What is AAVE (AAVE)? Learn about the leading lending protocol in the crypto market...

AAVE is a decentralized lending protocol that allows users to borrow and lend various crypto assets such as ETH, WBTC, USDT,... through liquidation pools. Currently, AAVE is the leading lending protocol in the crypto market based on TVL with more than 4 billion USD (as of October 2023). Let's learn about AAVE with Coin68 through the article below!

What is AAVE (AAVE)? Learn about the leading Lending protocol in the crypto market

What is AAVE ?

AAVE is a decentralized lending protocol that allows users to borrow and lend various crypto assets such as ETH, WBTC, USDT,... through liquidation pools. AAVE was originally built on Ethereum but has expanded to many other blockchains such as Avalanche, Arbitrum, Optimism, Base, Polygon,...

What is AAVE ?

AAVE connects borrowers and lenders through liquidation pools on the protocol. When lenders deposit crypto assets into the liquidation pool, they receive interest based on the loan period, which can change depending on market conditions. In return, borrowers deposit crypto assets into the liquidation pool as collateral and borrow supported assets, plus pay interest.

History of AAVE

ETHLend - the predecessor of AAVE was founded by Stani Kulechov in November 2017 and was initially a P2P lending platform. The protocol was later renamed AAVE which means “ghost” in Finnish and shifted from P2P lending to liquidation pool-based lending. Some notable events in the history of AAVE are as follows:

• November 2017: ETHLend launched an ICO for the LEND Token and raised $16.2 million.

• September 2018: ETHLend rebrands to AAVE and integrates more features.

• January 2020: ETHLend shuts down and the protocol changes its name to AAVE. The company shifts its strategy from P2P lending to liquidation pool-based lending .

• July 2020: AAVE platform upgrades and focuses more on security.

• September 2020: The first phase of “Aavenomics” allows users to exchange LEND Token for AAVE Token at a rate of 100 LEND = 1 AAVE.

• December 2020: AAVE V2 launched with upgrades including gas optimization, Credit Delegation and liquidity mining.

• January 2023: AAVE V3 launch adds new features Portal, eMode and Isolation Mode.

How AAVE Works

Loan

Users will deposit supported crypto assets into the liquidation pool and receive aToken with the corresponding value (for example, users deposit ETH will receive aETH). In addition, aToken will come with a yield based on the period of time the user lends it and it may change depending on market conditions. To avoid possible liquidation issues, AAVE has set up liquidation pools on Balancer and Uniswap so that lenders can withdraw their funds at any time.

Get a loan

Users deposit supported crypto assets into the liquidation pool as collateral and receive aToken representing the loan along with the interest the user must pay. AAVE uses an overcollateralized loan mechanism that requires users to collateralize assets equal to or exceeding the borrowed amount by 50-75%. This protects the funds in the protocol in case the user is unable to repay their loan. It is important that borrowers maintain the collateral ratio or the assets will be automatically sold or liquidated to repay the loan.

In addition, AAVE V3 also introduces two new mechanisms: eMode and Isolate Mode.

• Efficiency Mode (eMode): This is a mechanism that allows users to borrow the most with their collateral. This mechanism only applies when the collateral and the borrowed asset have a price correlation, such as stablecoins.
  

eMode mechanism in AAVE V3

• Isolation Mode: This is a mode applied to newly added assets to AAVE that are still under observation and can be XEM as higher risk assets. Each of these new assets will be allocated to separate pools called Isolated Pools. When that asset or pool is at risk, it will not affect the entire protocol. When an asset is assigned Isolation Mode, users can only borrow stablecoins that AAVE governance has approved and there will be a certain debt ceiling for those loans.

Isolation Mode Mechanism in AAVE V3

Flash Loan

Flash Loan is a mechanism that makes AAVE unique by allowing customers to borrow instantly without any collateral. A Flash Loan is taken out with the condition that the principal amount must be repaid in a transaction. If the loan is not returned to the pool on time, the transaction is reversed to ensure the safety of the funds in the reserve pool and no one is at risk. Flash Loans require a fee of 0.09% and are completed within 13 seconds.

Flash Loans are designed for developers to use to build instruments that require arbitrage, Capital , or liquidation Capital . For example, if a user wants to borrow from Maker but the price of the collateral has dropped and is at risk of liquidation, the user can use Flash Loans to repay that Maker loan and get the collateral back. They can then sell the collateral and return the Flash Loan, avoiding Maker liquidation without adding new Capital .

Rate switching

Another unique feature of AAVE is that it allows borrowers to switch between fixed and variable interest rates. Typically, DeFi interest rates are quite volatile, making it difficult to estimate long-term borrowing costs.

If users expect interest rates to rise, they can convert their loan to a fixed rate to lock in future borrowing costs. If users think interest rates will fall, they can convert back to a variable rate to reduce borrowing costs.

There are two exceptions where the fixed rate can change:

• Case 1: If the lending rate increases above the fixed lending rate, the system may become unstable due to paying more interest than it should. In this case, the fixed rate will be rebalanced to achieve a new stable rate.

