Aave – AAVE

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Aave – AAVE

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Contract adress: 0x7fc66500c84a76ad7e9c93437bfc5ac33e2ddae9

Welcome to our analysis of Aave – AAVE! Aave is a DeFi protocol that has emerged as a popular alternative to traditional banking in recent years. It is one of the largest lenders of cryptocurrency and its AAVE token has a larger market cap than its rivals Maker or Compound. In this article, we will provide an overview of Aave and its use case, as well as where to buy or sell AAVE. We will also share our thoughts on the cryptocurrency and help you make an informed decision about whether or not to invest in it. By the end of this article, you should have a good understanding of Aave and its potential as a DeFi investment.

What is Aave – AAVE?

Aave, also known as AAVE, is a decentralized finance (DeFi) protocol that enables users to lend and borrow a variety of cryptocurrencies and real-world assets (RWAs) in a peer-to-peer manner. It operates on the Ethereum, Polygon, Arbitrum, and other Ethereum scaling blockchains, and allows users to earn rewards by depositing their funds into the protocol or borrowing from funds deposited by other users. 

Aave is a non-custodial, completely decentralized platform that is governed by its community of AAVE token holders, who can vote on the development of the ecosystem. It is known as the world’s largest peer-to-peer loan provider and aims to eliminate the need for intermediaries, such as banks, in the lending and borrowing process. 

Aave allows users to borrow and lend stablecoins, altcoins, and other available crypto assets, and its mode of operation is different from traditional, centralized financial service providers. Overall, Aave is a unique DeFi platform that offers a range of lending and borrowing options to its users and is governed by the community through the AAVE token.

This review of Aave – AAVE was created for informational purposes. This article is not intended for promotion.

General info about Aave – AAVE

History of Aave

Aave, formerly known as ETHLend, is a decentralized finance (DeFi) platform that was founded in 2017 by Stani Kulechov and a team of developers. ETHLend originally operated as a peer-to-peer lending protocol on the Ethereum blockchain, allowing users to apply for loans by using their cryptocurrency assets as collateral. 

However, the team eventually realized that the peer-to-peer model was inefficient and decided to transition to a peer-to-contract model in September 2018. This new model allowed for quicker transactions within the system and provided users with instant access to funds in the liquidity pool. The transition to the peer-to-contract model led to a total rebrand from ETHLend to Aave, which is now one of the largest lenders of cryptocurrency in the DeFi space. 

Team

How lending works on Aave?

In the world of decentralized finance (DeFi), loans work differently than traditional loans from banks or financial institutions. Rather than going to a bank and providing collateral in exchange for a loan, DeFi loans are facilitated through smart contracts on the blockchain. These smart contracts automate transactions and allow users to borrow and lend cryptocurrency directly, without the need for intermediaries.

To get a DeFi loan, a user first needs to put up collateral in the form of cryptocurrency. This collateral is then used to secure the loan, and the user can borrow a certain amount of cryptocurrency based on the value of the collateral. The user then pays back the loan, including interest, over a set period of time.

For example, let’s say Marco wants to borrow some cryptocurrency and uses her Ethereum as collateral. He puts up 10 ETH as collateral and is approved for a loan of 10 000 USDC. Alice then receives the 10 000 USDC and agrees to pay back the loan, plus interest, over the course of 6 months. During this time, Marco’s 10 ETH remains locked up as collateral until He pays back the loan in full. If at any point the value of Marco’s ETH drops significantly and is no longer sufficient to cover the value of the loan, the smart contract may sell the ETH to cover the remaining debt.

In this way, DeFi loans allow users to access liquidity and borrow cryptocurrency without going through a traditional financial institution. However, they do come with risks, as the value of the collateral may fluctuate and the user may lose their collateral if they are unable to pay back the loan. 

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.

Borrowers and Lenders

Borrowers can access the assets in the liquidity pool by pledging an asset as collateral. The interest rate for borrowers depends on the availability of funds in the pool at a given time. As more funds are borrowed, the amount of available funds decreases, which increases the interest rate.

Lenders, on the other hand, earn an interest rate known as the “earn rate.” This rate is determined by a set of codes that secure the pool reserve to ensure steady withdrawals can be made at any given time. Aave aims to provide stable borrow rates to its users, even when the interest rate may vary.

Interest Rates

Borrowers can access the assets in the liquidity pool by pledging an asset as collateral. The interest rate for borrowers depends on the availability of funds in the pool at a given time. As more funds are borrowed, the amount of available funds decreases, which increases the interest rate.

Lenders, on the other hand, earn an interest rate known as the “earn rate.” This rate is determined by a set of codes that secure the pool reserve to ensure steady withdrawals can be made at any given time. Aave aims to provide stable borrow rates to its users, even when the interest rate may vary.

