AAVE, the pioneer in the decentralization of finance.

LeoFinance
6 Min Read
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AAVE

One of the most talked about Decentralized Finance (DeFi) projects is AAVE, formerly called ETHLend. At first AAVE was dedicated to offering decentralized loans with cryptocurrency collateral, however, this project has over the years been delivered to the evolutionary process that characterizes the crypto world. A fact that has led it to go beyond the threshold of being a simple crypto lending platform to a complete DeFi platform with multiple tools.

AAVE (at the time ETHLend) started with a very successful launch or ICO (Initial Coin Offering), which allowed them to raise US$ 17 million, which made it possible to finance this project managing to take their platform forward when the LEND token was launched in December 2017.

Initially, the project was set up to generate a decentralized marketplace for lending, offering a space on their platform for both those who wish to borrow or lend cryptocurrencies in exchange for interest. In AAVE those requesting loans have to offer collateral as a guarantee, this with the purpose of avoiding defaults, a rather flexible mechanism that attracted many users to this project.

In September 2018, ETHLend evolved into a platform offering new services, which is why its developers changed its name to AAVE. The project changed its lending system to one based on liquidity markets, in this way the platform offers a system where prices are calculated based on the availability of assets in that market (prices in AAVE are defined algorithmically taking into account the demand and supply of assets).

In this way AAVE creates an algorithmic lending market where users can do two things:

  • Invest money in pools to generate liquidity. This will allow the system to offer loans to other users, while earning profits in the form of interest per method of liquidity generation.

-Create a platform capable of offering loans with various collateral, collateralization options and operating policies. This in order to adjust to the needs of its users and different markets.

In both cases the operation of these two options is simple. On the one hand, to be a liquidity provider, it is necessary to invest your money in AAVE pools. In this way, with each new loan generated by the platform you will obtain a fraction of the profit that will be translated in the end into the total reward of your investment.

On the other hand, if you are a user who wants a loan, you must go to the platform to interact with it. Once logged into the system, AAVE will ask for collateral from the user if you wish to use the system to take any loans. You simply pledge your crypto-assets to opt for a loan, once the requested amount is returned, the platform returns the totality of the crypto-assets withheld.
In this way AAVE guarantees the security and operation of its decentralized platform.

The advantages offered by the AAVE system lie in the following points:

  • In all steps of operation there has been no involvement of centralized mechanisms in the form of institution, only the users by means of transparent and immutable smart contracts intervene in the process.

  • The platform does not buy or sell cryptocurrencies, these digital assets are simply pawned, so the taxation of this is very different and according to its creators is advantageous compared to those who are engaged in the exchange of cryptos.

Therefore, AAVE provides a better relationship than any bank, moreover, the possibilities offered by this platform are much greater than those of any centralized financial institution. However, this example is just a taste of what AAVE offers.

By accumulating assets to make loans
AAVE is able to offer loans to users who request them thanks to liquidity pools, which are nothing more than a grouping of cryptocurrencies that are incorporated into the protocol. Liquidity Pools are generated by users who use the platform, in return, they are called liquidity providers or LPs.

The objective of those who play the role of liquidity providers in these AAVE pools is to obtain profits, through the interest generated every time their cryptocurrencies are lent. This mechanism serves as an incentive for more and more people to want to inject liquidity, and thereby offer larger loans and earn higher profits.

These pools in AAVE currently represent several cryptocurrencies. In fact, the protocol supports cryptocurrency pools such as DAI, USDC, TrueUSD, USDT, sUSD, BUSD, Ethereum, YFI, BAT, EnjinCoin, KNC, LINK, Mana, MKR, REP, ZRX, wBTC, SNX and the native AAVE token.

At least a total of 19 tokens are supported on the AAVE platform, representing a total of US$ 1.8 billion in net values generated in the various pools, which gives a clear idea of the level of economic relevance AAVE has within the current DeFi ecosystem.

Moreover, pools are not only used to attract money, but also to offer returns. Pools offer those who inject liquidity an annual profit percentage ranging from 4.45 % (for DAI) to 0.02 % (for ZRX). Although these values are also adjusted according to the level of supply and demand within that pool and the total liquidity available within the pool. All of this is managed by smart contracts that constantly monitor these parameters.

AAVE also has a governance model that seeks to take the protocol to a new level of development. The governance system proposed by its developers is based on what they call AAVENOMICS.

AAVENOMICS is an entire economic policy that will sustain AAVE as a whole. The main idea is to transform your current LEND token to the new AAVE token. This conversion will be given in a ratio of 100 LEND to 1 AAVE, and its goal is to reduce the current LEND token circulation, and revalue the AAVE token.

In this way, each AAVE token holder will have the potential not only to vote within the platform, but will have a high value token that will have its point of origin in the production of incentives to users who make life within the protocol. In total, 16 million AAVE tokens will exist, of which 13 million will be distributed among users and 3 million will be locked in the reserve.

In addition, AAVE seeks for its token to increase user participation in governance, and at the same time serve as a macro stabilizer in its entire economic system by being a staking and trading tool within other protocols, such as Balancer.

The vision of this governance model is completely innovative, so it is expected that in the course of 2021 this system will be perfected as the migration process from the LEND token to the AAVE token is fully consolidated.

As always, the information presented here should not be taken as financial advice, each interested person should carry out his own research process, with the purpose of corroborating in depth everything expressed about this or any other cryptoasset. The foregoing may serve to feed the knowledge and investigative process of potential investors.

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