Aave

What is Aave (AAVE)?

Aave is a lending protocol that allows users to borrow and lend crypto assets. It is a crucial building block in the world of decentralized finance (DeFi).

Crucially, Aave is trustless. This means that users don’t need to trust a particular institution or person to hold or manage their funds. Instead, they can view Aave’s open source code and decide if the code will execute in the way that they want.

Aave, meaning “ghost” in Finnish, is meant to create a transparent and open infrastructure for DeFi. According to the Aave team, it is also meant to intrigue users with innovative technology.

Composed of a system of smart contracts running on the Ethereum blockchain, Aave is a sum of many parts: the Aave protocol, liquidity providers, AAVE holders, Ethereum and DeFi wallet partners, developers, as well as various projects contributing to the ecosystem.

Aave is a pioneer in the industry, having been created before the birth of decentralized finance on blockchain. It has broad support for over 20 cryptocurrencies and crypto assets across its protocols.

Aave also offers flash loans, where borrowing and repayment are done in a single transaction. These flash loans are used for various ends, such as arbitrage, collateral swaps, portfolio rebalancing, and even self-liquidation.

When Was Aave Launched?

Aave wasn’t always called Aave. It began its existence with the name ETHLend, which brought together the platform it was on, Ethereum, and its primary function, lending.

ETHLend came into being on May 1, 2017, and in November of that year, it held an initial coin offering (ICO) as ETHLend.io that raked in $16.2 million.

One billion native LEND tokens were sold at this ICO, with 300 million going to the founder and team.

The Aave rebrand happened in September 2018 and, just over a year later, the Aave V1 public testnet went live. The mainnet followed soon after, hitting the Ethereum blockchain on January 8, 2020.

Aave V2 core network went live in December 2020. Two months prior to that, LEND tokens were migrated to AAVE tokens at a ratio of 100:1, bringing the total number of tokens to 16 million AAVE.

Who are the Founders of Aave?

Aave was founded by Stani Kulechov, who became interested in blockchain technology and Ethereum while studying at the University of Helsinki.

Frustrated at the time by the lack of lending applications on Ethereum, Kulechov channeled his energy into creating ETHLend.

An early adopter of blockchain, Kulechov has stated that the ETHLend rebrand was partly due to wanting to expand the service offering of Aave beyond just lending.

Kulechov, who graduated from the University of Helsinki with a Master’s degree in Law, is a mentor to many founders and advisors of ICOs. According to Crunchbase, he is also an angel investor, with over 35 investments on record.

How Does Aave Work?

Aave broadly has two types of users, lenders and borrowers. Lenders deposit funds that they want to lend into the Aave protocol, and these funds are gathered in a liquidity pool. Each pool sets assets aside as a reserve in order to protect against volatility.

Borrowers use these pools to take out loans. In order to do so, borrowers have to first put up assets as collateral that exceed the borrowed amount by between 50 and 75 percent.

This stipulation that there is greater collateral than principal is called over-collateralization, and it protects the funds in the protocol in case users fail to repay their loans. If the collateralization falls outside this safe ratio, the collateral is automatically liquidated to repay the loan.

Users' deposits to the Aave protocol, irrespective of whether they are intended for borrowing or lending, also reward the user with interest-earning aTokens that are pegged to underlying crypto assets. Depositing ETH, for example, would give the user aETH.

These aTokens can be freely used and even traded, giving users access to cryptocurrencies they do not necessarily own. They also give holders a percentage of the fees accrued from flash loans.

Lenders, meanwhile, can earn interest while they keep their deposits locked into the platform. The rates that they receive will depend on what asset is being lent out, its supply, demand for borrowing, and utilization rate.

What Makes Aave Unique?

One of Aave’s key offerings is the flash loan. Flash loans allow users to take out loans without having to deposit any collateral. They take place with the stipulation that loaned funds are returned within the same Ethereum transaction as they were borrowed.

The safety mechanism involved here, especially given that there is no collateral involved, is that the transaction is reversed if the loan is not returned on time. This can happen since everything goes on within the same transaction prior to finalization.

While Aave was not the first platform to offer flash loans to users, it is certainly the most popular. And, although flash loans were intended for developers, anyone can make use of them, according to Aave’s guide to flash loans.

In fact, Aave is well-known and well-regarded in the DeFi space for its excellent liquidity and as a source of passive income for users via lending.

Unfortunately, flash loans have been subject to major attacks in the DeFi space. While Aave itself has not been attacked, other platforms have suffered. One of the best known attacks of this type occurred in 2021, when Cream Finance was attacked to the tune of $130 million.

Aside from flash loans and passive income, Aave also allows users to switch between fixed and variable interest rates. This allows borrowers to take better advantage of prevailing market conditions.

Finally, it is important to note that Aave is non-custodial. This means that even though you might have to ‘deposit’ your funds in Aave to use it, you’re simply interacting with a system of Ethereum smart contracts and not actually giving control of your funds over to Aave.

How is the Aave Network Secured?

Aave doesn’t have its own blockchain. Rather, it makes use of the Ethereum blockchain. The native token, AAVE, is an ERC-20 standard token on Ethereum.

This means that Aave actually uses Ethereum for its security. Ethereum is currently moving to a proof-of-stake consensus mechanism from its current proof-of-work Ethash algorithm.

Proof-of-work blockchains use computers, or, in Ethereum’s case, the graphics chips of computers, to solve complex mathematical puzzles. The computational power thus used is harnessed for network security.

