Decentralized Finance or DeFi is now a major topic being discussed in financial communities. The main goal of DeFi is to give crypto users full control over their assets, and it is because of decentralization and blockchain technology.
The DeFi market is booming at a rocket pace. According to DeFi Pulse, the DeFi market data provider, as of today, $8.65 billion are locked in DeFi, up from $1 billion in June 2020. Thanks to this staggering growth, new DeFi projects are emerging every day.
Given the flexibility and the larger developer community, the Ethereum blockchain platform is the primary choice for the DeFi projects. One of them is the Aave, which now occupies the number one spot in total value locked.
What is Aave?
According to its website, Aave is an open-source and non-custodial protocol enabling the creation of money markets.
Aave protocol launched on Ethereum mainnet in January 2020 and is now dominating the DeFi market with a total of $1.66 billion locked on the platform.
According to the DeFi pulse, Aave now accounts for about 19% of the total value locked (TVL) in DeFi. Aave is followed by Maker and Curve Finance which lock $1.43 billion and $1.31 billion respectively.
Aave also leverages its native token LEND to provide holders with discounted fees. In the future, LEND will also be staked for governance and as the first line of defense for outstanding loans.
Just like other DeFi platforms, Aave allows the crypto holder to lend their assets to earn interest on them. Customers can also borrow other crypto assets by collateralizing their assets and pay interest for this.
But Aave has introduced two unique features in its model. First is its interest rate model that allows users to switch between variable interest rates and stable interest rates. The second unique feature is Flash Loans that are designed specifically for developers. We will look at these and some other features in detail.
Interest Rate Model
Whereas other DeFi platforms like Compound and Maker tend to lock users into fixed or variable interest rates, the Aave interest rate model allows borrowers to switch between “stable” and “variable” interest rates. This allows them to get the best interest rates on their loans.
According to Aave, its borrow “interest rate strategy is calibrated to manage liquidity risk and optimize utilization.” The borrow interest rates follow Utilization rates U. By selecting an optimal utilization rate Uoptimal, the Aave interest rate model gives the following.
- When U<Uoptimal, the borrow interest rates increase slowly with the utilization.
- When U ≥ Uoptimal, the borrow interest rates increase sharply with utilization to above 50% APY if the liquidity is fully utilized.
The unique feature of Flash Loan is that it requires no collateral. Flash Loans gives developers the ability to borrow money from Aave and then pay it back in a single transaction. Unlike other loan processes that require guaranteeing repayment with collateral, Flash Loans simply rely on the timing of the loan’s repayment.
If the loan is repaid with full within the same block it was issued, it is approved. Otherwise, the entire transaction fails.
How To Lend on Aave
Aave currently supports four money markets: Aave, Uniswap, Set, and Next market. Simply visit the Aave’s homepage and select a money market and connect a supported wallet. The supported wallets include MetaMask, Coinbase Wallet, Fortmatic, Ledger, Torus, Wallet Connect, MEW Wallet, and Authereum. Deposited funds will then be supplied to the lending pool and the depositors can monitor their accrued interest in real-time in the Aave app dashboard.
When supplying money to Aave, users also receive aTokens to keep track of the funds that they have lent, as well as any interest earned.
Aave supports include DAI, USD Coin (USDC), Binance USD (BUSD), Basic Attention Token (BAT), Ethereum (ETH), native token ETHLend (LEND), Kyber Network (KNC), Chainlink (LINK), Maker (MKR), USDT Coin (USDT), TrueUSD (TUSD), sUSD, YFI, EnjinCoin (ENJ), REN, Augur (REP), SNX, WBTC Coin (WBTC), 0x Coin (ZRX).
Links of Interest
- Website: https://aave.com/
- Twitter: https://twitter.com/AaveAave
- GitHub: https://github.com/aave/aave-protocol
- Discord: https://discord.com/invite/U7Fh2Yf