Aave is a decentralized money lending protocol that has recently gained traction, having released a workable DeFi solution. In this article, we will review its peculiarities, some key milestones of its development, and share predictions on where it could be heading in the near future.
What is Aave?
Aave is a decentralized system of smart contracts running on the Ethereum blockchain that allows users to create money markets and earn interest by lending and borrowing cryptocurrencies in a trustless manner.
The Aave ecosystem consists of the Aave protocol, AAVE holders, liquidity providers, Ethereum and DeFi wallet partners, developers, and projects contributing to Aave. This variety of products is powered by the AAVE token.
The most significant and most integral aspect of the Aave system is the open-source liquidity protocol launched on January 8, 2020. It was created with a goal to unlock capital from smart contracts, improve capital flow within the DeFi ecosystem, and empower the community to make decisions. The key features of Aave Protocol 2.0 are Flash Loans, aTokens, credit delegation, fixed-rate deposits, rate switching, and Aave Governance. Let’s review each of them in detail.
aTokens. aTokens are interest-bearing tokens that are minted upon deposits and burned upon redemption. They accrue interest directly to borrowers. To reduce transaction costs in Aave 2.0, the aToken has integrated the EIP 2612 proposal which allows for payment of fees with ERC-20 tokens to be without gas approvals.
Credit Delegation. Credit Delegation is a feature where a depositor delegates a credit line to earn additional funds to someone they trust in case they only use the Aave Protocol to earn interest and not to borrow. Those who get credit lines are allowed to draw funds from a special Credit Delegation Vault. To protect funds, parties use an application called OpenLaw to sign terms and conditions agreements.
Rate switching. This model was implemented to protect borrowers from interest rate volatility and it allows them to switch between fixed and variable interest rates.
Trading functionalities. Deposited cryptocurrencies supported by Aave are available for trading even when they are used as collateral. Users are also provided with margin trading, which allows them to take long and short leveraged positions and enables liquidity providers to increase the weight of their deposits.
Governance. Aave Governance was released to enable AAVE token holders to delegate their votes to other addresses. To participate in Aave Governance, voters can sign messages from their cold wallets.
How Does Aave Work?
The Aave protocol allows users to earn interest on their digital assets and to borrow crypto tokens in the form of stable rate loans, variable rate loans, and flash loans. It offers 15+ cryptocurrencies for lending and borrowing including DAI, ETH, LINK, USDT, and AAVE.
Lenders provide liquidity by depositing funds that are collected into liquidity pools. Each pool sets assets aside as reserves to hedge against volatility. To avoid possible liquidity issues, Aave has set up liquidity pools on Balancer and Uniswap so lenders can redeem their funds at any time.
Similar to other Ethereum-based DeFi lending systems, Aave supports the concept of overcollateralized loans. This means that to borrow assets, users must first lock up collateral that exceeds the borrowed amount by 50-75%. This protects the funds in the protocol in case users cannot repay their loans. It is important that borrowers maintain the collateralization ratio otherwise their collateral is automatically sold or liquidated to repay the loan. Any interest earned by investing helps offset the interest rate accrued through loans.
Regardless of whether deposits are intended for lending or borrowing, users get interest-earning aTokens in exchange — which are pegged 1:1 to the value of the underlying asset. Each aToken is based on one crypto asset. For example, depositing ETH gives users aETH tokens. Such aTokens can be freely stored, transferred, and traded. This exchanging mechanism allows borrowers to access various cryptocurrencies without owning them.
Lenders have the opportunity to continuously earn interest on deposited assets. Interest rates depend on the currency, its lending supply, borrowing demand, and the utilization rate. In addition, aToken holders receive a percentage of fees accrued from Aave’s Flash Loans mechanism.
What makes Aave unique is that it allows customers to take instant loans without any collateral via Flash Loans, a borrowing mechanism primarily intended for developers. A flash loan is made on one condition in which the principal amount must be repaid within a single Ethereum transaction. In case the loan is not returned to the pool on time, the transaction gets reversed. This guarantees the safety of the funds in the reserve pool and nobody takes a risk. A flash loan requires a 0.09% fee and is completed within a 13-second period.
Flash Loans can be used for the following purposes:
- Refinancing loans
- trading profits generation
- Swapping cryptocurrencies in an automatic way
- Collateral swapping
Regardless of the purpose, the pay-back mechanism is protected by the code which contributes to the overall security of the system and allows users to borrow and lend funds without having to rely on any third party.
Aave vs. Compound: Similarities and Differences
Compound Finance and Aave have been the largest DeFi lending platforms and the largest competitors since the launch of Aave protocol. At first glance, they look much the same, however, there are some differences between them.
Here’s what they have in common:
- They are based on the same concept
- They offer overcollateralized cryptocurrency lending
- They allow earning interest on deposits
- They have governance tokens
- They have ERC-20 tokens representing underlying assets
Although similarities are aplenty, there are a few key points that set them apart. Among them are the following aspects:
- Aave’s most notable distinctive feature is uncollateralized Flash Loans
- Aave offers a wider range of tokens for borrowing and lending: 15+ ones as compared with 9 assets on Compound
- Aave offers both stable and variable interest rates with the rate switching service while Compound provides only variable ones
- Aave’s percentage on the collateral is higher; it permits borrowers to get 75%, whereas Compound gives 66%
- Compound has, on average, lower lending rates and borrowing fees than Aave
- Compound is easier to navigate and use for beginners
- To encourage participation, Compound gives lenders and borrowers COMP token fractions every few seconds
In general, Aave comes with a set of unique features and higher payout options than Compound, which makes it a more viable solution.
