What is Aave?

Aave is a decentralized protocol to earn interest on your deposits and borrow digital assets. It’s decentralised and non-custodial, meaning you are the direct owner of your funds at all times. This is possible through the use of smart contracts, making it fully transparent.

The protocol went live back in January, 2020, and currently counts $1,830,967,697.70 in liquidity. Last week, Aave announced V2 of the protocol on the main net, but before diving into that, let’s look at the basics.

What is the protocol and why do people use it?

Aave just blew up the DeFi space by growing to an over $1B market size within six months after V1 launch. Aave is a decentralized non-custodial market protocol where users deposit and borrow funds. I’ve written about DeFi before and explain the basics in a previous post. Basically, users providing liquidity will earn a passive income on their assets, while borrowers can borrow funds in an overcollateralized or undercollateralized way. This is a similar idea to what Compound and some other DeFi platforms have been doing.

I would encourage those who are really interested in Aave to watch this thirty minute introduction video:

Aave took a major leap of faith earlier this year by handing the admin keys to the community. By doing so the project became much more decentralized and the project saw an even more increased interest in return. Meanwhile, the genesis team continues to develop new features and improving the overall user experience.

Aave introduced new things such as enabling users to switch their interest rates while borrowing crypto between a variable and a stable interest rate. Aave also introduced flash loans, enabling developers to allow for flash loans to occur which means money is borrowed from Aave, something is done with this money and the money returns back to Aave all within one Ethereum transaction.

Something incredibly important I look at when using DeFi platforms are security audits. Aave has had various security audits by companies such as Trail of Bits, Open Zeppelin, Peckshield and Certik. The full list of audits can be found here.

Deposited funds are stored in smart contracts, the code is open-source and audited. When depositing funds to Aave you receive an ‘aToken’ back, which is a tokenised version of your lender position. These tokens can be moved and traded just like any other ERC-20 token. That said, the platform is pretty safe to use but I’d still like to point out that borrowing money comes with liquidation risks. Considering so many parties audited the code, I’d like to think the risk of bugs in the code are extremely low.

What’s coming up in Aave V2?

The full V2 protocol white paper can be found here. On top of the flash loans, aTokens and variable interest model, V2 will offer various new features.

A more brief overview of V2 is given in their recent Medium post. The Medium post gives a full overview of added features such as: yield & collateral swap, flash loans upgrades, repayment with collateral, gas optimisations and much more!

V1 depositors have earned an additional $906k in rewards thanks to the $1B Flash Loans volume. This is a massive achievement and flash loans will continue to grow in V2!

How do I deposit & how much does one actually earn?

If you’re interested in starting to use Aave to either earn fees or borrow funds, I’d recommend you to check out their official guide. This post is meant to provide you the tools to do your own research and get an overall overview of the project rather than providing full instructions.

Users depositing liquidity will earn fees from the interest rate payments on loans, as well as 70% of the flash loan fees. Each asset has their own APY and this spreadsheet provides good insights in the live APY of these available assets.

Aave Token and Aavenomics

AAVE is used throughout the whole protocol ecosystem in multiple ways.

Summarised, there will be 16M AAVE in existence. 13M AAVE will be redeemed by LEND token holders at a 100:1 rate (migrating ETHLend to Aave). 3M AAVE will be allocated to the ecosystem reserve.

The token is used for:

• Token migration event from LEND to AAVE. 16M AAVE will be redeemed by LEND holders at a 100:1 rate, and 3M AAVE are allocated to the Ecosystem Reserve.
• Staking in the safety module. This module acts as an insurance against shortfall events, while stakers earn rewards. This protects the markets.
• Incentives to reward those actively interacting with the protocol through borrowing or lending.
• Governance to create proposals and make key decisions (decentralisation)
• Incentives for applications built on top of the ecosystem (decided by the community)
• Ecosystem Reserve (AAVE holders decide how these funds are used for safety and incentives)

If you’re interested in reading details on the tokenomics, I recommend you check out their Aavenomics paper.

Fun Fact & Team

In this case ‘ghost’ definitely doesn’t mean anonymous, a full team overview can be found on their website. Although no links to their personal social channels for more information are provided.

What do I think about AAVE?

I’ll be honest with you, about a month ago I had never heard of Aave before. I discovered them through their collaboration with Axie Infinity, an NFT game I participate in. In order to receive a limited-edition NFT I had to purchase 0.65 AAVE.

After purchasing a little bit of AAVE I decided to do more research, and I was excited about what I read. I certainly (still) see massive growth opportunity for the protocol and token.

I decided to sell my tokens about a week ago though. I didd so based on TA, and would like to get back in again at a lower point again (0.0034 AAVE/BTC). Although, we could well see AAVE break out and head further upwards immediately.

A little while ago I decided to not add any long-term positions to my portfolio for now, therefore there is a big chance I’ll trade it and hold the token for a while, but I will not participate in their ecosystem long-term.

For those of you who are interested in DeFi and adding more DeFi tokens to your long-term portfolio, I suggest you to do your own research as well and base your decision upon that. The protocol being audited by many parties, handing over admin keys to the community and seeing massive growth do create trust.