Any contemporary financial system must include channels for people to lend and borrow valuable assets. Using these financial mediums, asset holders can earn interest on the funds they lend, or leverage on their debt to fulfill financial duties or invest when they borrow.
A major solution offered by blockchain technology in expanding access to crucial financial services is DeFi (decentralized finance). It enables individuals to make financial deals directly (peer-to-peer) and does away with financial middlemen like banks.
Creators of cryptocurrencies have introduced the "money market" concept in response to the demand for these services. One of these markets, Aave, is now one of the largest and most profitable.
Aave, similar to Uniswap, is a DeFi solution that enables users to lend and borrow funds and assets outside the services of traditional financial institutions.
The difference is that Aave has several secondary markets driven by its community, such as Aave ARC mainly for traditional financial institutions and Aave RWA for real-world asset trading.
Aave enables users to borrow a variety of cryptocurrencies without any interference from banks, brokers, or other intermediaries. For those who want to be involved in the decisions and future of DeFi solutions, its native governance token, AAVE, is a great investment consideration.
Purchasing AAVE means supporting a fast-developing technology that is certain to permanently change how we see financing. Initially founded on the Ethereum network, now the Aave protocol works in more than 6 networks (Polygon, Avalanche, Fantom among others).
The tokens used inside the protocol are ERC20 tokens. The ERC20 token standard is an implementation of fungible tokens that process crypto transactions via the Ethereum blockchain.
The protocol was created and is managed by a DAO (Decentralized Autonomous Organization). This indicates that it runs a decentralized governing system operated by those who own AAVE tokens.
In this article, we will breakdown Aave and how it operates by discussing:
- How Aave Works
- How to Borrow on Aave
- How to Lend on Aave
- How to Invest in Aave Native Currency
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How Does Aave Work
With Aave, users do not need a traditional financial organization to handle the management of their assets. They merely need to ensure that the Aave protocol will run true to code.
The Aave program allows users to transact with more than 30 different cryptocurrencies (this may vary according to the network), like ETH, BAT, and MANA. Users may lend or borrow these cryptocurrencies from other Aave users.
Borrowers on Aave are required to provide collateral before receiving loans, much as borrowers on other decentralized lending platforms.
In addition, the maximum amount of money they may borrow is limited to the value of the collateral that they submit.
Key Aave Features
The virtual currencies pooled by users for lending are gathered into liquidity pools. It is from these funds that the protocol lends to other parties.
New aTokens (The "a" is for "Aave.") are distributed to everyone who provides liquidity for the network by pooling their digital assets. Therefore, you obtain a return of aETH, when you deposit ETH into the liquidity pool.
You will get a portion of the system's instant loans as well as interest on any aTokens that you hold. How much you make depends on how saturated the liquidity pool you enter your virtual assets into. You won't make too much profit if you put tokens into a pool that is extra liquid.
You will, however, earn more interest if you deposit scarce tokens that the protocol is severely lacking at the moment. As for borrowers, interest rates change based on the kind of currency being borrowed.
The aToken is tied to the cost of a specific asset and encoded in a way that ensures lenders get paid interest on deposits. For instance, one may use BAT as collateral while borrowing ETH.
This makes it possible for a borrower to obtain a variety of cryptocurrencies without really having to acquire any of them.
Flash loans are a kind of non collateral needed loan that may be obtained using the Aave protocol. However, both the loan and its repayment must be completed in a very short period (the same transaction).
The liquidity that is available in Aave's lending pools often exceeds the amount that is needed by borrowers. Flash loans are so-called because the whole procedure is completed in the time it takes to add one block to the chain.
Borrowers that use flash loans make a nominal payment in exchange for the ability to withdraw a sizable quantity of cryptocurrency without providing any kind of security and to repay the loan inside the same transaction as it was issued.
If the loan is not returned before the completion of the block, the transaction will be annulled. These loans are often used for self liquidation, the trading of collateral, and arbitrage.
Aave began distributing version 3 of the protocol in March 2022. This version adds a function known as Portal which enables Aave to run without interruption across all blockchains.
This means you can use Aave to take part in the loan or borrowing processes on other chains such as Solana, Harmony, Fantom, or Avalanche.
How To Borrow on Aave
To borrow cryptocurrency from an Aave pool, you must first make a cryptocurrency deposit onto the platform that will be used as collateral. Using Aave you can borrow a cryptocurrency that is different from the one you put in.
Aave borrowers are required to provide a collateral equal to or above 120 percent (this may vary according to the cryptocurrency or token to be borrowed) of the value of the asset they want to borrow.
