Aave is a cryptocurrency platform that gives users and participants the ability to borrow and lend crypto without a middleman. In effect, it’s a sort of lending system in the crypto space that let’s users lend and borrow, and earn interest as a result.
The platform also has its own crypto tokens, and is a sort of Web3 version of more typical financial lending and flash loan systems. If you’re interested in the ability to lend out your crypto holdings and potentially beef up your returns for doing so, understanding what Aave is and how it works may be of use.
What Is Aave Crypto?
Aave’s definition has changed over time, as the company has evolved. On a technical level, Aave is a decentralized finance (DeFi) protocol that enables the borrowing and lending of cryptocurrency, including so-called flash loans. Flash loans are considered the first uncollateralized loan option in the DeFi space.
Aave is built on the Ethereum platform, and it’s considered one of the biggest DeFi projects, and one of the top that focus on lending and borrowing cryptocurrency through a pooled liquidity system. Lenders can earn relatively low-risk, passive income from interest paid on loans, without having to engage with third-parties or middlemen.
What Does Aave Mean?
Fun fact: the word “aave” means ghost in Finnish. As the company evolved (more on that below), its initial identity as ETHLand was renamed Aave, as a reflection of the organization’s imaginative, evolving nature.
How Does Aave Work?
Aave’s DeFi protocol allows users to provide loans using a system that is, in many ways, the inverse of how a bank would issue a loan.
First, there is no financial institution, and no intermediary that oversees or grants loan requests based on creditworthiness. Instead, Aave is a “trustless” network that utilizes smart contracts to execute the loans, removing the need for middlemen.
Where a bank would grant a loan in dollars (or another fiat currency), Aave lends cryptocurrency.
There are no widely accepted credit checks or scores in the DeFi space, thus, users must post collateral in order to get a loan on Aave.
» Looking for more guides? Check out our glossary of crypto coins.
What Is a Flash Loan?
A flash loan began as a unique feature on the Aave platform (other platforms now offer flash loans as well). They are uncollateralized products that are possible thanks to the way the Ethereum blockchain network functions — Aave is built on the Ethereum blockchain network.
Flash loans are automated, rapidly executed loans that must be repaid within one Ethereum transaction. If the principal and interest are not repaid in that time, the loan is effectively reversed, the transaction removed from the blockchain as if it had never occurred.
Liquidation
Users who deposit or pledge their crypto into liquidity pools (see below) are adding liquidity to the overall network. That means they’re increasing the amount of crypto that could potentially be borrowed. Collateral is important for crypto loans, as most crypto loans (except for flash loans) often need to be overcollateralized.
As such, crypto loans made on Aave that drop below a certain loan-to-value ratio may initiate an automatic selling process of the underlying collateral in order to pay back the loan.
In many ways, this is similar to a margin call, which can occur in margin accounts within a brokerage.
Liquidity Pools
Whereas a traditional bank would secure a loan using physical collateral (e.g. a home is the collateral for a mortgage), Aave relies on liquidity pools. In a liquidity pool, users deposit crypto funds they’re willing to lend, which is combined with other investors’ crypto. This increases the total potential amount of crypto that can be loaned through the network.
Borrowers can then use these pools to take out a loan. Borrowers pay interest on the funds they borrow; lenders receive Aave tokens (aTokens) that entitle them to a cut of the interest earned on the money they lend, a process that’s called yield farming.
How Does Aave Pay Interest?
Lenders who earn interest receive it in the form of whatever type of crypto they deposited into liquidity pools. There isn’t a limit to how much lenders can supply to liquidity pools, and how much lenders earn in interest varies. Withdrawing interest earnings is easy — it’s as simple as using the Aave user dashboard to initiate a transaction.
What Tokens Does Aave Use?
Aave issues two different tokens.
The first type are called aTokens, which are given to lenders so they can receive interest on their deposits. The second type are called AAVE tokens, the native token of Aave. AAVE performs more than one function and works like several other types of cryptocurrency, being both a governance token and an exchange token that offers users discounts on fees within the Aave protocol.
💡 Recommended: What Is a Governance Token and How Are They Used?
Aave is an open-source protocol, meaning anyone can see and verify how it works. As noted, the platform runs on the Ethereum blockchain. Unlike Bitcoin mining, which uses a highly complex and resource-intensive proof-of-work process, AAVE coins are based on the ERC-20 standard. A collection of smart contracts provides decentralized financial options to users.
AAVE Coin Price
Aave is one of the largest DeFi platforms, and as of February 20, 2023, AAVE crypto was the 47th largest cryptocurrency on the market with a market cap of nearly $1.3 billion. The price of one AAVE coin was around $91.That’s down considerably from a peak of more than $629 in May 2021.
There are 14 million total AAVE tokens in circulation — 88% of the eventual total 16 million.
History of Aave
Aave launched in September of 2017, and was originally known as ETHlend. Aave was created by Stani Kulechov, who, at the time, was not happy with the fact that there were relatively few lending applications built on Ethereum.
In September 2018, the protocol was rebranded and became Aave.
An initial coin offering (ICO) for AAVE was held in November 2017, and $16.2 million was raised in a sale for one billion AAVE tokens (then called LEND), and an additional 300,000 for investors. In 2020, LEND was replaced with AAVE coins, with every 100 LEND being converted to 1 AAVE, resulting in 16 million coins extant.
What Can You Use AAVE Crypto For?
AAVE is designed to be used on the Aave platform, similar to how ETH is designed to be used on Ethereum, and can provide several benefits to its holders.
