AAVE — the platform that works as a credit organization in a crypto-currency universe
What is AAVE?
AAVE is a well-known cryptocurrency platform that allows its users to borrow or lend money. AAVE is utilizing the Ethereum network to perform its operations. A user is able to deposit tokens and subsequently earn interest on these. They can also borrow coins and pay interest back with these coins. In a way, AAVE has the same role in the cryptocurrency ecosystem as an established bank or a credit union that gives credit to its users.
AAVE is a decentralized financial application with features that allow users to use a peer-to-peer network to move the assets that are being traded.
The platform has its own algorithm that allows to establish lending rates and match lenders to borrowers, making a perfect pair. The users don’t need to make much effort to perform the operations, the algorithm takes on the job.
The AAVE token
The AAVE token is an Ethereum token that powers the governance on the platform. The idea behind this token is that the token holders are able to vote for the possible changes that can be implemented in the application.
How did the AAVE start?
Around the year 2017, the team of developers created a product they called ETHLend. This platform was matching lenders and various borrowers. While generally performing well, a downside of the platform was that it was not doing everything automatically. The borrowers had to get the lenders to meet them before performing a financial transaction of any sort. The two big problems they faced were the liquidity of the system and the actual matching of the borrowers and the lenders.
Things were not smooth on the platform until 2020 when the developers started the whole thing anew while creating AAVE. Their idea was that the emerging cryptocurrency market was the best ecosystem on which their product could have been developed.
How AAVE works?
AAVE utilizes smart contracts to get algorithms that make the matching of borrowers and lenders work automatically.
What’s the difference between AAVE and ETHLend?
In AAVE, instead of using peer-to-peer lending as it was to get a borrower to meet a lender, they utilized a peer-to-smart contract mechanism of communication. What does it entail? A lender can deposit money to a smart contract and earn interest and a borrower on their end can deposit collateral to another smart contract and borrow from any smart contract they would want to borrow from.
They used the newly developed algorithms in the smart contracts to determine the loan rates based on how much liquidity was in each smart contract.
Do you know what AAVE means?
AAVE in Finnish means “a ghost”. How does that connect to the nature of the brand? When you either lend your sum of money or you borrow money on AAVE, your presence is invisible. You act completely anonymously. There are no banks that overlook your operations. No one can see what you are doing. You have no idea who is the entity on the other side of the chain of the smart contract.
How does AAVE work?
If you go on the AAVE platform online, you will see the current rates of borrowing and lending.
There are what is known as overcollateralized loans. Whenever a borrower borrows 80 percent of your house to make payments on it, your house becomes collateral. That means if you cannot for some reason pay your loan back, the bank will evict you from your house and will keep the house to itself.
Crypto loans, on the other hand, do not always work like this. If you want to buy crypto, you want to be overcollateralized. To give you an example, if you want USD 100, you have to give a bank USD 120. It sounds ridiculous. Why would you want to give someone more money than you would want to borrow, especially if you already have this money? Consider the following situation: if I give you USD 100 worth of ETH and you give me USD 80 of Tether, a stablecoin, you may use this USD 80 and then decide to pay it back. By the time you want to give it back, ETH may double in price. You cash your USD 100 of ETH but you get USD 200 cash value.
For these cases, AAVE has a liquidation threshold where they will automatically use your collateral to cover the loan you created. Using this, the investors never can lose their money.
Paying back the loans on AAVE
How can a user pay the loans back? Since you have to put more than 100 percent of your loan, you have to log in and start paying the loans. What about the timeframe for paying the loans? Unlike traditional loans, AAVE does not set a specific date when you have to pay back your loan. As long as your position is safe, you can borrow for an undefined period. However, as more time passes, the interest will grow, making your overall health factor go down in the end dramatically. At the critical point, your deposited assets may become liquidated by the platform.
AAVE Flash loans
Flash loans are the new feature that the platform started offering its users fairly recently. The flash points, at the same time, are one of the main selling points of the platform. Flash loan is a crypto loan where you can borrow millions of USD without putting up any collateral whatsoever. A flash loan must be paid back in the same cryptocurrency block it was borrowed in. It is specifically created for the quick operations where you can make flash profits. You can use it at your own risk.