Aave (AAVE), Non-custodial Cryptocurrency Lending Protocol

0
88
Aave (AAVE), Non-custodial Cryptocurrency Lending Protocol
Aave (AAVE), Non-custodial Cryptocurrency Lending Protocol

Aave (AAVE), the open source and non-custodial protocol allowing the creation of decentralized finance (DeFi) markets. It allows its users to earn interest on the deposit of their cryptocurrencies and to borrow assets, all in a decentralized way.

What is the Aave Protocol?

Created in 2017 and based in London, the company Aave is at the origin of the protocol of the same name. It develops a decentralized non-custodial financial market protocol in which users can participate as lenders or borrowers.

Lenders provide liquidity to the market to generate passive income, while borrowers can take out loans with crypto-assets pledged as collateral.

The Aave protocol supports over 15 different crypto-assets, with a wide selection of stablecoins. During a deposit in the Aave protocol, Aave Tokens (aTokens) are forged.

These particular tokens track the value of the underlying asset and are burned upon repayment of the loan. While the underlying asset is lent to borrowers, aTokens earns real-time interest. Moreover, they can be freely stored, transferred and exchanged.

Aave also offers under-collateralized solutions. The protocol thus makes loans possible instantly without the need for a guarantee.

In the past, Aave was known as ETHLend, which the company quickly dropped to mark its shift from a decentralized P2P lending strategy to one based on liquidity pools.

Previously, the protocol’s native token was LEND, which was recently replaced by AAVE following a community-accepted migration. The migration ratio was 100 LEND for 1 AAVE.

“Aave” is a Finnish word that translates to “ghost” in English. For Aave, this represents its goal of creating a transparent and open infrastructure for highly decentralized finance.

FmD RPvzYaaWijTQlcQBU890UtfK0dpMyvwP gi4DOocNcbKg2VRD2XsJP1M2Y2gM3fa800zOsbWTl 0lvGXJhQ nf0OQn6cSzSRNdgAylZ1zSmvXOa3zqFKw12I02souP3q7QCNQpzXzIi4gVg908k

Aave Logo (AAVE)

The Aave Protocol Ecosystem

Complex in how it works, let’s take a look at the many components of the Aave protocol. How does it work, and what does it allow you to do?

Tokenization by Aave Tokens

The Aave protocol implements a tokenization strategy for liquidity providers. When making a deposit, the user receives a corresponding amount of derivatives tokens, dubbed Aave Tokens (or aTokens).

These correspond with a 1:1 ratio to the underlying assets deposited and follow the ERC 20 standard of Ethereum. The balance of aTokens of each depositor increases over time due to the permanent accumulation of interest generated by deposits.

aTokens natively implement the concept of interest rate redirection. This concept makes it possible to distinguish the value accumulated over time by the interest paid by the borrowers from the initial balance.

As soon as a wallet linked to Aave contains aTokens, the value accumulated by the latter can be redirected to any address, which makes it possible to split the balance and the interest generated.

Despite the benefits this tokenization model has, it comes with a significant downside. It is not possible to transfer the entire balance in one transaction.

Indeed, the exact amount of a transfer cannot be entered since the interests continue to operate even during the confirmation of the transfer operation. This means that a very small balance (dust balance) will always be left on the wallet from which a transfer originates.

Deposit Cryptocurrencies and Generate Income with Aave

Aave first requires a connection to an external wallet supporting Ethereum.  Due to its effectiveness and reputation in the industry, I highly recommend using MetaMask. This web browser is relatively easy to use and initialize.

If you already have your own MetaMask wallet and are used to using it, skip this tutorial. Otherwise, discover the 3 preliminary steps before being able to use Aave with MetaMask:

qQ8OiUA26RFHqZdS

Deposit Funds on Aave

Depositing cryptocurrencies on Aave allows you to generate earnings passively. In effect, you are rewarded by the protocol for providing liquidity to assets which other people will borrow.

