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 protocol and it’s considered one of the biggest DeFi platforms, 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.
Here is your guide to the Aave protocol and its native token, AAVE crypto.
How Does Aave Work?
What is Aave and how does it function compared with other crypto platforms? Aave is a DeFi protocol that provides loans using a system that is basically the opposite of going to a bank in almost every way.
First, there is no financial institution, 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, thus removing the middlemen.
Where a bank would grant a loan in dollars (or another fiat currency), Aave’s loans are in crypto. 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.
And where a traditional bank would secure a loan using physical collateral (e.g. a home is the collateral for a home loan), Aave relies on liquidity pools. Here, users deposit crypto funds they’re willing to lend into a single pool, a process sometimes called yield farming. Borrowers can then use these pools to take out a loan. Borrowers pay interest on the funds they borrow; lenders receive interest on the money they lend.
» Looking for more guides? Check out our glossary of crypto coins.
What is a Flash Loan?
A flash loan is a unique feature on the Aave platform. These are uncollateralized products that are possible thanks to the way Ethereum works (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.
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.
Aave is an open-source protocol, meaning anyone can see and verify how it works. The platform runs on the Ethereum blockchain. Unlike Bitcoins, which are mined using 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. Crypto rules and regulations on platforms like Aave are governed by smart contract code.
AAVE Coin Price
As of October 27, 2021, AAVE crypto was the 44th largest cryptocurrency with a market cap of $4.59 billion. The price of one AAVE coin was $350.54.
There are 16 million total AAVE tokens in circulation; that is the maximum amount that will be created. The total value locked (TVL) of the Aave protocol as of October 27, 2021 was $19.2 billion.
Aave is one of the largest DeFi platforms.
Recommended: What is DeFi? A Guide to Decentralized Finance
History of Aave
Aave launched in September of 2017 and was originally known as ETHlend. Aave was created by Stani Kulechov. He was not happy with the fact that there were few lending applications built on Ethereum.
In September 2018, the protocol was rebranded and became Aave. In case you’re wondering, What is Aave, and what does it mean?, the word “aave” means ghost in Finnish.
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, 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.
There are over 30 different types of crypto users can lend or borrow on the Aave platform: e.g. ETH (the native token of Ethereum), DAI, stablecoins like Tether or USDC, and more.
Should You Invest in AAVE?
Investors who believe that decentralized lending will continue growing may find AAVE crypto appealing.
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.
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 exchange account. Make sure the exchange provides trading for the AAVE cryptocurrency. AAVE trades on many popular exchanges like Binance, Huobi Global, Kraken, CoinTiger, and SoFi Invest®.
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 such as Uniswap, for example, requires only a crypto wallet like MetaMask. 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.
Aave allows users to borrow digital assets and earn interest on deposits/loans — thanks to it being an open-source, decentralized lending protocol built on the Ethereum platform. Though it’s known for its innovative flash loan product — uncollateralized loans that must be rapid within a single Ethereum transaction — users can also take advantage of lending and borrowing crypto using Aave’s liquidity pools.
AAVE crypto is one of two tokens used on Aave. Lenders can deposit crypto in a pool with other investors and get what’s called an aToken, which enables more accurate tracking of payments. Users who wish to borrow funds can post AAVE tokens as collateral, potentially earning a discount on loan fees. Using AAVE as collateral can also help raise borrowing limits for users.
If you’re interested in getting more involved in the DeFi space and specifically with protocols that focus on lending, you may want to buy AAVE. It’s easy to do when you open an account on the SoFi Invest® crypto trading app. SoFi Invest makes it simple and straightforward to trade crypto, stocks, and ETFs. With SoFi Invest, your crypto is kept secure, and you can trade 24/7.
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