Holding AAVE tokens typically gives users discounted trading fees on the platform. Borrowers who offer up AAVE tokens as collateral for their loans may also get discounts on fees. These borrowers also gain the ability to take out larger loans. On the other side, users can lend AAVE and collect interest.
Finally, AAVE crypto borrowers can take out fee-free loans when those loans are denominated in the token.
Similar to some other DeFi tokens, like Uniswap (UNI), the AAVE coin is also a governance token. Holding AAVE crypto gives holders the ability to vote on upcoming proposed changes to the Aave protocol.
Traders can also speculate on the price of AAVE, hoping to buy low and sell at a higher price later. Short-term traders are required to pay cryptocurrency taxes when they sell coins, however, which is important to keep in mind.
There are more than 30 different types of crypto users can lend or borrow on the Aave platform: e.g. ETH (the native token of Ethereum), DAI, and stablecoins like Tether or USDC, among others. Note, too, that Aave has also started deploying GHO, its own decentralized stablecoin, into the crypto space, too.
Should You Invest in AAVE?
Investors who believe that decentralized lending will continue growing may find AAVE crypto appealing. But whether or not you should invest in AAVE, or any other cryptocurrency, will depend on your specific investing goals and financial situation — there is no right or wrong answer. If you’re looking to increase the level of crypto diversification in your portfolio, however, it may be worth a look.
To determine whether investing in AAVE is wise, consider your risk tolerance, time horizon, and how crypto fits into your overall investing strategy. It may be worth it to consult a financial professional for additional insight, and to review Aave’s documentation to make sure you understand the project top to bottom.
Be aware, though, that AAVE, like any other crypto, is far from a safe investment. Cryptos have their own unique risks, and it may not be in every investor’s wheelhouse to dip into the crypto space.
Pros and Cons of Aave
Investing in Aave has its pros and cons, too.
Owning AAVE gives users special privileges on the Aave platform, as noted above, including discounts on transactions and fees. And because Aave is one of the biggest DeFi lenders, AAVE has high liquidity.
In terms of stability, longevity, and commitment to innovation, the Aave platform continues to be one of the largest in the DeFi space.
That said, investing in crypto requires a deep familiarity with how various platforms, tokens, and coins work, and the potential risks involved. Unlike the markets for stocks and bonds or even ETFs, which are long established and highly regulated, the crypto markets are relatively new, largely unregulated, and rapidly evolving. While this presents many possible opportunities for investors and traders, there are no guarantees of positive outcomes, given the volatility of this space.
|
Pros and Cons of Aave |
|
|---|---|
| Pros | Cons |
| AAVE holders get discounted trading fees | Volatile value |
| Ability to earn interest lending crypto | AAVE only has utility on the Aave platform |
| High liquidity | Unregulated, evolving market |
AAVE Fees to Be Aware of
There are fees associated with using the Aave platform. For one, there are transaction fees for using the Ethereum Blockchain, generally called “gas fees,” which are used to facilitate transactions on the network. There are also fees associated with borrowing crypto on the Aave network, as mentioned, which are partially paid to lenders or those who contribute to liquidity pools.
How to Buy AAVE Cryptocurrency
Buying AAVE is similar to most other cryptocurrencies. Here are the basic steps that a user needs to know.
1. The first thing required is an account on a crypto exchange. Make sure the exchange provides trading for the AAVE cryptocurrency.
2. After creating an account, a user can then deposit either some Bitcoin, dollars (or other local fiat currency), or a stablecoin, depending on what trading pairs the exchange currently trades.
Buying crypto directly with a credit card might also be an option, but doing so often involves higher fees (not only might the exchange charge additional fees, but credit cards often treat crypto purchases as a cash advance, which comes with even more fees).
3. At this point, a user can buy AAVE. Simply select the trading pair that includes AAVE and the currency deposited during step number two.
For example, if a user had bitcoin and wanted to buy AAVE, they would select the pair called “BTC/AAVE.” If they had dollars, it might be “USD/AAVE.” For a stablecoin like USDC, it might be “USDC/AAVE.” Enter a buy order for the desired amount of coins at a desired price. Alternatively, on exchanges that include order books in the user interface (like Binance), simply select the top sell order and buy from it.
Alternatively, investors could use a decentralized exchange (DEX) to acquire AAVE. Using a DEX generally requires only a crypto wallet, of which there are many to choose from. Users don’t have to create an account and can simply swap coins on the platform.
After buying AAVE tokens, some users may want to consider moving their crypto into a crypto wallet that supports AAVE. This method of crypto storage provides extra security, as the coins can be taken offline and put into cold storage where it’s less likely that hackers might access them.
FAQ
Is Aave crypto a good investment?
It’s impossible to say that any cryptocurrency is a “good” investment, given the risks involved with investing in crypto. But as with any investment, there is a chance that it could garner big returns for investors, and Aave also allows for the lending of crypto, which can help earn additional returns.
Why is Aave crypto so popular?
Aave gained popularity due to its flash loans, and is now one of the larger DeFi lending platforms on the market. The ability to lend and borrow without a middleman has advantages for users, and the ability to earn interest or staking rewards may be particularly attractive to investors.
Does Aave gain value?
Aave has gained value in the past, and likely will in the future. Cryptocurrencies are volatile investments, though, and gain and lose value often — as such, it’s likely that Aave will gain value at some point in the future.
Photo credit: iStock/RgStudio
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