What is AAVE?

Aave, formerly ETHLend, is a decentralized non-custodial borrowing and lending protocol that lets users deposit assets into liquidity pools to earn interest and borrow assets at a variable or fixed interest rate. It was launched in 2017 by Stani Kulechov, following a $17.8 million initial coin offering (ICO). Aave also allows users to take out uncollateralized, ultra-short duration loans known as Flash loans.

The decentralized protocol manages debt by ensuring that all loans (except flash loans) on its platform are over-collateralized, meaning the value of the collateral must be greater than the loan itself. If the value of a user's collateral falls below a certain threshold, the collateral is automatically liquidated to repay some of the debt. This ensures that there is always adequate liquidity in the system. 

What Is Aave: Quick Facts

• Aave is a decentralized borrowing and lending decentralized finance (DeFi) protocol.
• It is the second-largest DeFi protocol in the world by Total Value Locked (TVL), according to DeFiLlama.
• Aave maintains liquidity in its platform by requiring all loans, except very short-term loans called "Flash loans," to be overcollateralized and has a fail-safe liquidity pool known as the Safety Module.
• Its native AAVE token is used for governance and can be staked in the Safety Module for rewards.

About Aave – How Does Aave Work?

Aave, although originally built on Ethereum, is a multi-chain DeFi protocol, meaning it's supported by several blockchain networks, including Fantom and Avalanche; which is actually one very unique thing about Aave. It supports Ether and other ERC-20 tokens (tokens created using the Ethereum blockchain's ERC-20 standard) and operates in a peer-to-peer, decentralized manner as it's based on smart contracts.

So how does Aave work to maintain liquidity in its system? Well, it does that by requiring that all loans, except flash loans that typically last only a few seconds, be over-collateralized. It automatically liquidates the collateral of debtors who are unable to maintain their loan-to-value ratio (LTV) to repay a portion of their debt and restore liquidity. The LTV defines the maximum amount that can be borrowed with a specific amount of collateral. You might be wondering "what is Aave's LTV?" It's 75%.

When users deposit their assets into one of Aave's liquidity pools, an aToken (e.g., aETH) is minted and given to them. The aTokens serve as a claim to and have the same value as the deposited collateral. aTokens earn interest in real-time and can be redeemed for the underlying asset (collateral) at any time. They also entitle holders to a portion of the fees obtained from flash loans.

The interest earned by users fluctuates based on the lending supply and borrowing demand of the asset in question. Assets that offer higher interest rates often come with a higher risk of the user not being able to access sufficient liquidity, as they typically have utilization rates close to 100%.

Aave also has a designated liquidity pool, known as the Safety Module. What is Aave's Safety Module? Well, it acts as a fail-safe in case there's insufficient liquidity in the system. Users deposit their AAVE tokens in the Safety Module and earn more AAVE tokens as a reward. These tokens are sold off to restore liquidity whenever there's such a risk. The Aave protocol is governed in a decentralized fashion by the holders of the AAVE token.

Where Is AAVE Used?

AAVE is primarily used for governing the Aave protocol, as it grants the power to vote on matters concerning the protocol to its holders. With AAVE, you can vote on governance proposals and even create your own, enabling you to have a say in the future of the protocol. The more AAVE tokens you hold, the greater your voting power. AAVE's usefulness, however, is not limited to voting; it can be used for several other things, such as:

Trading

With the aid of a cryptocurrency exchange like OKX, you can speculate on the value of AAVE tokens in an attempt to make a profit. It's worth noting that cryptocurrencies are highly volatile and shouldn't be traded by inexperienced individuals.

Earning Interest

With an investment service like OKX Earn, you can earn interest on your AAVE tokens. OKX Earn,  in particular, lets you earn interest on your tokens over flexible and fixed terms while you maintain complete ownership of them.

Staking in the Safety Module

AAVE holders can "lock" their tokens in the Safety Module, which is the liquidity pool that acts as a safeguard against any liquidity issues that might occur. Users who deposit their tokens in this pool earn additional AAVE tokens as a reward. 

What Is Aave: History 

Aave was founded in 2017 as ETHLend by Stani Kulechov while he was studying law at the University of Helsinki. At the time, Aave was one of the first DeFi protocols in existence. 