The Aave platform is powered by AAVE token, (formerly known as LEND), based on the ERC-20 standard. It was created to encourage users to manage and develop the Aave ecosystem by voting and staking their tokens.
LEND was the native token of Aave from 2017 to September 2020 when the migration to the new currency began. LEND has been swapped for AAVE at a rate of 100:1. The total coins supply was reduced from 1.3 billion LEND to 16 million AAVE. 13 million AAVE tokens were issued to be redeemed by LEND token holders, and 3 million tokens are held in the Aave Ecosystem Reserve to stimulate protocol growth.
AAVE tokens are designed to be deflationary. About 80% of platform fees are used by the protocol and to increase the token value coins collected from fees are burned. Users can buy AAVE from exchanges or earn by depositing or taking out a loan. The coins can be stored in any Ethereum-compatible wallet such as MyEtherWallet or Metamask.
AAVE Token Functions
The AAVE token has several functions and advantages, which include:
- Fee reductions. AAVE holders and borrowers get a fee discount for platform transactions if they use AAVE as collateral.
- Staking. AAVE tokens can be staked within the protocol Safety Module to provide insurance to depositors. Stakers earn staking rewards and protocol commissions.
- Proposing. Users are allowed to propose on the platform changes.
- Voting. AAVE provides its holders with protocol-level governing rights and is used to decide on Aave Improvement Proposals (AIPs), new features, and future protocol updates.
In addition, AAVE holders can further examine loans before they are released to the general public if they pay commissions in AAVE. Borrowers are not charged with fees if they take out loans denominated in the AAVE token.
The History of Aave
Stani Kulechov established a P2P lending platform ETHLend in November 2017 in response to the lack of loan applications on Ethereum. Since then some important events have happened in the ecosystem.
- November 2017. ICO for ETHLend token LEND raised 16.2 million USD.
- September 2018. ETHLend underwent rebranding and got the name of Aave to integrate a wider variety of platform features.
- January 8, 2020. ETHLend stopped operating and the Aave protocol went live on the Every blockchain protocol has a mainnet. This is a component of the blockchain where the transactions of a cryptocurre... changing the company strategy from P2P lending to a pool-based one.
- July 2020. The Aave platform upgraded its protocol’s internal economics with a focus on security.
- September 2020. The initial phase of Aavenomics and swapping LEND for the newly minted AAVE token began.
- December 2020. Aave protocol V2 is launched. The upgrade includes gas optimizations, credit delegation, and liquidity mining.
As the project continues to evolve, new major milestones can be expected in the future.
AAVE Price History
AAVE price history begins with the ICO when LEND was sold at a rate of 0.0162 USD a coin. Since then, the token value has been steadily increasing, and October 2020 started with the price of $53.49 per coin, which then grew with a steady performance ‘till it reached $84.31 at the end of December. The highest AAVE price of $555.04 was recorded on Feb. 10, 2021 during the bull run that occurred in the early stages of the year.
At the time of writing the coin is worth $370.99.
What Is The Future of Aave?
The future of Aave looks really bright at the moment. The global crypto The market capitalization (or market cap) of a cryptocurrency is a measurement of its market value. In other words, it... has grown significantly reaching an incredible number of over $1.7 trillion. That allows us to make assumptions that the hype around digital assets will not diminish and the need for online borrowing in the form of cryptocurrencies will increase. Since Aave is one of the most exciting projects in the DeFi industry we believe it will play a crucial role in this niche.
In a highly volatile cryptocurrency market, it is difficult to say if a token is a good long-term investment. However, some experts and analysis services are trying to predict the future of AAVE based on the information from various sources.
Longforecast predicts a price of $928 for early 2022 and $1,637 for the end of the year. This would mean a 344% increase, which they believe will be followed by a two-year decrease to $375 in 2025.
The Digitalcoin platform thinks that December 2021 will end with a price of $627 increasing to $756 in 2023. By 2025 1AAVE will cost $1,347.
Wallet Investor expects a long-term increase with the price prognosis of $5,468 for 2026 expecting the revenue around +1,379.6% with a 5-year investment.
According to TradingBeasts, 2021 will end with a price of $477 followed by a further increase during 2022-2024 with the price fluctuation within $800-1,190.
We can see that many analysts are optimistically expecting the coin price to increase, with profits between 300% and 3,000%.
AAVE’s price is affected by different factors. The first one is the growth of the overall crypto market capitalization, which means increasing currencies adoption. The second factor is the hype around the DeFi sector in which Aave is one of the most promising projects. Its leadership in the field of flash loans also counts. Another factor influencing the AAVE value is coin burning, which lowers the supply and serves as a positive price driver. Besides, the token price, usage, and popularity are tied to the adoption of the Aave platform by users and success of assets it lists.
The Bottom Line
AAVE represents a really great solution for those who want to lend or borrow funds without having to rely on a bank or any other centralized financial institution. The decentralized approach together with all the processes guarded by the code makes this platform transparent and secure. As the demand for such solutions has only been growing over the past few years, the capitalization of the project is also expected to grow together with the price of the coin fueling the platform, which makes it a good investment.