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The Aave Platform and AAVE Token Explained

I have been fascinated by crypto for a long time now, and I enjoy sharing what I have learned about it on ToughNickel.



What Is Aave?

Aave is an application on the Ethereum blockchain that allows users to lend out cryptocurrencies and earn interest on them. With Aave, Ethereum users can earn a passive income with their crypto, or they can take out a crypto loan. Essentially, Aave is a crypto bank (like Celsius and Nexo) but it is decentralized and controlled by its users. All loans are automatically managed by smart contracts.

It was founded in 2017 under the name ETHLend, but it was later rebranded to Aave, which means "ghost" in Finnish. The application soon became one of the largest projects in the decentralized finance sector. Aave has its own token—called AAVE—that gained a lot of value during the DeFi craze in 2020.

Lending and Borrowing With Aave

Aave allows its users to lend and borrow 20 different Ethereum-based cryptocurrencies. If you deposit funds to their lending pool, you get an "a"-token of that crypto in exchange for it as a placeholder. For every 100 DAI that you deposit, you get 100 aDAI back. This aDAI then earns compounded interest. At the moment, DAI has a yearly interest rate of 12.21%, so after holding 100 aDAI for one year, you would have 112.21 aDAI, which you could then swap back into DAI at an exchange rate of 1 aDAI = 1 DAI.

It is important to know that the interest gained with Aave is flexible. The interest rate that you can see on the Aave website always shows the average yearly interest rate for the past 14 days. It can fall or rise at any time depending on how high the demand for a particular cryptocurrency is. The interest rate is usually always higher than that of a regular bank account, especially for stablecoins like Tether.

The Aave interface displaying a few of the available cryptocurrencies

The Aave interface displaying a few of the available cryptocurrencies

If you want to borrow crypto with Aave, you first need to deposit collateral. This can be any asset on Aave. The amount you borrow cannot be higher than your collateral. The reason why someone would want to take a loan there is that they can gain liquidity without lowering the amount of crypto they hold, which they wouldn't want to do if they are bullish for their asset.

When borrowing, users can choose a loan with a stable interest rate or one with a variable interest rate. The rates offered are always based on how high the demand for the currency is. The fixed rate is usually higher, but the flexible rate has the possibility to rise higher.

To deposit or borrow crypto from Aave, you only need to connect your wallet to the application. This can be done with a browser wallet like MetaMask or Trustwallet, but you can also connect a hardware wallet like a ledger to Aave. The Coinbase crypto exchange also lets its users connect their funds to the DeFi bank.

Since Aave runs on Ethereum, it can only be used to borrow and lend Ethereum-based cryptocurrencies like UNI or ENJ. Bitcoin cannot directly be lent or borrowed, but Wrapped Bitcoins, which are special Bitcoins that have been modified to be able to run on Ethereum, can be used on Aave.

Aave is Finnish for "ghost"

Aave is Finnish for "ghost"


In addition to normal lending and borrowing, Aave can also be used for flashloans. A flashloan is a crypto loan that anyone can take without a collateral as long as they pay the loan back within the same transaction. This seems useless, but in the DeFi world, this sort of loan can be used to instantly move funds to a better opportunity.

If you have a loan with a 10% interest rate on another crypto-lending platform, like Compound for example, then you could use a flashloan to move your debt to another platform with a 5% interest rate. In this case, you would borrow crypto from Aave to pay off your debt on the first lending platform and then borrow crypto to pay off your debt on Aave on the new platform.

A flashloan lets you instantly move crypto assets for a small fee. However, using flashloans requires a deep understanding of smart-contract programming, so it’s not for everyone.

The AAVE Token

AAVE is the native token of the Aave platform. It is not a cryptocurrency but rather a token that runs on the Ethereum blockchain. That means that it depends on Ethereum, and users have to pay ETH gas fees when sending it.

Its main purpose is governance. Token holders can vote on requested changes and whether new cryptocurrencies should be added to the platform for lending and borrowing. The token is essentially a share of the Aave platform.

Back when Aave was called ETHLend, the native token was called LEND. This token has been replaced by AAVE, and LEND holders can swap their tokens for AAVE at a rate of 100 LEND = 1 AAVE. There is a max supply of 16 million AAVE, and 3 million of these may be locked up in a treasury smart contract that can be used for the development of the platform if AAVE holders vote for that.

AAVE price performance from September of 2020 to May of 2021

AAVE price performance from September of 2020 to May of 2021

Is AAVE a Good Investment?

The value of the token depends on the platform. The more crypto is being deposited and borrowed on Aave, the higher the price for its governance token will become. The token gained a lot of value during the DeFi craze in 2020.

Since Aave is one of the biggest decentralized finance applications on Ethereum, it is well established in the growing DeFi sector. Aave is also constantly being worked on and further improved. I believe the AAVE token is a very promising long-term investment, but all crypto-sector investments are inherently risky.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2021 Krypton Currency