• Case 2: It is more beneficial for the borrower if the variable rate is 20% lower than the fixed rate, the loan will automatically decrease to compensate for the difference.

Credit Delegation (CD)

This is a mechanism that allows users to deposit funds into AAVE to earn additional returns by delegating credit lines to borrowers they trust. In this way, users use AAVE to earn interest without borrowing through Credit Delegations. Those who receive credit lines are allowed to withdraw assets from special Credit Delegations and borrow them. To protect funds, parties use an application called OpenLaw to sign agreements on loan terms.

The purpose of Credit Delegation is to help users, organizations, and exchanges access DeFi liquidation . Delegators can receive additional Credit Delegation yields in addition to the yields from regular lending.

Portal

This is a new mechanism in AAVE V3 that allows users to easily move assets seamlessly between markets on different blockchains. AAVE integrates cross-chain bridges such as Connext, Hop Protocol to move assets across different markets. For example, users who borrow or lend ETH and receive aETH on Ethereum can also receive aETH on Arbitrum or Optimism.

Portal Mechanism in AAVE V3

Features of AAVE

Dashboard

This is the interface that displays the crypto assets that users lend or borrow on many different blockchains with 2 versions V2 and V3. In addition, users can also XEM the lending or borrowing APY interest rate here.

Dashboard feature interface on AAVE

Market

This is the interface that displays all the crypto assets AAVE supports and users can lend or borrow on many different blockchains with 2 versions V2 and V3. Here, users can track the APY index when lending or borrowing a specific asset.

Market feature interface on AAVE

Users select a specific asset and select “Supply” to lend and select “Borrow” to borrow by mortgaging the asset. AAVE also marks the asset types according to 2 mechanisms eMode or Isolated Mode for users to refer to when making a loan.

Interface when borrowing a specific asset

Stake

This is where users can Staking AAVE Token into the Safety Module to receive stkAAVE from the protocol. If a shortfall event occurs, AAVE will sell AAVE in the Safety Module (up to 30%) to cover losses. In return, users will receive an incentive called Safety Incentives with 550 stkAAVE distributed daily. When withdrawing AAVE, users must wait 10 days to withdraw AAVE from stkAAVE to avoid affecting the entire protocol.

Staking feature interface on AAVE

Governance

This is where proposals are displayed for AAVE Token holders to vote on governance decisions for the protocol here.

Governance Features on AAVE

Besides, BDG Labs, a developer of Web3 products, is integrating Chainlink 'sCCIP into AAVE to ensure a highly secure cross-chain governance system in the future. Integrating CCIP will give AAVE the ability to easily scale to more blockchains and perform critical operations like governance through a highly secure solution. 

AAVE 's governance model when integrating CCIP

Other products in AAVE 's ecosystem

Stablecoin GHO

GHO is a Decentralized Stablecoin, collateralized by various crypto assets and Peg to the USD. GHO is created by users (also known as borrowers) by collateralizing assets into the protocol and Mint a certain amount of GHO. The ratio between collateral and loan will be designed to ensure the security of the protocol. When the loan is repaid or liquidated, the user's GHO will be burned from the protocol.

AAVE 's GHO Stablecoin

GHO also has a price balancing mechanism to keep the price at 1 USD compared to the market which takes place as follows:

• If GHO > 1 USD: Users Mint 1 GHO on AAVE and sell them for more than 1 USD on the market, increasing the supply of GHO on the market and pushing the price of GHO down.
  

• If GHO < 1 USD: Users buy 1 GHO on the market for less than 1 USD and burn them for 1 USD on AAVE, reducing the supply of GHO on the market and pushing the price of GHO up.

Aavegotchi

Aavegotchi is a metaverse game inspired by the Tamagotchi game that allows players to raise virtual pets based on Non-Fungible Token technology on Ethereum. The game is a combination of DeFi, Non-Fungible Token and Metaverse, giving players unique experiences when participating in the game.

Aavegotchi

Aavegotchi has a native Token called GHST which is used as a unit to purchase digital assets, Staking for rewards, and participate in governance in the AavegotchiDAO.

Basic information about Token

AAVE Token Allocation

AAVE Token Allocation Ratio

What is AAVE Token used for?

AAVE is the native Token of AAVE and is used in the following cases:

• Users who hold AAVE or borrow assets using AAVE will receive a discount on the protocol's transaction fees.

• AAVE holders can Staking the Safety Module to add security to the protocol and earn incentives.
  

• AAVE holders can propose, vote on new features, new assets and decide on protocol parameters.

Where can investors trade AAVE Token ?

Currently, investors can trade AAVE Token at:

• CEX Floor: Binance, Coinbase, Cooperative, OKX,...

• DEX: Uniswap, Balancer, SushiSwap,...

In which wallets can investors store AAVE Token ?

AAVE is a Token with ERC-20, BEP-20 standards, so investors can store it on wallets such as Metamask , Trust Wallet , Coin98 Wallet ,… For convenience in trading, investors can also store AAVE on the wallets of exchanges that list this Token .

Development roadmap

Currently, AAVE has not announced its future development roadmap. However, AAVE is supporting the integration of Liquid Staking Token (LST), RWA to diversify the assets borrowed and lent on the protocol.

