Aave DeFi Overview: Borrow & Lend Crypto
Another cryptocurrency which has recently come onto the radar of a number of traders is Aave. Some of you may be wondering what Aave is and what does it do. Well you may be surprised to discover that, despite its recent rise to fame, Aave isn’t actually a new project. Rather, it is a DEFI cryptocurrency project which been around for years.
What Is Aave?
Aave is a DEFI cryptocurrency. This means it is a decentralized project which focuses on creating a financial system within the cryptocurrency world. Aave is a cryptocurrency lending system which allows users to borrow or lend cryptocurrency without the need for an overseeing centralized entity such as a bank. Think of Aave as the Payday Loans of the cryptocurrency world.
The History of Aave
As previously mentioned, Aave isn’t a new project, rather it is a rebranding of a different cryptocurrency product. Aave was originally created in 2017 under the name ETHlend. ETHlend was founded by CEO Stani Kulechov who was frustrated that there were so few options for borrowing and lending cryptocurrency. He decided to later rebrand the product as Aave, because Ethlend implied the company only allowed the borrowing and lending of ETH, when in reality, he hopes to offer much more that lending in just one cryptocurrency.
How Does Aave Work?
Aave is run on the Ethereum blockchain and is made up of a series of smart contracts. If a user wishes to borrow cryptocurrency, he or she must first put collateral into a smart contract, and they may then borrow up to the value of the collateral in cryptocurrency. Aave currently supports the lending and borrowing of 20 different cryptocurrencies, the most popular being ETH, DAI, BAT, and Mana. And the best part is, borrowers can choose if they would like a fixed rate or variable interest rate loan, which can come in handy in the volatile cryptocurrency world.
An example of how lending on Aave would work, is an investor would post 17 DAI as collateral to borrow 1 ETH. They may then invest that ETH in another project without actually owning that cryptocurrency, pretty cool huh?
So where is all this money coming from? Well users who borrow money, just like in the fiat world, have to pay back their loans with interest. And instead of a bank, or other centralized entity collecting this interest, it is given to the individuals who chose to lend their cryptocurrencies on the platform. If you want to become a lender on the Aave platform, it is quite easy, you simply deposit the funds you wish to lend to users, then you will be given two tokens; aTokens, which allow you to collect interest on your deposited money, and AAVE tokens, which are the native token of the Aave system. When you hold these AAVE tokens, you can get discounts on loans in that you will not be charged a fee for borrowing or lending tokens if you do so in AAVE.
What Are Flash Loans?
Aave has a really cool feature known as flash loans, which is a loan which is instantly issued and settled within the blockchain. Flash loans take advantage of the fact that it takes a number of seconds, maybe even minutes, to settle a transaction on the blockchain. A user who wishes to use a flash loan can request a loan, and then pay it back within the same block of transactions with an attached 0.09% fee. They can do this without needing to put collateral on their loan. This is really useful for high level traders as they can use the funds for immediate trading opportunities without having to lock up their funds in a smart contract.
Unfortunately, flash loans have also been used to attack the Ethereum blockchain and steal thousands of dollars’ worth of deposits. So, unless you know what you are doing, it is highly discouraged for you to use the flash loan feature of Aave. And these loans happen so quickly that it is very difficult to use them efficiently if you are an inexperienced trader.
How Many AAVE Coins Are Out There?
The AAVE cryptocurrency is designed to be deflationary, meaning when people use AAVE instead of paying fees, these tokens are burned. In July 2020, there was 1.3 billion LEND (the old version of the platforms token) tokens in circulation, but Aave revealed a plan to swap these 1.3 billion LEND tokens for a newly minted version of the currency called AAVE. During this event, the coins were swapped on a 1:100 ratio, bringing the total supply at the time down to 16.2 million AAVE.
Where Can You Buy AAVE?
You can purchase AAVE on a number of large marketplaces such as Binance, CoinBene, OKeX, and CoinDCX. Some of these platforms don’t accept fiat currencies so you may need to use another platform like Coinbase to convert your fiat currency to cryptocurrency before purchasing. It’s also important to note that buying the AAVE token is different than lending your cryptocurrency on their platform. If you wish to become a lender on the Aave platform, you need to do so directly through the platform. This way you can earn AAVE (and interest on your cryptocurrencies!) instead of buying it.
However, when you do purchase AAVE on an exchange, this does act a bit like stock in the company, and if you purchase enough, you may have some say where the software goes in the future. So, if this interests you, maybe you do wish to purchase AAVE outright instead of earning it for loaning users your cryptocurrencies. If you have more questions about what Aave is, and how to use it, the developers have a community Discord server which can be used to ask questions. You can find out more information about this, and the coin on their website.
Take Away
Aave is currently making huge waves in the DEFI world, and with a full decentralized borrowing and lending protocol, it’s difficult to see its growth trajectory curbing in the future. If you do decide you want to get involved in the project, it’s probably better to do so by lending others your cryptocurrency, rather than outright purchasing the coin.
But it’s important to remember that purchasing cryptocurrency, or becoming involved in the DEFI movement at all can be extremely risky. So be sure to discuss any large financial transactions with someone you trust before you make them.
