What is Aave, one of the biggest lending protocols?

Updated on 10 August, 2022 5:08 PM
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    Aave is one of the most famous projects in the DeFi world, which has made lending, borrowing, and earning interest on crypto assets highly convenient for crypto enthusiasts. So for people wondering what DeFi is, here is a sneak peek into what it holds and why is it gaining popularity amongst the crypto community today. DeFi, or decentralized finance, is a financial system not regulated by centralized authorities such as stock exchanges, brokers, banks, etc. They utilize smart contracts to process transactions and record the same.

    So for people fed up with another jargon of the crypto market, you need not be worried as we are here with a brief description of smart contracts. A smart contract is a coded contract written between a buyer and a seller, which defines their terms and conditions of trade. The contract is self-executable, and the transactions executed via smart contracts are irreversible and traceable. They are operated via code and function on the decentralized blockchain.

    Aave is a type of DAO or  Decentralized Autonomous Organization, a blockchain-based organization governed by native crypto tokens. People owning such tokens have the authority to vote on important proposals and issues related to DAO.

    History of AAVE

    Aave was initially known as “ETHLend” and launched in 2017. It was co-founded by Nolvia Serrano, Jordan Lazaro and Stani Kulechov. Aave’s literal meaning is ‘ghost.’ While ETHLend was a peer-to-peer lending platform, Aave switched to a pool-based one. This implies that AAVE functions through liquidity pools instead of building a direct relationship between the lenders and borrowers. This has several benefits, such as an automated process and the luxury of diversified options.

    Now for those wondering why the developers decided to change the name of the protocol, here’s a short story for them. So right after ETHLend’s launch in 2017, the 2018 bear market provided no opportunity for the protocol to flourish, eventually leading to its downfall. Since ETHLend was based on a direct lender-borrower relationship, it could not ensure enough liquidity, and manually matching the loan requests to offers was cumbersome. To tackle these issues, the developers re-branded the protocol and brought some unique features to the table, which we will elaborate on in further sections of our blog.

    How does Aave work?

    Aave’s developers ensured to remove all technical barriers in the platform to provide a seamless experience to their users. Following are some basic steps that one needs to follow to start using the facilities offered by Aave:

    Step 1: Deposit funds into the liquidity pools of the network.

    Step 2: Borrowers must lock a more significant amount of collateral than the amount being withdrawn.

    Aave’s Native Token

    The native token of Aave exists by the same name, i.e., AAVE, which is an ERC-20 token. In addition to being used as a governance token, AAVE is also an insurance fund for depositors. ETHLend had its native token with the name LEND, which AAVE replaced at a rate of 100:1 as ETHLend’s users migrated from the platform. When users deposit a certain amount of AAVE, they receive aTokens in return that facilitate earning of interests on the amount lent.

    Features of Aave

    Aave has several unique features that make it one of the most widely used DeFi platforms. Some of its features include:

    • Traditional lending and borrowing following the model of over-collateralization
    • Swapping of collaterals.
    • Flash loans with a negligible interest rate of only 0.09%
    • Flexibility to switch between floating and fixed interest rates.

    These unique features of Aave make it user-friendly and are the reason why so many people are investing in Aave.

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