Summary: AAVE operates as a lending platform where users can borrow and lend a wide range of cryptocurrencies without the need for a centralized intermediary. At the heart of AAVE's functionality is the creation of liquidity pools, which are collections of funds locked in smart contracts that facilitate these lending and borrowing activities.
Users who lend their digital assets to these pools earn interest, while borrowers can obtain loans by providing collateral, which ensures the system's security and efficiency. AAVE's innovative approach, which includes features like flash loans that allow for quick borrowing without collateral under specific conditions, exemplifies the protocol's contribution to the broader DeFi ecosystem by enhancing accessibility and flexibility in digital finance.
- Largest DeFi borrowing and lending protocol with over $3.5B in value locked on the platform.
- Available cross-chain on Ethereum, Avalanche, Arbitrum, Polygon and other networks.
- Launching a stablecoin called AAVE Ghost (GHO) designed to drive more value to investors and stakers.
What is AAVE?
AAVE is a decentralized finance (DeFi) protocol that facilitates the borrowing and lending of cryptocurrencies. Users can earn interest by depositing their digital assets into liquidity pools, which are then available for others to borrow by providing necessary collateral. The protocol is renowned for its innovative "Flash Loans," which are essentially uncollateralized loans that must be repaid within a single transaction block, thus creating opportunities for arbitrage and other financial strategies without requiring collateral
The recent upgrade, AAVE V3, has brought forward several significant improvements including enhanced capital efficiency and the introduction of cross-chain functionalities. It features the "Isolation Mode," which permits users to use specific assets as collateral to borrow only stablecoins, thereby augmenting the security and decentralization of the system. Another notable addition is the "E-mode," which optimizes capital efficiency when the collateral and borrowed assets have correlated prices, offering users increased borrowing power. This version also successfully reduces gas costs by around 20-25%, making transactions on the platform more economical
How Does AAVE Work?
AAVE operates by enabling individuals to deposit assets and secure loans against them. A participant can allocate their cryptocurrency assets into the AAVE system, transforming into a liquidity provider and accruing interest as a reward for facilitating capital. Borrowers have the privilege to use their cryptocurrency assets as security, obtaining loans denominated in ETH or stablecoins like USDC or DAI.
The platform employs a sophisticated risk evaluation mechanism, assisting users in adeptly navigating their exposure to market fluctuations. AAVE offers flash loans and grants users the capability to establish their personal money markets or engage in lending activities within them.
How High are AAVE Yields?
The yields on AAVE's available markets will vary depending on on-chain activity and demand for borrowing. At the time of writing, AAVE’s supply rate for ETH on Ethereum mainnet is 1.59%. This is very low compared to historical yields because demand for credit in decentralized finance (DeFi) has decreased significantly as the bear market continues to worsen.
That said, the yields on AAVE are still competitive compared to other money-market protocols and have minimal smart contract risk. Furthermore, the yield may be higher if you’re staking specific tokens like aLINK or aDAI, which is currently at 10% and 7.5%, respectively. You can view the top 10 pool APYs below provided by DefiLlama.
AAVE Fees
AAVE charges three different types of fees, which include borrowing, lending and flash loan fees. The borrowing fee is 0.09% per year for ETH-based assets, while the lending fee is 0.04%. The flash loan fee is also low at just 0.09%. There are also variable fees to supply and withdraw assets from the protocol depending on the network you use.
For example, gas fees on the Etheruem blockchain are relatively high due to the high-demand for blockspace. Whereas Layer 2's cost significantly less and are generally under $1 to deposit or withdraw cryptocurrencies from the AAVE protocol.
What is the AAVE Token?
The AAVE token (AAVE) is the native utility token of the platform. It is used for governance and to incentivize liquidity providers, borrowers, holders and users of the platform. Using AAVE tokens, users can vote on proposals that will impact how the protocol functions, such as increasing or decreasing fees and introducing new features.
Additionally, users who stake AAVE receive revenue from the protocol and higher yields when they supply assets in the protocol. AAVE stakers will also receive revenue from the forthcoming AAVE stablecoin (GHO), which is expected to be released in Q1 2023.
What is the AAVE Ghost (GHO) Stablecoin?
The AAVE team has announced an over-collateralized stablecoin product called AAVE Ghost (GHO). The token will be pegged 1:1 with the US Dollar and users can mint it at a certain collateralization ratio relative to their deposited assets. The GHO stablecoin will only be mintable against WETH, WBTC, USDC and AAVE when initially launched.
The GHO stablecoin will also be available on AAVE’s Layer 1 and Layer 2 deployments, allowing users to take advantage of the reduced gas fees.
Is AAVE Safe?
Engaging with AAVE might potentially be more secure compared to utilizing centralized lending platforms. This stems from the fact that platforms like AAVE function on a transparent and trustless blockchain network, which shields them from conventional financial misconduct witnessed in platforms such as FTX and Celsius.
Moreover, all transactions and lending activities on AAVE are recorded and verifiable on the blockchain, offering an enhanced layer of transparency and safety. Nonetheless, akin to any financial endeavor, it is vital to conduct personal research and thorough analysis before opting for any lending platform, AAVE included, and to remain cognizant of the possible risks entailed in using these platforms.
Final Thoughts
In conclusion, AAVE is a formidable force in the DeFi world, offering innovative solutions for cryptocurrency borrowing and lending. Its recent upgrade, AAVE V3, introduces enhanced functionalities and user-security tools, optimizing transaction efficiency and lowering costs. Users can benefit from various financial strategies, including low-cost liquidity and arbitrage opportunities, without compromising on security.
Co-Founder & former Investment Banker (Finance MBA) turned Full-Time analyst and Head of Research at Buy Bitcoin Bank. Left traditional finance to pursue my interest in digital assets and decentralized finance.