The computer that solves the puzzle is given a reward, called the block reward, and is allowed to create the next block of the blockchain. All of the other computers, called miners, can validate this newly found block.

When Ethereum moves to proof-of-stake, this multitude of mining machines won’t be required any longer. Instead, validation will take place based on how many ETH nodes are locked away, or staked. The higher the stake, the better the chance to create a block.

In proof-of-stake, behaving according to the protocol is incentivized with a reward. Meanwhile, acting contrary to the protocol is disincentivized by slashing, where the node’s locked funds are confiscated.

What is the Use of AAVE?

The AAVE token is the native token of the Aave platform, and it has three main uses.

First and foremost, borrowers get discounts on platform transactions when collateral is posted using AAVE.

Secondly, AAVE is used for governance. Holders of AAVE can propose platform changes, and the token gives its holders protocol-level votes that are used to decide on proposals, new features, and future updates.

Finally, AAVE can be staked in the protocol’s Safety Module, which provides insurance to depositors. Through this staking, users earn rewards as well as protocol commissions. The Safety Module is intended to be used as a means of last resort in the case of a protocol shortfall.

Who Controls Aave?

Aave is decentralized and controlled by its holders via on-chain Aave Improvement Proposals (AIPs) using the native token AAVE. This process allows stakeholders to discuss all changes to the protocol and proposed upgrades before their deployment. AAVE held in cold storage as well as AAVE staked in the Safety Module can be used to vote on AIPs directly. Alternatively, such AAVE can be delegated to Aave protocol politicians to empower their votes.

How Much AAVE Is In Circulation?

The AAVE token was a result of the migration from the platform’s previous LEND token at a ratio of 100 LEND to 1 AAVE.

The supply changed from 1.3 billion LEND to 16 million AAVE, with the newly diluted 3 million AAVE being held in the ecosystem reserve for protocol incentives. The other 13 million AAVE were redeemed as planned by LEND token holders.

As of July 2022, there are just under 14 million AAVE in circulation.

How Do You Buy AAVE?

As one of the leading platforms in the entire decentralized finance niche and boasting the highest TVL (total value locked) of any DeFi platform, AAVE is a highly sought-after cryptocurrency.

One of the best ways to purchase Aave is within the sphere of decentralized finance using a decentralized exchange (DEX), but plenty of centralized exchange (CEX) platforms also offer AAVE. You can also buy AAVE in a peer-to-peer manner.

Is It Possible to Buy AAVE Instantly?

AAVE isn’t a blockchain of its own, so if you’re going the DEX or peer-to-peer route, the transaction speed will depend on the blockchain you use.

Base layer Ethereum can take a little while, up to a few minutes, based on network congestion at the time you transact. If the DEX is using a layer 2 solution, however, your transactions may well be practically instantaneous.

Purchasing AAVE on a CEX tends to be instantaneous, but it’s important to note that you haven’t actually purchased any AAVE. You will have deposited your funds to a centralized entity which (hopefully) sets aside a portion of the AAVE they hold for you using an internal ledger.

You’re only entitled to the AAVE you purchase on a CEX when you actually withdraw it. Then, the CEX will have to send AAVE to your wallet, and it will settle just as fast as the blockchain can finalize the transaction.

How Do You Store AAVE?

Although it is possible to store AAVE with a CEX, these tokens cannot be used for discounts or governance while held by any sort of custodial service. In fact, it is the CEX itself that will take part in governance. Given that some CEX products compete with Aave, the decision to store AAVE with a CEX is a risky one.

Luckily, AAVE can be stored in many wallets since it is an ERC-20 token. This means that any Ethereum-compatible wallet will be able to do the job. These wallets may be:

• Cold wallets. Representing cold storage, cold wallets keep keys online for greater security. Hardware wallets like the Ledger are good examples of cold wallets, but writing your keys on a piece of paper also counts.
• Hot wallets. These wallets connect to the internet for greater convenience, such as a quick connection to platforms like Aave. The popular Metamask browser extension is an example of a hot wallet you can use with Aave. 

Aave Energy Consumption

Since it doesn’t run its own blockchain network, it is difficult to pinpoint exactly how much energy Aave consumes. It could, however, be suggested that a fraction of Ethereum’s consumption can be attributed to Aave.

Prior to Ethereum’s shift to proof-of-stake, it has been estimated to consume around 80 TWh. Once the merge is completed, Ethereum will dramatically reduce its consumption. Aave most closely resembles a bank in terms of its products revolving around passive income, interest earning, and borrowing. As per a report by Galaxy Digital in 2021, banks consume around 260 TWh each year.

Is AAVE a Good Investment?

Aave is a big part of cryptocurrency’s DeFi revolution and, for better or worse, it looks like it’s here to stay.

While the world of decentralized finance and the idea of trusting money to code is alien to many and not without risk, it provides a way for many consumers to gain access to services and returns that they otherwise couldn’t.

DeFi also poses a systemic risk to the established finance industry, and it is vulnerable to attacks on many fronts. Lobbyists with pockets full of dollars have a loud voice, and the institutional involvement in DeFi has already had dire consequences.

Nevertheless, Aave offers a key service to ordinary consumers and does so in a decentralized way. Users of Aave can, with enough investment in AAVE, have a voice in how the platform is run. For many, this sort of power is priceless.