals (AIPs). Apart from this AAVE can be staked within the protocol Safety Module to provide security/insurance to the protocol/depositors and that way earn staking rewards and feed from the protocol.
Image source: https://aave.com/branding
In this first article I wanted to introduce you to the world of Aave. I remind you that in this new section I analyze different tokens and for each one I make a first introductory article and a second one where I explain in more detail the peculiarities of the project. If you want to know more about Aave, I invite you to follow me to stay updated on the various topics I face, and activate a reminder for next Sunday, when the second part dedicated to Aave will be released!
Have you already lended or borrowed crypto with Aave?
Let me know in a comment below and share your experience with the Publish0x community!