Aave Protocol (AAVE)
AAVE——An Open-Source DeFi Protocol
1. Aave protocol is a "decentralized, open-source, and non-custodial money market protocol".
2. Depositors earn interest by providing liquidity to lending pools, while borrowers can obtain overcollateralized loans by using the liquidity from these pools.
3. Similar to other DeFi platforms (e.g., Compound, Fulcrum), deposits are tokenized as aTokens, which accrue interest in real-time. Aave Protocol supports more than 15 different assets, with a large selection of stablecoins.
4. AAVE（LEND) tokens are used for fee reductions and will also be used for governance rights at the protocol level for future smart-contract updates. LEND tokens are also burnt from the fees collected from the Aave Protocol.
5. Since January 2020, Aave protocol also offers undercollateralized solutions: flash loans allow developers to borrow instantly and easily without any collateral.
1. What is Aave?
Aave is a blockchain-based protocol powering a non-custodial money market that involves borrowers and lenders/depositors. It is a decentralized cryptocurrency collateral loan protocol that is open source and unregulated, its code is accessible to all users, it is fully transparent and trackable, and it can be audited by all. Users can act as depositors or borrowers in Aave. Lenders provide liquidity by depositing cryptocurrencies in a pool contract. Simultaneously, in the same contract, the pooled funds can be borrowed by placing a collateral. Loans do not need to be individually matched, instead they rely on the pooled funds, as well as the amounts borrowed and their collateral. The Aave protocol is implemented through a set of smart contracts on the Ethereum blockchain, which ensure security and do not require the intervention of an intermediary.
2. Who is the founder Aave?
Aave is a for-profit company founded in 2017 by Stani Kulechov and based in Switzerland. Kulechov was trained in law in Helsinki and started Aave while still a student. The firm, originally named ETHLend, raised $16.2 million in an initial coin offering (ICO) in 2017, during which time it sold 1 billion units of its LEND cryptocurrency. A remaining 300 million units of LEND cryptocurrency were held for the Aave team. ETHLend was different from Aave in that, instead of pooling funds, it tried to match lenders and borrowers in a peer-to-peer fashion. In 2018 ETHLend was renamed Aave, which means “ghost” in Finnish. ETHLend became a subsidiary of Aave.
3. How does Aave work?
Users deposit funds they wish to lend, which are then collected into a pool. Borrowers may then draw from those pools when they take out a loan. These tokens can be traded or transferred as a lender wishes. To facilitate this activity, Aave issues two types of tokens: aTokens, issued to lenders so they can collect interest on deposits, and LEND tokens, which are the native token of Aave. The LEND cryptocurrency offers holders several advantages. For instance, LEND borrowers don’t get charged a fee if they take out loans denominated in the token. Also, borrowers who use LEND as collateral get a discount on fees. LEND owners can further look at loans before they are released to the general public if they pay a fee in LEND. Borrowers who post LEND as collateral can also borrow slightly more. Currently, 80% of fees collected by the Aave system are used to burn LEND. The remainder is used to pay lenders. The constant burning of LEND is expected to reduce its supply, thus driving up the price of the token if demand remains constant.
Aave flash loans
As one of its main features, Aave introduced the concept of “Flash Loans”, which allow users to instantly borrow money without any required collateral. The safety of funds in the reserve pool is guaranteed by Aave’s ability to reverse the transactions and undo all the actions in case the liquidity is not returned to the pool on time. As per Aave’s statements, this functionality is designed for developers and not technically advanced users. Flash loans take advantage of a feature of all blockchains, which is that transactions are only finalized when a new bundle of transactions, known as a block, is accepted by the network.