AAVE was launched in 2017 by Stani Kulechov under the name ETHlend, and later rebranded as AAVE in 2018. This cryptocurrency is sometimes referred to as the “ghost” due to its fast lending features, which have attracted significant attention. This article will analyze this decentralized finance platform to help you make decisions for future investments.
What is AAVE?
AAVE is a decentralized finance (DeFi) protocol that allows for lending and borrowing of various cryptocurrencies, including what are known as flash loans. Flash loans are considered the first unsecured loans in the DeFi space.
AAVE is based on the Ethereum protocol and is considered one of the largest DeFi platforms, focusing on cryptocurrency lending through a shared liquidity pool. Lenders can earn passive income by lending out their cryptocurrency, with relatively low risk and without needing to deal with third parties or intermediaries.
Below is a guide to the AAVE protocol and its native token, the AAVE cryptocurrency.
How Does This Cryptocurrency Work?
What is AAVE, and how is it different from other cryptocurrency platforms? AAVE is a decentralized finance protocol that offers lending and borrowing services through a system that is almost the opposite of traditional banks.
First, there are no financial institutions or intermediaries reviewing or approving loan applications based on creditworthiness. Instead, AAVE operates on a “trustless” network, using smart contracts to execute loans, thereby eliminating intermediaries.
In traditional banking, loans are made in fiat currency, like USD, whereas in AAVE, loans are made in cryptocurrency. There are no credit checks or universal credit scores in decentralized finance (DeFi), so users must provide collateral to borrow from AAVE.
While traditional banks require physical collateral (e.g., real estate for a mortgage), AAVE relies on liquidity pools. Here, users deposit the cryptocurrencies they wish to lend into a single pool, a process sometimes called “yield farming.” Borrowers can take loans from these pools and pay interest. Lenders can earn interest on the cryptocurrencies they lend out.
What Are Flash Loans?
Flash loans are a unique feature on the AAVE platform. These are unsecured products, made possible by the way Ethereum works (AAVE is built on the Ethereum blockchain).
Flash loans are automated and completed quickly, with repayment required within a single Ethereum transaction. If the loan and interest are not repaid within this timeframe, the loan is effectively canceled, and the transaction is deleted from the blockchain as though it never happened.
AAVE Tokens
AAVE issues two different types of tokens. The first type is aTokens, which lenders can use to earn interest on their deposits.
The second type is the AAVE token, the native token of AAVE. AAVE serves multiple functions, both as a governance token and as a transactional token, offering users discounts on transaction fees within the AAVE platform.
AAVE is an open-source protocol, meaning anyone can view and verify how it operates. The platform runs on the Ethereum blockchain. Unlike Bitcoin, which requires mining through a resource-intensive proof-of-work process, AAVE tokens are based on the ERC-20 standard.
A set of smart contracts offers users decentralized financial options. The cryptographic rules and standards on platforms like AAVE are governed by the smart contract code.
History of AAVE
AAVE was launched in September 2017 under the name ETHlend and was created by Stani Kulechov. He was dissatisfied with the lack of lending applications on Ethereum.
In September 2018, the protocol rebranded as AAVE. You may wonder, what does AAVE mean? “Aave” means “ghost” in Finnish.
AAVE held its Initial Coin Offering (ICO) in November 2017, raising $16.2 million by selling one billion AAVE tokens (then called LEND), in addition to raising $300,000 from investors. In 2020, the LEND token was replaced by the AAVE token, with 100 LEND converting to one AAVE, resulting in a total supply of 16 million tokens.
How to Use AAVE Cryptocurrency?
AAVE is designed to be used on the AAVE platform, providing holders with various benefits.
Holding AAVE tokens generally provides special privileges on the platform, including transaction fee discounts. As mentioned earlier, borrowers can use AAVE tokens as collateral to receive fee discounts. These borrowers can also access more funds to borrow. On the other hand, users can lend out AAVE tokens and earn interest.
Finally, when loans are denominated in AAVE tokens, AAVE lenders can enjoy fee-free transactions.
Like some other DeFi tokens (e.g., UNI by Uniswap), AAVE is also a governance token. Holders of AAVE cryptocurrency can vote on future changes to the AAVE protocol.
Traders can also speculate on the price of AAVE, attempting to buy low and sell high. Short-term traders will need to pay cryptocurrency taxes when selling tokens.
The AAVE platform supports more than 30 different types of cryptocurrencies that users can lend and borrow, such as ETH (Ethereum’s native token), DAI, stablecoins like Tether or USDC, and more.
Is AAVE Worth Investing In?
Investors who believe that decentralized lending will continue to grow may find AAVE cryptocurrency attractive.
Holding AAVE can provide users with special privileges on the platform, such as fee discounts. Since AAVE is one of the largest lending platforms in DeFi, it offers high liquidity.
In terms of stability, longevity, and commitment to innovation, AAVE remains one of the most important in DeFi platforms.
However, cryptocurrency investment requires a deep understanding of how various platforms and tokens operate and the risks associated with them. Unlike the well-established and highly regulated stock markets or ETFs, the cryptocurrency market is relatively new, often unregulated, and rapidly changing. While it offers many opportunities for investors and traders, given the volatility of the space, positive returns cannot be guaranteed.
How to Buy AAVE?
Buying AAVE is similar to purchasing most other cryptocurrencies. Here are the basic steps you need to know.
- First, you need to create an account on an exchange that supports AAVE trading. AAVE can be traded on several popular platforms such as Binance, Huobi Global, Kraken, CoinTiger, and SoFi Invest®.
- After creating an account, you can deposit Bitcoin, USD (or other fiat currencies), or stablecoins, depending on what trading pairs are supported by the exchange.
- At this step, you can purchase AAVE. Simply select the trading pair that includes AAVE and choose the currency you deposited in step 2.
For example, if you have Bitcoin and want to buy AAVE, you can select the BTC/AAVE trading pair. If you have USD, you can choose the USD/AAVE pair. For stablecoins like USDC, the trading pair could be USDC/AAVE. Then set a buy order for the amount of tokens you want.
Alternatively, investors can buy AAVE directly using a decentralized exchange (DEX). Using a DEX like Uniswap only requires a cryptocurrency wallet (e.g., MetaMask). You do not need to create an account, and you can easily trade tokens on the platform.
