Flash Loans, aTokens, and rate-switching are among the flagship features of the platform, along with the availability of 16 different assets.
Flash loans are perhaps the most outstanding concept on the Aave platform. Users are able to borrow cryptocurrency instantly, without any collateral!
How can DeFi loans work without collateral, you may ask?
The magic is behind the speed of the loan – hence the “flash” in flash loan. Each flash loan borrower must borrow, use, and return the funds within the same transaction.
If for any reason these borrowed funds are not returned to the lending pool in time, the entire series of transactions and the origination of the loan is cancelled.
Aave has also introduced aTokens, which are interest-bearing tokens that are pegged 1:1 to the value of the underlying asset.
They work in a similar way to Compound Finance’s cTokens or chai.money’s CHAI token, which are also backed by other assets and earn interest. Whereas cTokens and CHAI earn interest via value appreciation, aTokens pay interest with an increasing balance of aTokens.
In this way, aTokens are always equivalent in value to their underlying asset.
The rate-switching function allows users to switch between fixed-rate interest or variable interest rates, to get the best current rate.
Road to Decentralization
As with many decentralized finance protocols, the Aave protocol plans to gradually phase into complete decentralization over an extended period of time, to ensure a smooth initial launch and public testing phase.
For this initial phase, the Aave team will retain control over the protocol, in order to more easily address any early incidents or issues.
The long-term governance plan is currently under development, and will be integrated once this development is completed. The system will incorporate the LEND token, and will all be published in a formal roadmap post within the next few weeks.
LEND Price Action
The Aave token (LEND) has performed extremely well since lows in August last year, outperforming much of the cryptocurrency market despite flying under the radar.
It is currently up over 100% from the 29th of December, likely in anticipation of the Aave Protocol mainnet launch.
What to watch
Flash loans may be the most interesting feature to watch on Aave.
The function opens up a whole range of new opportunities for risk-free money making across platforms.
Although this feature will most likely be of most use to DeFi-savvy developers, it will be extremely interesting to witness the creation of arbitrage tools and other applications.
These will likely remove inefficiencies across DeFi, and contribute to a smoother and more-liquid ecosystem.
Check Aave out now at https://app.aave.com/.
Alejandro is a New Zealand-based trader and writer who has been involved in the cryptocurrency and blockchain space since early 2016. Being extremely passionate about this emerging technology, he has written content for a myriad of projects and news outlets.