Aave is a decentralized finance (DeFi) protocol that allows anyone to lend and borrow cryptocurrencies without going through a centralized intermediary. When users lend, they earn interest; when they borrow, they have to pay interest.
Aave is built on the Ethereum network. All tokens on the network also use the Ethereum blockchain for transaction processing. These are called ERC20 tokens.
The protocol itself uses a decentralized autonomous organization (DAO), which means it is operated, governed, and voted on by AAVE token holders.
Do you know?
Before the name change to Aave, the product was called ETHLend. Both are developed by the team led by Stani Kulechov, a Finnish law student.
Servicesactive loan how on Aave?
Traditionally, to get a loan, you need to go to a bank or other financial institution with lots of cash liquidity. The bank will require collateral to provide the loan (in the case of a car loan, the car will be collateralized). Then you pay the principal and interest monthly to the bank.
DeFi is different. No banks exist. Instead, smart contracts (which are computer code that automate transactions, such as selling if the token price reaches a certain threshold) do the job. In other words, DeFi removes the middleman from asset trading, futures, and savings accounts.
In effect, that means you will get crypto loans from people instead of financial institutions. However, you still have to mortgage the property. In a DeFi system that tries to say no to fiat, the collateral is another token.
And because cryptocurrencies are highly volatile, DeFi platforms require more collateral value than loan value. For example, for a $500 crypto loan on Aave, you’ll need to pay more than that amount in another type. If the price drops sharply and the collateral doesn’t cover the amount borrowed, the collateral can be liquidated, meaning the protocol will take it to cover your loan.
Aave currently has pools for more than 20 assets operating on Ethereum, including stablecoins USDT, DAI, USDC, and GUSD. In addition, there are other markets such as LINK, BAT and UNI.
Why many people Want to borrow cryptocurrency?
While buying or selling cryptocurrency often makes more sense, borrowing it can be useful in some situations. One of the most obvious cases is arbitrage. If you see a token trading at different rates on different exchanges, you can make money by buying it in one place and selling it in another.
However, since spreads are usually small after accounting for transaction fees and bid-ask spreads, you must have plenty of coins to make a decent profit.
That’s where Aave’s flash loan feature comes into play. Aave pioneered the use of instant loans. In it, people borrow cryptocurrency without collateral, use it to buy an asset, sell that asset, and return the original amount in the same transaction while pocketing the profits.
How liquidity pools work
In the early days of DeFi, if you wanted to borrow a property, you had to find someone on the platform who wanted to lend you a loan at the price and terms agreed upon by both.
Things have gradually evolved since then.
Aave bypasses the entire peer-to-peer lending process, opting for pool-to-peer lending instead.
Specifically, users deposit digital assets into a “liquidity pool”. They become money that the protocol can then lend. Anyone who deposits their token into a pool and thus “provides liquidity” will receive a new aToken (“a” stands for “Aave”). So if you deposit DAI into the liquidity pool, you will get aDAI in return.
As an aToken holder, you will receive a portion of the platform’s quick loan as well as interest on those aTokens. If you deposit tokens into a pool with plenty of liquidity, you won’t earn much. But if you send tokens that the protocol is in dire need of, you will earn more.
The same is true of borrowing, and the interest rate varies depending on the loan.
Why don’t people give? get a loan?
There are a few reasons. First, you have to transfer crypto to Aave to start using the platform, you cannot buy it with a credit or debit card. And with Ethereum’s high transaction costs, some people are hesitant to transfer small amounts.
Second, there’s an element of risk involved, and liquidation is an important part of how Aave manages debt, ensuring people can still get loans.
If that’s still not enough after the collateral is liquidated, Aave has a backup called the Safety Module. Inside this pool are the AAVE tokens that the user has deposited. If things are calm, they get more AAVE as a compensation. If the system needs funding, the system will liquidate the AAVE tokens.
Token AAVE use for what?
Users can use AAVE tokens as collateral. When they do, their borrowing limit is raised. AAVE borrowers can also skip the loan fee and get a discount if they use it as collateral.
AAVE can be purchased or traded on several popular exchanges such as Binance and Huobi Global.
According to Decrypt
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