In addition to the usual loan features seen in other protocols like Compound, Aave includes notable distinguishing features such as uncollateralized loans and “rate switching”.
The protocol is open-source and non-custodial, meaning that no third party is ever in control of user funds.
The native token of the Aave platform – LEND – provides holders with several advantages such as discounted fees and staking rewards.
Aave was originally launched as ETHLend, a lending platform which was founded in 2017 by Stani Kulechov.
The ETHLend ICO held in November 2017 raised $600,000 worth of Ether, in exchange for 1 billion LEND tokens.
ETHLend was rebranded to Aave in September 2018, with the intent to integrate Bitcoin interoperability and accompany the release of new platform features.
Flash loans are likely the most unique feature of the Aave protocol. Unlike the typical over-collateralized loan, Flash Loans require zero collateral to use!
Instead of guaranteeing repayment with collateral, Flash Loans simply rely on the timing of the loan’s repayment. As long as the loan is used and paid back in full within the same block it was issued, it is approved. On the other hand, if the loan is not paid back within the same block, the entire loan is cancelled.
Flash loans open the doors for safe and secure arbitrage opportunities, across the Ethereum DeFi ecosystem – all at virtually no cost to the user.
As with other lending platforms, Aave users can lend and borrow cryptocurrencies in a permissionless fashion. However, the interest rate structure with Aave is quite different.
Whereas other lending platforms tend to lock users into fixed or variable interest rates, Aave’s rate-switching function allows users to switch between two different types of rates. This allows them to get the best interest rate on their loans, by changing between “stable” and “variable” interest rates.
It should be noted that these stable rates are not fixed interest rates. Rather, they are a more stable form of variable interest rate, which is more constant and less susceptible to market fluctuations.
How’s It Work?
To get started with Aave, visit https://app.aave.com/.
Once connected, users can begin supplying funds to the protocol, immediately earning interest or unlocking the ability to borrow more cryptocurrency.
To deposit funds, select an asset and enter the amount you wish to lend. From here, simply approve Aave’s access to the chosen asset, and sign the transaction for the deposit.
Your deposited funds will then be supplied to the lending pool, and you can monitor your accrued interest in real-time in the Aave app dashboard.
Unlike cTokens, however, each aToken retains a value equivalent to that of the underlying asset. For example, one aDAI token will always have the same value as a real DAI token. Rather than having aTokens appreciate in value with interest (as with cTokens), the number of aTokens in your balance will increase instead.
This meme from Aave depicts the process pretty well.
— Aave (@AaveAave) January 24, 2020
It is important to note that each asset has a different collateral requirement, due to differences in price volatility. Stablecoins provide the greatest loan-to-value ratios, due to their inherent price stability.
Each asset on Aave has two independent interest rates: A stable rate, and a variable rate. Users can switch between the two however they’d like.
Aave Pay allows Europe-based users to pay for everyday items in fiat currency, using their cryptocurrency balance.
Users can take a loan out via the ETHLend platform, and send fiat currency to any bank account – all without directly cashing out their cryptocurrency holdings.
The service currently only supports the Euro.
The Aave Token (LEND)
Aave’s native token – LEND – is an ERC20 token with a total supply just shy of 1,300,000,000. (1,000,000,000 of which was sold in the ICO)
LEND was originally used as a utility token within the ETHLend platform. It provided users with a variety of benefits including reduced fees, improved loan-to-value ratios, and staking rewards.
However, as ETHLend shut down and was replaced by Aave, the LEND token took on additional use-cases including platform governance as it moves toward a more decentralized model.
LEND holders are able to vote on proposals made by the development team, as well as economic parameters including interest rates, liquidation configurations, and new assets.
The protocol is now designed to burn 10% of platform fees captured in LEND tokens. This implies that the LEND supply will consistently be decreasing, which may improve token value over time.
Borrowers who supply 500,000 or more LEND to the protocol will reduce their borrowing fees by 80%.
Supported Assets on Aave
Aave supports the following Ethereum-based assets:
Basic Attention Token (BAT), Dai (DAI), Ethereum (ETH), Kyber Network (KNC), Aave (LEND), ChainLink (LINK), Decentraland (MANA), Maker (MKR), Augur (REP), Synthetix (SNX), TrueUSD (TUSD), USD Coin (USDC), Tether (USDT), Wrapped BTC (WBTC), 0x (ZRX), and Synthetix USD (SUSD).
For in-depth blog posts and platform updates, check them out on Medium.