Flash Loans

Aave also introduced flash loans, enabling developers to allow for flash loans to occur which means money is borrowed from Aave.

Flash Loans are a type of loan offered by the Aave decentralized finance (DeFi) platform that allows users to borrow any amount of funds without providing collateral. The key characteristic of Flash Loans is that they must be paid back within the same block that they were borrowed, making them a low-risk option for users. Aave was the first platform to offer Flash Loans, and they have become a popular feature for users looking to trade assets and maximize profits through arbitrage.

In this example, a user is using a Flash Loan from the Aave platform to trade assets and maximize profits. Here’s a step-by-step breakdown of what’s happening:

  1. The user borrows 50,000 USDT from Aave via a Flash Loan.
  2. The user uses the borrowed 50,000 USDT to buy DAI on the Compound platform, receiving 50,505 DAI in return.
  3. The user then takes the 50,505 DAI and exchanges it for 50,505 USDT on the Uniswap platform.
  4. The user pays back the original 50,000 USDT borrowed from Aave, plus a 0.09% fee. The total amount paid back is 50,045 USDT.
  5. The user has made a profit of 460 USDT by exploiting a price discrepancy between the Compound and Uniswap platforms.

Aave Security

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.

Use case of Aave – AAVE

What is GHO?

GHO is an algorithmic stablecoin being developed by Aave,. It is pegged to the value of the US dollar and is collateralized by a basket of cryptocurrencies chosen by users. It allows users to mint GHO tokens by providing collateral in the form of cryptocurrency, and these tokens can be used for borrowing on the Aave platform. Aave plans to use GHO as a secondary revenue source, with all revenue generated by GHO being captured by the Aave treasury. GHO is intended to make stablecoin borrowing on Aave more competitive and may serve as a model for other DeFi protocols to follow. 

It will be backed by a basket of cryptocurrencies chosen by users, and will function similarly to other algorithmic stablecoins, where users can mint $1 worth of GHO by providing $1 worth of cryptocurrency as collateral. GHO will be used for borrowing on the Aave platform, and will have a number of features to manage market volatility and higher loan-to-value ratios, including incentivizing users to acquire staked AAVE tokens to reduce the cost of minting GHO and contributing to the protocol’s Safety Module to help protect against short fall events and insolvency. 

What is the AAVE token?

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

The AAVE token is the native token of the Aave decentralized finance (DeFi) platform. It is used to facilitate transactions and govern the protocol, with AAVE token holders having the ability to vote on the direction of Aave and the management of its funds. Each AAVE token is equal to one vote.

In addition to its governance role, AAVE can also be used for staking and trading. Users can post AAVE as collateral to increase their borrowing limits and receive discounts on fees. If you’re interested in reading details on the tokenomics, I recommend you check out their Aavenomics whitepaper.

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)

AAVE Allocation

The allocation of AAVE tokens is the way in which the tokens are distributed and used within the Aave ecosystem. According to the information provided, the allocation of AAVE tokens is as follows:

  • Core development: 30% of AAVE tokens are allocated to core development, which includes the development of the Aave protocol and related technologies.
  • User experience development: 20% of AAVE tokens are allocated to user experience development, which includes work on improving the user experience on the Aave platform.
  • Management and legal: 20% of AAVE tokens are allocated to management and legal expenses, which includes the costs associated with running and regulating the Aave protocol.
  • Promotions and marketing: 20% of AAVE tokens are allocated to promotions and marketing, which includes efforts to promote the Aave platform and increase its visibility.
  • Miscellaneous costs: 10% of AAVE tokens are allocated to miscellaneous costs, which includes expenses that don’t fit into any of the other categories.

 

Where to buy and sell Aave – AAVE?

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What do we think about Aave – AAVE?

It seems that Aave is a well-regarded DeFi protocol that offers a variety of features and benefits for users. The launch of GHO, a decentralized, collateralized stablecoin, is expected to make stablecoin borrowing on the Aave Protocol more competitive and generate additional revenue for the Aave DAO. 

Aave – AAVE conclusion

In summary, Aave is a decentralized finance (DeFi) protocol that allows users to lend and borrow a variety of cryptocurrencies and real-world assets (RWAs) in a peer-to-peer manner. It operates on multiple blockchains, including Ethereum and Polygon, and is governed by its community of AAVE token holders. Aave operates differently from traditional financial service providers, as it uses smart contracts on the blockchain to facilitate loans through collateralized cryptocurrency.

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Disclaimer: Trading and investing in cryptocurrencies (also called digital or virtual currencies, altcoins) involves a substantial risk of loss and is not suitable for every investor. You are solely responsible for the risk and financial resources you use to trade crypto. The content on this website is primarily for informational purposes and does not constitute financial advice.

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