Depositing your cryptocurrencies on Aave makes sense if you hold stablecoins. Take the example of Tether’s USDT, for which Aave is offering an annual interest rate of 5.22% at the time of this writing.

Using this feature is very simple. Simply select the asset you wish to deposit from among the cryptocurrencies supported by the platform, then enter the amount of your deposit. Once your deposit is recorded, you start earning interest.

EeXlCGfwvqLfi2taNvzMu9jVtPplJQgOXvp635AIVXcLRq Yp6chRsXl2FIcCJsApy19U0ZzBa7M N8XLIqRvDmlUeTgXE1Ubqpi80pgxhti7LX KW4F3tgu0KYoxT ngk5wSBEx br31nw7X1 163U

Each asset has its own supply and demand market with its own annual interest rate that changes over time thus, if the gap between available cash and borrowed funds narrows, the annual interest rate on deposit increases (this is also a function of other factors).

How is interest calculated?

Token custodians on Aave receive ongoing revenue that changes based on market conditions and is divided into two parts.

Payment of interest rate on loans

All those providing liquidity to an asset share the interest paid by the borrowers corresponding to the average borrowing rate multiplied by the utilization rate.

The higher the utilization rate of a reserve, the higher the return for depositors. A real-time updated spreadsheet lets you see this interest rate model in action.

Paying the interest rate on flash loans

Depositors receive 0.063% of the volume of any flash loan executed on Aave.

Borrow Cryptocurrencies with Aave

Why Borrow Cryptocurrencies?

Second possibility with Aave, borrowing cryptocurrencies. It may seem quite curious to you, but borrowing cryptos can be relatively interesting.

Suppose you have an open position in an asset; let’s take the example of ETH, and an investment opportunity presents itself to you. You will not be able to get your ETH back unless you close your position.

By borrowing cryptocurrencies with Aave, you can obtain liquidity without selling your assets. This allows you to take advantage of new investment opportunities or even meet unexpected expenses.

How to Borrow Cryptocurrencies with Aave?

First of all, you must deposit funds on Aave, which will serve as a guarantee, also called “collateral”. Refer to the previous section for more on this point.

Once in front of the list of available assets, select the one you need, then click on the “Borrow” button at the bottom right.

Then fill in the desired amount according to your collateral. Then select a stable or variable rate and confirm your transaction. Aave allows you to change the selected rate type at any time.

The following capture summarizes the interest rate for a deposit, the stable rate and the floating rate of USDT on Aave. Thus, the interest rate by choosing a stable loan is set at 8.61% at the time of writing these lines. As for the variable loan, this offers a lower interest rate of 6.96%.

What is the Difference Between Stable Rate and Variable Rate?

The stable rate

Stable rates act like a fixed rate in the short term but can be rebalanced in the long term depending on changing market conditions. Opting for a stable rate, therefore, makes it possible to plan in advance the amount of interest to be paid.

A rebalancing of stable rates is unlikely but occurs if the average borrowing rate is below 25% and the utilization rate is above 95%.

Variable rate

The variable rate is the rate based on supply and demand in Aave. The variable rate will change over time and is more advantageous depending on the situation.

What is the AAVE Used for?

A true engine of the Aave ecosystem, the AAVE plays the role of a utility token. It can be used in particular to reduce the costs of the various Aave services and also gives rights to the governance of the protocol.

AAVE is used to vote and decide the outcome of Aave Improvement Proposals (AIPs). Additionally, the AAVE is eligible for staking under the protocol’s security module. This provides security to depositors and helps generate passive income.

AAVE tokens used to pay Aave fees are automatically burned. Thus, this naturally reduces the number of tokens in circulation, which also increases its rarity.

Aave’s Fundraising

The Aave project raised a total of $24 million over 2 funding rounds when the LEND token was still in circulation.

In November 2017, Aave went through a public ICO, which raised $16.5 million. Note that during this fundraiser, the LEND token was offered at a price of only $0.017270 (which represents an AAVE token at $1.7270).

