Aave is a decentralized money lending protocol that has recently gained traction, having released a workable DeFi solution. In this article, we’ll review its peculiarities, some key milestones in 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. It 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 Decentralized Finance (DeFi) takes the decentralized concept of blockchain and applies it to the world of finance. Build... wallet partners, developers, and projects contributing to Aave. This variety of products is powered by the native token — AAVE.
The most significant integral aspect of the Aave system is its open-source liquidity protocol launched on January 8, 2020. It was created with the goals of unlocking capital from smart contracts, improving capital flow within the DeFi ecosystem, and empowering 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, aToken has integrated the EIP-2612 proposal which allows for payment of fees with ERC-20 tokens without gas approvals.
Credit Delegation (CD). It allows a depositor to earn additional funds by delegating a credit line to someone they trust. In this way, a depositor can use the Aave Protocol to earn interest without needing 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 the interest rate volatility. 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’re 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 more than 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 the condition that 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
- Generating trading profits
- Swapping cryptocurrencies automatically
- Collateral swapping
Regardless of the purpose, the payback mechanism is protected by the code, which contributes to the overall security of the system. This feature also 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 the Aave protocol. At first glance, they look much the same. However, there are some significant differences between them.
Here’s what Compound and Aave have in common:
- Based on the same concept
- Offer overcollateralized cryptocurrency lending
- Allow earning interest on deposits
- Have governance tokens
- ERC-20 tokens represent underlying assets
Despite their similarities, a few key points set Compound and Aave apart. Among these differences are the following:
- Aave’s most notable distinctive feature is uncollateralized Flash Loans.
- Aave offers a wider range of tokens for borrowing and lending: 15+ 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 receive 75%, whereas Compound gives 66%.
- Compound has, on average, lower lending rates and borrowing fees than Aave.
- Compound is easier for beginners to use and navigate.
- To encourage participation, Compound gives lenders and borrowers COMP token fractions every few seconds.
In general, Aave’s unique features and higher payout options make it a more viable solution than Compound.
The Aave platform is powered by the 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 2020, when the migration to the new currency began. LEND has been swapped for AAVE at a rate of 100:1. The total coin supply was converted 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. In order to increase the token value, coins collected from fees are burned. Users can buy AAVE from exchanges, or earn tokens 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 Safety Module protocol to provide insurance to depositors. Stakers earn staking rewards and protocol commissions.
- Proposing. Users are allowed to propose platform changes.
- Voting. Aave provides its holders with protocol-level governing rights, used to decide on Aave Improvement Proposals (AIPs), new features, and future protocol updates.
In addition, if AAVE holders pay commissions by using AAVE, they can further examine loans before they’re released to the general public. Borrowers are not charged with fees if they take out loans denominated in the AAVE token.
The History of Aave
In November 2017, Stani Kulechov established a peer-to-peer (P2P) lending platform, ETHLend, in response to the lack of loan applications on Ethereum. Since then, some important events have transpired in the ecosystem.
- November 2017: ICO for ETHLend token (LEND) raises 16.2 million USD.
- September 2018: ETHLend undergoes rebranding to Aave, integrating a wider variety of platform features.
- January 8, 2020: ETHLend stops operating and the Aave protocol goes live on the mainnet, changing the company strategy from P2P lending to pool-based.
- July 2020: The Aave platform upgrades its protocol’s internal economics, with a focus on security.
- September 2020: Initial phase of “Aavenomics” and swapping LEND for the newly minted AAVE token begin.
- December 2020: Aave Protocol V2 is launched. The upgrade includes gas optimizations, credit delegation and liquidity mining.
As the project continues to evolve, major new milestones can be expected in the future.
AAVE Price History
AAVE’s price history begins with the 2017 ICO when LEND was sold at a rate of $0.0162 per coin. Since then, the token’s value has been steadily increasing. October 2020 began with the price at $53.49 per coin, which then grew steadily, reaching $84.31 at the end of December 2020. AAVE’s unique selling points picked up from the crypto market as the protocol is self-sustaining to allow “flash loans” with uncollateralized loan options in the DeFi space as long as it’s paid back within the same transaction.
As the demand for DeFi increases, AAVE became more valuable and eventually leads to its all-time high of $666.86 on May 18, 2021. However, the trend declined and AAVE retracted and was trading at a consolidation price of $220 to $315 range. Currently, AAVE is trading at $384.79 three months after its all-time high. It’s showing a positive trend, but will it sustain in the long run?
What Is the Future of AAVE?
The future of AAVE looks really bright at the moment. The global crypto market capitalization has grown incredibly, reaching more than $1.7 trillion. We can therefore assume that the hype around digital assets will not diminish and that the need for online borrowing in the form of cryptocurrencies will only 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’s 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 information from various sources.
The Economic Forecast Agency 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.
Digitalcoin predicts that December 2021 will end with a price of $627, increasing to $756 in 2023. By 2025, 1 AAVE will cost $1,347.
Walletinvestor expects a long-term increase, with a price prognosis of $5,468 for 2026, expecting revenue around +1,379.6% with a 5-year investment.
According to TradingBeasts, 2021 will end with AAVE’s price at $477, followed by a further increase during 2022–24, with the price fluctuating between $800–$1,190.
We can see that many analysts are optimistically expecting the coin’s 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 The market capitalization (or market cap) of a cryptocurrency is a measurement of its market value. In other words, it..., 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 AAVE’s value is coin burning, which lowers the supply and serves as a positive price driver. Besides, token price, usage and popularity are tied to the adoption of the Aave platform by users, as well as the success of assets it lists.
The Bottom Line
AAVE represents a great solution for those who want to lend or borrow funds without having to rely on a bank or any other centralized financial institution. This decentralized approach, together with all of 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 Aave’s project is also expected to grow, together with the price of the coin fueling the platform, which makes it a very good investment indeed.