Kulechov, who graduated with a Master's degree in law in 2020, now acts as CEO of Aave Companies (the organization that supports Aave) with a mission to create a more transparent, equitable, and inclusive financial ecosystem through the protocol, which is what brought about Aave in the first place.

Following its launch, Aave raised $17.8 million in an ICO with the goal of building a decentralized peer-to-peer lending platform, selling almost a billion units of LEND—its native token before rebranding to Aave. Upon switching to a liquidity pool model (from peer-to-peer lending) in 2018, the organization rebranded to Aave. 

In 2020, Aave Companies launched the Aave protocol—the open-source, non-custodial protocol that it has since operated on. The launch of the Aave protocol attracted massive interest from users, with the "Flash Loan" feature captivating cryptocurrency developers and enthusiasts from all over the world.

AAVE Tokenomics

The AAVE token is the ERC-20-based native token of the Aave protocol. Its main use is for the governance of proposals about Aave, but it can also be traded freely on cryptocurrency exchanges and staked in the Safety Module for rewards.

AAVE, which started trading at around $50 in May 2020, has a total supply of 16 million. Before the "migration" from ETHLend to Aave, the token was called LEND. LEND tokens were later exchanged for AAVE after the migration at the rate of 100 LEND per AAVE, reducing the number of tokens held by users from 1.3 billion to 13 million. What is AAVE's circulating supply? As of the time of writing, it stands at 13.9 million.

Three million AAVE tokens were also issued and allocated to the AAVE ecosystem reserve. This reserve is controlled by AAVE holders and the funds in it are meant to incentivize the development of the Aave protocol and ecosystem. AAVE's supply, like the protocol it spawned from, is highly decentralized, meaning no entity has a significantly large holding and thus an outsized controlling interest in the platform. 

The revenue from fees charged to Aave's users is used to buy back and remove some of the tokens from circulation, a process common in DeFi known as "burning."

How Is AAVE Created? 

You've probably wondered "what is AAVE's creation process?" Since it has no blockchain of its own and runs on multiple chains. AAVE is neither created by mining nor staking. So how does AAVE work? Well, it is simply issued by the maintainers of the protocol according to previously laid out rules and systems. 

The development team behind Aave would typically need the majority of Aave users to vote on a proposal to increase the supply before proceeding to do so. In the case of a "Shortfall event", where a liquidity deficit has occurred or is likely to occur, AAVE tokens staked in the Safety Module are sold to cover the deficit. However, if this proves to be inadequate to restore liquidity, a proposal to issue more AAVE is then made to be voted on by the Aave community. If the community votes in favor of such, new AAVE tokens are issued and sold on the open market to cover the deficit.  

AAVE's Competitors and Standing 

Aave has a number of notable competitors, with the biggest ones, when ranked by TVL, being JustLend and Compound, according to DeFiLlama. JustLend, with a TVL of $3.24 billion at the time of writing, is the first and official lending platform of the TRON protocol and, just like Aave, allows users to borrow and deposit assets in pools in return for interest payments. Compound, which was once the largest by TVL but now has just $2.63 billion, is another decentralized Ethereum-based lending protocol that also utilizes liquidity pools to allow users to borrow and lend their assets for interest payments. 

Aave is currently the largest and most popular borrowing and lending protocol on the Ethereum blockchain and in the world, boasting a TVL almost $2.4 billion greater than its nearest competitor, JustLend. 

Aave's native AAVE token also leads its peers, it has a market cap of a whopping $1.4 billion, dwarfing Compound's COMP token, which has $562 million, and JustLend's JST, with just $250 million.

Aave, unlike JustLend and Compound, is a multi-chain protocol, meaning it is supported by more than one blockchain. Aave also has a higher LTV ratio than Compound, which means you can borrow more of an asset for a given amount of collateral on Aave than on Compound. And while they all offer reasonably similar annual percentage yields (APY), Aave is the only one that supports Flash loans.