Development Team

Notable members of the AAVE development team include:

• Stani Kulechov: He is currently the Founder and CEO of AAVE.
  

• Nicole Butler: She is currently the CCO (Chief Compliance Officer) of AAVE.

• Peter Kerr: He is currently the CFO of AAVE.
  

• Christina B.: She is currently the Head of Growth and Partnerships at AAVE.
  

Investor

AAVE has successfully raised $32.5 million from 3 previous Capital rounds with the participation of investment funds such as Blockchain Capital, ParaFi Capital, Framework Ventures,... 

AAVE investors. Source: cryptorank.io

Partner

AAVE is currently partnering with a variety of projects to enable users to borrow and lend across a variety of assets, including:

• Blockchain: Arbitrum, Optimism, Base,...

• DEX: Uniswap, Curve,...

• LSDfi Protocol: Lido, Rocket Pool,...

• Real World Asset (RWA) : Centrifuge.

• Infrastructure: Chainlink. 

AAVE V4 Update Information

The AAVE V4 update brings a number of notable improvements to improve operational efficiency and user experience. The main goals of the update are to increase profits for lenders, reduce interest rates for borrowers, and improve the operating mechanism of the GHO stablecoin to support liquidation and better collateral management.

With the Smart Account feature, users can manage multiple positions efficiently without creating multiple wallets. In addition, AAVE V4 also extends liquidation to multiple blockchains, creating an aggregated liquidation layer. One of the highlights is the common liquidation layer, which optimizes the risk coefficient of collateral assets, bringing lower interest rates to borrowers. The Base Rate is also set to remain stable until the lending market reaches its limit, minimizing volatility. Furthermore, AAVE V4 lays the foundation for cross-chain lending features and real-world asset (RWA) integration .

However, GHO's soft liquidation mechanism has been controversial, with accusations of being inspired by Curve Finance's stablecoin crvUSD. Currently, AAVE V4 is still in discussion and needs more community feedback before being adopted, but these features promise to create a more flexible platform that better meets the needs of users in the DeFi ecosystem.

AAVE Development Outlook 2024

- Launch of Layer 2 Lens Network (May 2024) : Lens Protocol , a project under the AAVE ecosystem, has launched Lens Network, a Layer 2 decentralized social network built on ZKsync technology, with the goal of bringing high transaction throughput and low cost to SocialFi applications .

- AAVEnomics (July 2024) : The AAVE community has approved the AAVEnomics proposal , which involves buying back AAVE Token from the market and Chia profits with users who Stake the GHO stablecoin, to increase benefits and promote the value of the AAVE Token.

- BlackRock's BUIDL Fund Integration (August 2024) : AAVE has proposed integrating BlackRock's BUIDL Token fund into the GHO stablecoin's Peg mechanism, aiming to optimize returns for users by investing in safe assets such as cash and US government bonds.

- Layer 2 Expansion (August 2024) : AAVE expands its operations to Layer 2 solutions such as Arbitrum , Base , and ZKsync , which help reduce transaction fees and increase processing speed, attracting more users and driving growth for the protocol.

- "Sky AAVE Force" Alliance Proposal (September 2024) : AAVE founder Stani Kulechov and MakerDAO founder Rune Christensen have proposed a DeFi alliance called " Sky AAVE Force ", aimed at increasing cooperation and expanding liquidation between DeFi applications.

- Launch of AAVE Trust (October 2024) : Grayscale Investments launches AAVE Trust , allowing institutional investors to access AAVE Token more easily and securely, contributing to the growth of AAVE in the eyes of traditional financial institutions.

- Collaboration with World Liberty Financial (WLFI) (October 2024) : AAVE collaborates with World Liberty Financial (WLFI) to develop a new DeFi protocol with the ambition to reshape the lending/borrowing model in the DeFi market and replace traditional banks.

AAVE Token Price Trend Prediction

Based on the positive information about the project mentioned above by Coin68, it can be seen that the AAVE project has attracted a lot of attention from retail investors as well as investment funds such as GrayScale . Not only that,AAVE 's TVL on Ethereum has reached 10 billion USD, demonstrating the interest and trust of many investors.

AAVE Token Perspective on TradingView on October 8, 2024

Between early July 2024 and early October 2024, the AAVE Token grew by more than 120%, demonstrating investor interest in the project. Based on the current market trend (as of October 8, 2024), the 68 Trading community predicts that the AAVE token has the potential to continue growing and could reach a price of $240, bringing a total return of more than 80% in the medium term.

Summary

AAVE is a decentralized lending protocol that allows users to borrow and lend various crypto assets such as ETH, WBTC, USDT,... through liquidation pools. AAVE is still constantly developing when launching V3 version, stablecoin GHO, supporting many types of assets such as Liquid Staking Token (LST), RWA to serve users to lend or borrow.

Through this article, you have probably grasped some basic information about the AAVE project to make your own investment decisions.

Note: Coin68 is not responsible for any of your investment decisions. Wish you success and earn lots of profit from this potential market!