Aave loans are a fantastic choice for those who own cryptocurrency that they would prefer not to sell but need liquid funds.
If the price of the cryptocurrency you deposited climbs in the duration of your loan, the amount of crypto that you originally placed will be valued higher, and you will be able to withdraw some of your collateral.
On the other hand, let's say that during the loan term the value of your deposit drops to a level that is lower than 82.5 percent of its initial value (this percentage may vary), Aave may liquidate your position by selling your collateral to a liquidator or you can keep collateral intact by injecting more collateral.
How To Lend on Aave
Deposits may be made to the numerous crypto pools on the Aave platform by anyone wishing to maximize their cryptocurrency holdings. The interest on the loans taken by borrowers is then dispersed to the lenders.
The Aave protocol is also called a decentralized liquidity market protocol since lenders provide its liquidity. Since Aave operates as a non-custodial platform, depositors who lend their cryptocurrency to Aave pools never relinquish full ownership of their cryptocurrency.
Tether, DAI, USD Coin, and Gemini dollars are just a few of the stablecoins that Aave presently has pools for. Avalanche, Fantom, Harmony, and Polygon are a few additional marketplaces that you can access via the new Portal feature.
Aave furthermore offers pools for physical assets (RWAs), like real estate, freight, shipping bills, and payment advances. Physical companies may tokenize parts of their operations for such pools with the assistance of an Aave partner company called Centrifuge.
Investors may buy (or keep as collateral) these tokens after they have been tokenized, and they will function like bonds and provide a return on their investments. Therefore, real-world enterprises may borrow money using these assets as security.
How to Invest In Aave
Aave has two distinct kinds of tokens, including aTokens which are Ethereum Classic (ERC-20) tokens that have been distributed to lenders in exchange for interest payments on deposits. These tokens should not be confused with AAVE tokens, which are the governance token of the Aave system.
Being the native token of the Aave protocol, the token is one of the DeFi currencies with the greatest market cap. Based on the AAVE protocol, Aave tokens are what are used to regulate it.
Aave token holders have elective powers on essential issues concerning Aave, such as how the protocol's assets should be managed. Every AAVE token represents one vote. Aave tokens may also be posted as collateral by token holders, and doing so raises their borrowing limits.
Aave borrowers also have the perk of avoiding borrowing charges and may be eligible for a charge reduction if they pledge the cryptocurrency as collateral for their loan.
The total supply of Aave tokens amounts to 16 million tokens, of which 3 million are reserved for future use in the development of the program and are stored in a reserve contract.
When used to make payments toward fees on the Aave protocol, AAVE tokens are "burned," which means they are removed from circulation. This cements AAVE's status as a deflationary asset. AAVE can be bought or sold on a lot of different cryptocurrency exchanges, such as Binance or Coinbase.
To purchase AAVE simple follow these steps:
Choose an exchange
For the purpose of this tutorial, we will be using Coinbase, however, you can buy AAVE from other exchanges including Binance, Bitstamp, Uphold, eToro, Kukoin, and Huobi Global.
Get a Coinbase account
Install the Coinbase app on your device, then start the registration process. You will be required to provide a valid form of ID. You may also be asked to verify your residence. Based on where you reside, verifying your identification could take more than a few minutes.
Add a payment method
Link a payment method by tapping on the box labeled "payment method" in the menu. You have the option of using a debit card, opening a bank account, or initiating a wire transfer. After that, choose "Buy" from the list of available alternatives.
Choose Aave from the listed assets
Enter "Aave" into the search field and tap the Aave icon that appears in the list of results to bring up the screen where you can make your purchase.
Select your purchase quantity
Enter the amount you wish to spend in your currency of choice. It will be converted automatically by the software into an Aave amount.
Complete the purchase
When you are ready, tap the "Preview purchase" button. You will be shown the specifics of your transaction. Check that everything is in order, and then complete the transaction.
Wrapping up on Aave
Aave is the first company in the Decentralized Finance sector to provide the collection of financial tools that they currently offer. They also created the concept that is known as "cryptocurrency debt," which was previously unavailable.
Within the framework of conventional banking, debt is constantly being acquired to utilize as leverage in expanding assets and generating more income.
The door to the various types of markets has been opened for the very first time with the innovations Aave is bringing into the DeFi sector, and now that Aave is just beginning to garner traction may be an opportune time to invest.
Thanks for reading and stay tuned for more useful content about DeFi platforms and how you can invest in them!