Aave's Partnerships and Investors

Aave is a highly composable DeFi protocol—it integrates with multiple other DeFi protocols to offer advanced features to its users and, as a result, has quite a number of partners. It has partnered with other leading DeFi platforms like Balancer, Centrifuge, Uniswap, and MakerDAO, the largest DeFi protocol by TVL. It has also partnered with the popular and fast-growing Ethereum sidechain, Polygon.

Aave has raised a total of $49 million over 8 rounds of funding, including 4 ICOs, a seed round, and a venture round. The organization has raised this sum from a total of 16 investors, including some very high-profile names such as Alameda Research, Blockchain.com Ventures, Three Arrows Capital, and IBM.

Aave's SWOT Analysis

Aave's Strengths

Aave sets itself apart from the competition in many ways. One of its most distinguishing features is having multi-chain support, which allows it to support a wide range of cryptocurrency assets and cater to users beyond just one blockchain. Other notable strengths include its high level of composability, considerably higher LTV ratio than its competitors, support for flash loans, and the support of a for-profit organization, Aave Companies.

Aave's Weaknesses

Perhaps Aave's biggest weakness is that it requires loans on its platform to be over-collateralized in order to minimize the risk of default. This represents a significant barrier to adoption for many who would prefer to make use of their assets rather than have them tied up as collateral. Aave also faces fairly stiff competition from new entrants and incumbents. Additionally, some fear that the protocol's cross-chain nature could make it more vulnerable to attacks.

Aave's Opportunities

Aave allows users from anywhere in the world to access loans collateralized by easy-to-acquire digital assets without requiring them to have a credit rating or monthly income, as is typical with traditional lenders. This could prove very alluring to a lot of users underserved by the traditional financial industry. Additionally, its flash loans allow users to carry out trades and perform tasks unprecedented in the world of finance. 

Aave is also taking steps to even further scale its platform. Cross-chain governance, another peculiar thing about Aave, grants users the ability to send governance proposals across blockchains. Aave is now the first DeFi protocol to implement it, and it is a feature that has the potential to further expand Aave's market. The Aave team has also announced the development of a mobile wallet and plans to expand to popular protocols Curve Finance and Sushiswap.

Aave's Threats

Aave faces a lot of competition from established players as well as new upstarts, as competition in the DeFi lending space continues to heat up. New competitors are constantly entering the lending market in a bid for their own share of it. Aave, like its peers, also faces the risk of unfavorable regulatory policies and theft of user funds. 

Aave's Roadmap

The team behind Aave has been relentless in developing new features for the protocol since the rebrand and launch of the Aave protocol in 2020. One notable feature that was recently launched is the cross-chain governance bridge. The cross-chain governance bridge is a smart contract that allows the Aave protocol to be governed across blockchains. Users can send governance proposals or Aave Improvement Proposals (as they're often called) from any blockchain that supports the Ethereum Virtual Machine (EVM) and cross-chain messaging. In February 2022, Aave's first cross-chain governance proposal was passed, marking DeFi's first as well.

Other developments in the works include a mobile wallet and an expansion to popular DeFi protocols Curve Finance and Sushiswap.

Aave News, Updates, and Highlights

GHO Stablecoin

In July 2022, the company supporting the Aave protocol announced that it is going to be launching a stablecoin called GHO. Users must provide collateral to mint GHO, and like loans on Aave, GHO must be overcollateralized. The stablecoin, which in many ways is similar to MakerDAO's DAI, will have its value pegged to the US dollar and be backed by a basket of crypto assets chosen by users. Users also earn interest on their deposited collateral.

Expansion to Curve and Sushiswap

In an attempt to scale its markets, Aave has announced an expansion to DeFi protocols Curve Finance and Sushiswap, two of the largest decentralized exchange (DEX) protocols on Ethereum.

Mobile wallet

On the 1st of January 2022, Aave CEO Stani Kulechov announced that they are building a mobile wallet. The price of AAVE reacted positively to the news.

Gasless Voting

Several holders of the AAVE token, especially those with small holdings, do not participate in voting on Aave's governance proposals due to the high gas fees involved in doing so. To solve this and improve inclusivity, the Aave team is trying to implement a feature that will allow users to vote on proposals for free.

