What is AAVE?
One of several emerging cryptocurrencies, Aave is a decentralized lending system that allows users to borrow, borrow and earn interest on cryptoactives, all without intermediaries.
Running on the Ethereum blockchain, Aave is a smart contracts system that allows these assets to be managed by a distributed network of computers running your software.
This means that AAVE users do not need to rely on a particular institution or person to manage their funds. They just need to trust that their code will run as written.
At its core, the AAVE software allows you to create pools of loans that allow users to borrow or borrow 17 different, criptomoedas including ETH, BAT and MANA.
Like other decentralized lending systems on Ethereum, Aave borrowers must deposit collateral before they can borrow.
Furthermore, they can only lend up to the amount of collateral they deposit.
Borrowers receive funds in the form of a special token known as an aToken, tied to the value of another asset. This token is then encoded so that creditors receive interest on deposits.
A borrower can deposit collateral in DAI, for example, and borrow in ETH. This allows the borrower to gain exposure to different cryptocurrencies without immediately owning them.
Aave may also introduce additional features such as instant loans and other forms of debt and credit issuance that take advantage of blockchains' unique design properties.
Who Created the AAVE?
Aave is a for-profit company founded in 2017 by Stani Kulechov and based in Switzerland. Kulechov studied law in Helsinki and founded Aave while still a student.
The company, originally called ETHLend, raised $16,2 million in an Initial Coin Offering (ICO) in 2017, during which it sold 1 billion units of its AAVE cryptocurrency — originally called LEND.
Another 300 million AAVE cryptocurrency units were kept for the AAVE team.
ETHLend differed from Aave in that, rather than pooling funds, it tried to match creditors and debtors in a peer-to-peer fashion. In 2018, ETHLend was renamed to AAVE, which means “ghost” in Finnish. ETHLend became a subsidiary of AAVE.
Other products and services announced at the time included a trading desk to handle big deals, a game studio focused on blockchain games, and a system to handle payments.
Why AAVE Has Value?
AAVE plays a central role in the management of the Aave software, allowing users to vote on changes to its rules and policies.
The Aave team is working on a proposal that would outline exactly how AAVE tokens are used to control the system, which is expected to be launched in mid-2020. As an example, an AAVE owner can vote on interest rates for certain loans and aspects of how deposits are managed.
In addition to this utility, AAVE gets value from its finite supply and the fact that it uses the fee income to buy AAVE and remove the cryptocurrency from circulation.
Currently, 80% of fees charged by the Aave system are used to burn AAVE. The remainder is used to pay off creditors. Constant burning of AAVE is expected to reduce its supply, thus raising the price of the token if demand remains constant.
How Does AAVE Work?
Aave is perhaps best described as a system of loan pools.
Os users they add the funds they wish to borrow, which are then collected into a pool. Borrowers can then withdraw from these pools when they take out a loan. These tokens can be traded or transferred as per the lender's wishes.
To facilitate this activity, Aave issues two types of tokens: aTokens, issued to creditors so they can collect interest on deposits, and AAVE tokens, which are the native AAVE tokens.
AAVE virtual currency offers holders several advantages. For example, borrowers of AAVE loans are not charged if they make loans denominated in the token. THEbesides, borrowers using the AAVE cryptocurrency as collateral get a discounted rate.
Owners of AAVE cryptocurrencies can better review loans before they are released to the general public if they pay an AAVE fee. Borrowers who post AAVE as collateral can also borrow slightly more.
Data company Nomics has a more extensive list of AAVE features.
AAVE allows certain loans, called “Flach loans”, to be issued and paid off instantly. These loans do not require upfront collateral and happen almost instantly.
Flash loans take advantage of a feature of all blockchains, which is that transactions are only finalized when a new transaction packet, known as a block, is accepted by the network.
Adding each new block takes time. In Bitcoin (BTC), this interval is approximately 10 minutes. In Ethereum, it's 13 seconds. A fast AAVE loan therefore takes place in this 13-second period.
Fast lending works like this: A borrower can apply for funds from the AAVE, but must pay those funds, at a rate of 0,09%, in the same block. If the borrower does not do this, the entire transaction will be canceled so that no funds will be borrowed.
Consequently, AAVE is not at risk and neither is the borrower.
A borrower may wish to use a flach loan to take advantage of trading opportunities or maximize profits from other systems built on Ethereum. It is possible to exchange different cryptocurrencies automatically using flash loan to generate profits commercials.
Note: Instant Loans have been combined to perform attacks on loan systems built on Ethereum, sometimes stealing hundreds of thousands of dollars in deposits.
Why use AAVE?
AAVE may be of interest to traders or investors who believe decentralized lending will continue to grow in popularity.
As of July 2020, the Aave system was among the most active decentralized lending systems on Ethereum, having accumulated $158 million in total deposits. Competing lending platforms include Compound and Maker, which have over $600 million in deposits.
You can also use AAVE if you want to have a say in the rules that govern the Aave system by voting on how fees charged for loans are distributed to AAVE token holders.
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