Lenders earn interest by depositing digital assets into specially created liquidity pools (similar to Compound). Borrowers can then use their crypto as collateral to take out a flash loan using this liquidity.
Aave (which means “ghost” in Finnish) was originally known as ETHLend when it launched in November 2017, and has successfully raised $16.2 million through an ICO round. However, the rebranding to Aave happened in September 2018.
$AAVE provides holders with discounted fees on the platform, and it also serves as a governance token.
Aave, and its predecessor ETHLend, were founded by Stani Kulechov. At the time, he was frustrated at the lack of lending applications on Ethereum — and his project was built before decentralized finance even existed.
Kulechov is a serial entrepreneur who went to law school and began programming when he was a teenager. He was an early adopter in the blockchain space. The CEO has said that he wanted to rebrand ETHLend as Aave so the company could offer a wider range of services beyond Ether lending.
According to Kulechov, Aave’s main target market are people who are already engaged in the cryptocurrency community.
ETHLend was different from Aave in that, instead of pooling funds, it tried to match lenders and borrowers in a peer-to-peer fashion. In 2018 ETHLend was renamed 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 large trades, a game studio focused on blockchain games and a system to handle payments.
The LEND cryptocurrency migrated to AAVE at a rate of 100 LEND tokens to 1 AAVE, dropping the total supply of its cryptocurrency to 18 million AAVE.
Aave is a lending protocol based on lending pools, where users can deposit cryptos into and lend cryptos out of the pool (similar to the principle of Compound), without the need for a one-to-one matching between lenders and borrowers. In addition to basic lend & borrow, the platform also supports flash loans (no-collateral loans) and fixed and floating rate conversions. The participants of the platform can be simply divided into lenders (depositors), borrowers and liquidators.
Lending Pool for lenders and borrowers
Each lending pool can have different types of tokens in it, and the total value of all assets expressed in ETH is the Total Liquidity of the lending pool. Each pool has an LTV (Loan-To-Value) metric, which is a weighted average of the LTV of the different assets. Each time the asset value in the pool change, the smart contract updates the pool's data and interest rate.
Lenders deposit funds they wish to lend, which are then collected into a liquidity pool, and then received an Aave interest-bearing tokens (aTokens for short) as representative and liquid asset. Borrowers may then draw from those pools when they take out a loan. Meanwhile, borrowers can choose whether they want variable or fixed interest rate. A variable interest rate will depend on the utilization rate of the pools. The higher the utilization rate, the higher the price of the interest rate.
More detailed algorithm please visit: https://docs.aave.com/faq/
Aave's interest-bearing tokens (aTokens)
Aave interest-bearing tokens (aTokens for short) are minted upon deposit and burned when redeemed. The aTokens are pegged 1:1 to the value of the underlying asset that is deposited in Aave protocol. aTokens provide holders with discounted fees on the platform, and it also serves as a governance token — giving owners a say in the future development of the protocol.
Aave allows certain loans, called “flash loans,” to be instantly issued and settled. These loans require no 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 bundle of transactions, known as a block, is accepted by the network.
Adding each new block takes time. On Bitcoin, that interval is roughly 10 minutes. On Ethereum, it’s 13 seconds. An Aave flash loan therefore takes place in that 13-second period.
The flash loan works like this: A borrower can request funds from Aave, but they must pay back those funds, and a 0.09% fee, within the same block. If the borrower doesn’t do this, the entire transaction is cancelled, so that no funds were ever borrowed.
As a result, Aave doesn’t take a risk and neither does the borrower.
A borrower may wish to use a flash loan to take advantage of trading opportunities or maximize profits from other systems built on Ethereum. It’s possible to swap different cryptocurrencies in an automatic way using flash loans to generate trading profits.
Note: Flash loans have been combined to execute attacks on lending systems built on Ethereum, sometimes successfully stealing hundreds of thousands of dollars worth of deposits.
- aToken can be traded with other assets backed by the protocol, which means aToken can be used as collateral can also be used for trading, so that the user can avoid liquidation due to a fall in the price of the original asset, or even make a profit.
- Allows users to repay the loan directly from the collateral (previous loan repayments required taking out the collateral, buying the borrowed asset, and then repaying the debt).
- Flash Liquidation: Users can participate in liquidation through Flash Loan.
- In V2 version users can execute flash loan for multiple assets in the same transaction.
- In version V2, debt positions are tokenized so that borrowers will receive a token representing their debt. This debt tokenization enables local credit delegation in the Aave protocol and allows borrowers to manage their debt positions from a cold wallet.
- With local credit authority, borrowers are able to take out unsecured loans using credit authority.
- Borrowers can have both fixed and variable rate positions in the same wallet and still be able to switch between the two rates at any time.
V3 Market offers greater capital efficiencies, increased security, and cross-chain functionality, while facilitating increased decentralization across the protocol. Aave V3 brings new features as well.
Here is what you can do on Aave V3:
Isolation mode allows Aave Governance to list new assets as isolated assets, which have a specific debt ceiling. Only certain assets can be borrowed in isolation mode—specifically, approved stablecoins. In order for an asset to become approved for borrowing, assets are voted on by AAVE token holders through the Aave Governance Forum.
The debt ceiling for an isolated asset is represented as the maximum amount in USD that can be borrowed against the user’s collateral with two decimals of precision.
High Efficiency Mode (E-mode)
The E-mode feature maximizes capital efficiency when collateral and borrowed assets have correlated prices. For example, DAI, USDC, USDT are all stablecoins pegged to USD. These stablecoins are all within the same E-mode category. Accordingly, a user supplying DAI in E-mode will have higher collateralization power when borrowing assets like USDC or USDT.
Only assets of the same category (for example stablecoins) can be borrowed in E-mode.
E-mode does not restrict the usage of other assets as collateral. Assets outside of the E-mode category can still be supplied as collateral with normal LTV and liquidation parameters.
More detailed information about Aave V3 please visit: https://docs.aave.com/faq/aave-v3-features