Aave and Flash Loans

Flash loans, invented by the Aave development team, are a new financial tool. Flash loans are instant, uncollateralized loans that must be repaid in a single transaction. They take advantage of a blockchain's ability to revert transactions if certain conditions are not met. The condition, in this case, is that the borrowed funds must be returned to the lender before the transaction is completed. Lenders are paid a fee as an incentive, which makes flash loans particularly alluring to them since they are technically risk-free.

A flash loan allows a user to swap debt and collateral in a collateralized loan on Aave, so that they might, for example, swap volatile collateral for a stable one and avoid the risk of being liquidated. So, for example, if a user borrowed USDT while using ETH as collateral on Aave and the price of ETH was crashing, the user could take out a Flash loan right on Aave to swap their volatile ETH collateral for less volatile crypto or stablecoin. 

Where To Buy AAVE

One of the easiest ways to buy AAVE is via a centralized cryptocurrency exchange like OKX. OKX lets you purchase AAVE using your credit or debit card or bank transfer, among a range of other payment options. OKX supports over 92 local currencies and even lets you buy AAVE with other cryptocurrencies.

How To Store AAVE

On an Exchange Like OKX

Centralized exchanges like OKX provide you with crypto wallets where you can store your assets and abstract away all the complexities of securing and using them. OKX's wallets, for example, can hold multiple different assets, saving users the hassle of having to maintain multiple different wallets and private keys. Though storing your assets on centralized exchanges comes with many benefits, it is generally not advised for users who want to store assets for extremely long periods.

In an ERC-20 Wallet

Aave is an ERC-20 token, and so it can be stored in any ERC-20 compatible digital wallet like Metamask or MyEtherwallet. It is worth noting that the burden of storing and securing your private keys will be entirely on you if you store your tokens this way.

In a Hardware Wallet

Hardware wallets like the Ledger Nano S or Ledger Nano X are reputed to provide the best security for your assets. However, they may be too expensive or technical to use for some and will require you to secure them by yourself.

How To Stake AAVE

You can stake your AAVE tokens via OKX Earn, OKX Earn lets you stake AAVE over variable and fixed periods and earn passive income in the form of interest payments. You retain complete ownership of your AAVE and can withdraw them at any time.

Aave tokens can also be staked in their native dapp. These are typically done in Safety Module, where they earn a portion of Aave's transaction fees for their owners. Use their decentralized app (dApp) to stake the tokens.

FAQs

What Is Aave?

Aave is a multi-chain borrowing and lending DeFi protocol that allows users to borrow cryptocurrency assets using their own assets as collateral or lend assets in exchange for interest payments. It also allows users to borrow large amounts of money for very short periods without any collateral in exchange for a small fee.

What Is AAVE Used For?

AAVE, formerly LEND, is primarily used as the governance token of the Aave protocol, allowing holders to vote on and create governance proposals. It, however, has many other uses, such as staking and being used to restore liquidity in the event of a deficit. AAVE can be used for market speculation too.

Where Can I Buy AAVE?

One of the easiest ways to buy AAVE tokens is through a centralized exchange like OKX. OKX allows you to buy AAVE with your local currency and a convenient payment method, such as your credit or debit card or bank transfer, through a simple and user-friendly interface.

What Is Aave's Loan-To-Value (LTV) Ratio?

The LTV ratio defines the maximum amount of an asset that can be borrowed with a specific amount of collateral. It is expressed in percentages and denominated in ETH. So, for instance, with an LTV of 80%, a user can borrow 0.8 ETH worth of an asset for every ETH of collateral deposited.

Can You Mine AAVE?

No, AAVE cannot be mined. It is only the native token of the Aave protocol, which runs on Ethereum and other blockchains but is not a blockchain network by itself. AAVE is issued by the development team as they see fit, with the blessing of the decentralized governance community. There are strict rules in place governing how and when new tokens are to be issued.

How Can I Stake AAVE?

AAVE can be staked in the Safety Module for passive rewards. You can do that with your AAVE tokens via their decentralized app (dApp). A much more convenient and less technical way of earning passive income on your AAVE tokens would be through OKX Earn. OKX Earn is an investment service that allows you to earn interest on your AAVE over fixed and flexible periods.