Aave is a decentralized finance (DeFi) protocol that enables users to lend and borrow cryptocurrencies without intermediaries. It has become one of the largest and most popular DeFi platforms since its launch in 2020.
Key takeaways
- Aave allows users to lend crypto assets to earn interest or borrow against their crypto by putting it up as collateral.
- The protocol uses smart contracts to automate its onchain lending and borrowing processes.
- Aave helped pioneer flash loans in DeFi and offers unique features like stable rate borrowing. Today, the protocol boasts over $11 billion in total value locked (TVL) across 12 different networks.
What is Aave?
Aave is an open-source, non-custodial lending protocol built on Ethereum and other blockchain networks.
For lenders, Aave provides an opportunity to earn interest by supplying cryptocurrencies to liquidity pools. aTokens, which are interest-bearing tokens that represent a user's deposited assets, automatically accrue interest. On the flip side, borrowers can take out overcollateralized loans by depositing supported crypto assets as collateral.
The protocol supports lending and borrowing for a wide range of tokens, from wrapped assets like WBTC to cryptodollars like Aave’s native GHO stablecoin. Aave's smart contracts automatically match lenders and borrowers, determine interest rates algorithmically, and manage the entire lending process without middlemen.
How does Aave work?
Aave V3, the latest version of the lending protocol, introduced several innovative features:
- 🧪 Isolation Mode: This allows Aave Governance to list new assets with specific debt ceilings, limiting the maximum amount that can be borrowed against certain collateral. Users in isolation mode can only borrow stablecoins approved by governance.
- ⚡️ High Efficiency Mode (E-mode): E-mode maximizes capital efficiency for assets with correlated prices. For example, users supplying one stablecoin can have higher borrowing power when borrowing other stablecoins.
- ⛓️ Portal: This feature enables users to move their assets seamlessly across different blockchain networks where Aave V3 is deployed, enhancing cross-chain functionality.
- 🔒 Risk Management Tools: Aave V3 implements new risk mitigation features such as Supply and Borrow Caps, and Risk and Listing Admins, providing additional security and stability to the protocol.
Why Aave?
Compared to traditional lending institutions, Aave offers several advantages:
- 🙌 Accessibility: Anyone with an internet connection and crypto wallet can access Aave's services without needing a bank account or credit check.
- 🔍 Transparency: All transactions and interest rates are visible on the blockchain, providing full transparency.
- 💨 Efficiency: Smart contracts automate processes, reducing costs and enabling near-instant transactions.
- ➿ Flexibility: Users can borrow multiple assets, switch between variable and stable interest rates, and use unique features like flash loans.
How to invest in Aave?
AAVE is the native currency of the Aave protocol. It serves multiple purposes, like facilitating Aave’s community governance processes and offering a staking instrument for users who want to earn yield by depositing to the Aave Safety Module backstop fund.
At the time of this guide's update, AAVE was trading around $106.65 per token with a market capitalization of approximately $1.59 billion, making it the 53rd-largest cryptocurrency in the market. You can purchase AAVE on major crypto exchanges like Coinbase or Kraken or decentralized exchanges like Uniswap.