Aave is a popular DeFi protocol that makes it possible to borrow and lend cryptocurrencies and tokens at interest. The name of the platform comes from the Finnish word, which translates as “ghost”. Today Aave is one of the most dynamically developing services based on Ethereum.
The startup was launched in 2020. Initially, the Aave protocol worked on a peer-to-peer basis, making it possible for users to interact with each other clients directly through a smart contract. But since in such a model it is not always possible for a user to find sufficient liquidity to conclude a deal, the project was transferred to a new peer-to-contract model. With this innovation, now you can deposit funds into a liquidity pool from which other clients can freely borrow at fair interest rates. The following currencies are now available to AAVE clients: DAI, GUSD, sUSD, TUSD, USDC, USDP, USDT, BAL, ETH, LINK, YFI, BUSD, MKR, RAI, UNI, WBTC, SUSHI, FEI, AAVE, BAT, FRAX , AMPL, CURVE, DPI, ENJIN, KNCL, LAND, REN, renFIL, SNX, 0x.
Working mechanism
The interest rate on deposits is calculated by a smart algorithm for each individual asset based on supply and demand. According to the terms of the platform, borrowers can take out a loan only after providing collateral in return. At the same time, loans and collateral can be placed in different digital assets.
Aave uses the LTV (Loan to Value) ratio to calculate the amount of the loan and collateral, which is the ratio between the principal amount of the loan and the estimated value of the asset provided as collateral. In this case, the value of the collateral must exceed the value of the asset in which the loan is taken. For example, if the LTV is 70%, then for a security of 1 ETH, the user can borrow assets in the amount of 0.7 ETH. The excess collateral system ensures that Aave’s liquidity providers can withdraw their funds from the pool at any time.
Tokens
Aave Liquidity Providers automatically receive an aToken after making a deposit according to their pool share. The protocol also supports the AAVE internal control token, which provides holders with a number of privileges such as:
- Capability to take part in voting for changes in the protocol;
- Reduced transaction fees;
- Placing your tokens in a special protocol security smart contract.
The smart security contract is designed to protect users from lack of capital to repay loans.
Flash loans
The integrated Flash loans service deserves special attention within the AAVE ecosystem. It provides users with access to urgent unsecured loans. Aave has essentially become a trailblazer in the DeFi protocol niche by offering this type of service.
In AAVE, loans are taken and repaid within the same block on the Ethereum network. The smart contract that governs a particular loan is programmed to broadcast the transaction to the network when the loan is repaid before the block is confirmed. Otherwise, the transaction is canceled. At the same time, the commission is only 0.09% of borrowed funds.
AAVE flash loans are used in a wide variety of DEX trading areas. In particular, fast loans are used in arbitrage, when a trader wants to earn from the difference in asset prices on different trading platforms.
Summary
AAVE is a promising and very interesting project for the consumer, which provides access to inexpensive loans. All loans are taken in cryptocurrency, and anyone who has free funds and wants to earn some money can become a member of the pool of lenders. AAVE is a universal ecosystem built on the principles of rational and fair distribution of income, which guarantees its successful development in the long term.
Despite the temporary instability in the market, experts say that this asset has a considerable investment prospect. For private users, the system is also of commercial interest. You can learn more about the specifics of the ecosystem on the official website aave.com.