Secondly, in July 2020, Aave received support from several investment funds, allowing it to raise an additional $7.5 million. The project has notably received support from DTC Capital, Parafi Capital, Three Arrow Capital and Framework Ventures.

Team and Partners

The Team

According to the official list of members of the Aave team, it consists of 18 people. Let’s take a look at the background and missions of its main members:

Founder and CEO of Aave, Stani Kulechov is a seasoned business leader with extensive experience in developing solutions in the blockchain industry. A graduate of a Master of Laws at the University of Helsinki, Stani Kulechov notably advises many blockchain projects and often speaks at conferences about FinTech and Ethereum smart contracts.

Chief Operating Officer of Aave, Jordan Lazaro, graduated in risk management and international policy from Paris X Nanterre.

Aave’s Chief Compliance Officer, Ville Valkonen, holds a key position in the development of the company’s products. In particular, he directs the technical support of the startup.

bxvUZYVfhoqZJ34VB bpK31q7 T76N 67RE768naN7Cbyik6cm9Y QZzyBw2AHOAt 3XlbP86kfSqAA0lbWyOVQpRZ3Hklv8 Lord Me n

From left to right: Stani Kulechov, Jordan Lazaro Gustave and Ville Valkonen

The Partners

For a company whose activity is based on decentralized finance, Aave has entered into numerous partnerships:

  • Chainlink: the decentralized oracle network provides Aave with reliable asset price data. Learn more.
  • MYKEY: a wallet that integrates Aave’s DeFi products into its ecosystem
  • RealT: Aave brings to this real estate tokenization platform mortgages on Ethereum. Learn more.
  • Gitcoin: Aave organizes online hackathons on the theme of Web 3.0
  • Tether: with the stablecoin issuing company USDT, Aave improves its decentralized flash loan solutions

How to Buy AAVE?

With its large capitalization, the AAVE token is available on many platforms such as Binance, OKEx, Huobi, Uniswap, HitBTC, and ProBit.

For trading comfort, notably facilitated by the high liquidity of the platform, we recommend that you use Binance to buy and sell AAVE.

Explanations for Buying AAVE on Binance

  • Register on Binance
  • You will receive an email and need to click on a link to verify your account
  • Deposit funds on the platform
  • Click on the  Market menu  and look for the pair  BTC/AAVE
  • All you have to do is buy AAVE for the amount of your choice
  • Congratulations, you are now in possession of AAVE tokens.

How to Store AAVE Tokens?

Since the AAVE is an ERC-20 token, there are many solutions for storing it. The safest way to store your AAVE tokens is undoubtedly to use a hardware wallet. The most famous wallets of this type are those of  Ledger, a French company co-founded by Éric Larchevêque.

For users of wallets from the manufacturer Trezor, these also support AAVE.

If a physical wallet does not seem necessary to you, it is also possible to store AAVE on web wallets dedicated to the Ethereum ecosystem, such as  MyEtherWallet (MEW) or MetaMask.

Aave (AAVE) Protocol Ratings and Reviews

A true flagship of decentralized finance, the Aave protocol is essential for any follower of the sector. Besides borrowing cryptocurrencies and the possibility of generating passive income, other DeFi applications are based on Aave.

The most famous of these is undoubtedly Aavegotchi, a community project that takes up the concept of Tamagotchis but with DeFi and NFTs sauce. These virtual companions bring the famous CryptoKitties up to date, bringing many unique features that I invite you to discover in our presentation of the project.

In the future, Aave thinks big and intends to conquer all of Europe. Indeed, since August 2020, the Financial Conduct Authority (FCA), the financial policeman of the United Kingdom, has granted Aave an electronic money institution license. This license authorizes the startup to provide payment services in the same way as those of Coinbase and Revolut.

LEAVE A REPLY

Please enter your comment!
Please enter your name here