What is the Aave Protocol?
Founded in 2017 and based in London, Aave is the originator of the same name’s protocol. It is developing a decentralized protocol for the non-custodial financial market in which users can participate as lenders or borrowers.
Lenders provide liquidity to the market to generate passive income, while borrowers can take out loans with crypto-assets as collateral.
The Aave protocol supports more than 15 different cryptocurrencies, with a wide selection of stable corners. When depositing in the Aave protocol, Aave Tokens (aTokens) are forged.
These particular tokens track the value of the underlying asset and are burned when the loan is repaid. While the underlying asset is loaned to the borrowers, the aTokens earn interest in real-time. Besides, they can be freely stored, transferred, and traded.
Aave also offers sub-collateralized solutions. The protocol makes it possible to borrow instantaneously without the need for collateral.
In the past, Aave was known as ETHLend, which the company quickly abandoned to mark its transition from a decentralized P2P lending strategy to one based on liquidity pools.
Previously, the protocol’s native token was LEND, which was recently replaced by AAVE following a community-accepted migration. The migration ratio was 100 LEND to 1 AAVE.
“Aave” is a Finnish word that translates as “ghost” in English. For Aave, this represents its goal to create a transparent and open infrastructure for highly decentralized finance.
The Aave Protocol Ecosystem
Complex in its operation, let’s take a look at the many components of the Aave protocol. How does it work and what does it allow you to do?
Tokenization by Aave Tokens
The Aave protocol implements a tokenization strategy for liquidity providers. During a deposit, the user receives a corresponding amount of derivative tokens, called Aave Tokens (or aTokens).
These tokens correspond with a 1:1 ratio to the underlying assets deposited and follow the Ethereum ERC 20 standard. The balance of each depositor’s aTokens increases over time due to the permanent accumulation of interest generated by the deposits.
The aTokens natively implement the concept of interest rate redirection. This concept distinguishes the value accumulated over time by the interest paid by borrowers from the initial balance.
As soon as a portfolio linked to Aave contains aTokens, the value accumulated by them can be redirected to any address, allowing the balance and the interest generated to be split.
Despite the advantages of this tokenization model, it comes with a significant disadvantage. It is impossible to transfer the entire balance in a single transaction.
Indeed, the exact amount of a transfer cannot be filled in since the interest continues to run even while the transfer transaction is confirmed. This means that a minimal balance (dust balance) will always be left on the portfolio at the transfer’s origin.
Deposit Cryptographic Credits and Generate Revenue with Aave
Aave requires a prior connection to an external portfolio supporting Ethereum. Because of its efficiency and reputation in the industry, I strongly advise you to use MetaMask. 🦊 This web browser is relatively simple to use and initialize.
If you already have your own MetaMask wallet and are a regular user, skip this tutorial. Otherwise, discover the 3 preliminary steps before you can use Aave with MetaMask:
To begin, you need to download MetaMask, which takes the form of a browser extension. It is available on Chrome, Firefox, Opera and Brave, among others. Click on the link below and add the MetaMask extension to your browser :
Once MetaMask is installed, the process of creating your portfolio begins. You must now choose between linking a portfolio you already have or creating a new one. For a more simplified use, choose to create a new wallet.
MetaMask now asks you to create a password to secure your portfolio. For security reasons, I strongly advise you to create a unique and complex password, which you reserve for MetaMask.
MetaMask keeps your private keys locally in your browser, and your password allows you to encrypt them so that no one but you can use your funds from that browser.
Finally, MetaMask will ask you to save a secret 12-word backup phrase. This phrase is extremely important and will allow you to retrieve your funds if you lose access to your device.
Write this phrase on a piece of paper and store it in a safe place. If you want even more security, write it down on several pieces of paper and store them in two or three different places.
💡 Beware of phishing by mail! MetaMask will never ask you for your recovery phrase. Never share this phrase with anyone.
Once you have made your arrangements, click on the Next button:
Finally, MetaMask asks you to fill in the recovery phrase to make sure that you have saved it correctly. The process is now complete, you can now use MetaMask!
Before using your MetaMask wallet, you must supply it with ETH or ERC-20 tokens. To do so, you can either deposit funds from another platform or buy Ether directly from the extension.
Due to the high cost of the latter method, I strongly recommend that you purchase Ether outside the options offered by MetaMask. If you do not have ETH yet, you can consult our guide to purchasing this cryptocurrency.
Once you have your ETHs in your pocket, you need to send them to MetaMask. To do this, click on the Buy button and then on View Account:
Then MetaMask displays your deposit address and its associated QR code. Now send your ETHs from the withdrawal function of the platform where they are currently stored.
Depending on the congestion of the Ethereum blockchain during the execution of your transaction, it may take from a few minutes to several hours before it reaches your MetaMask portfolio. So don’t be worried if you don’t receive your ETH at the moment.
Your ETH have arrived on MetaMask? Now let’s make the connection between your wallet and Aave!
Before using your funds on MetaMask, you must link your portfolio to Aave. To do so, go to Aave and click on the Browser Wallet button :
Then choose the market to which to link your portfolio. By default, select “Aave Market”. A MetaMask window will then open and ask you to confirm the connection to the Aave protocol. Click on the Next button then Connect to establish the connection.
That’s it, your funds held on MetaMask are now directly usable on Aave! Now that this step has been completed, let’s find out more about how Aave works!
Deposit funds on Aave
Depositing cryptocurrencies on Aave allows you to generate gains passively. Indeed, you are rewarded by the protocol for providing liquidity to assets, which others will borrow.
Depositing your cryptocurrencies on Aave makes sense if you have stable corners. Take Tether’s USDT for example, for which Aave offers an annual interest rate of 6.19% at the time of writing.
Using this feature is very simple. Simply select the asset you wish to deposit among the cryptocurrency systems supported by the platform, then enter the amount of your deposit. Once your deposit has been registered, you will start earning interest.
Each asset has its own supply and demand market with its own annual interest rate that changes over time. Thus, if the gap between available cash and borrowed funds narrows, the annual interest rate on deposit increases (this is also a function of other factors).
How is the interest earned calculated?
Token depositors on Aave receive a continuous income that evolves according to market conditions and is divided into two parts.
Payment of interest on loans
All those providing liquidities to an asset share the interest paid by borrowers corresponding to the average borrowing rate multiplied by the utilization rate.
The higher the utilization rate of a reserve, the higher the return for depositors. A spreadsheet updated in real-time allows you to see this interest rate model in action.
Interest rate payment on flash loans
Depositors receive 0.063% of the volume of any flash loan executed on Aave.
Borrowing cryptocurrencies with Aave
Why borrow cryptocurrencies?
Second possibility with Aave, the borrowing of cryptocurrencies. It may seem rather curious, but borrowing cryptos can be quite interesting.
Let’s suppose you have an open position on an asset, let’s take ETH’s example, and an investment opportunity arises. It will be impossible for you to recover your ETH unless you close your position.
By borrowing cryptocurrency with Aave, you can, therefore, obtain liquidity without selling your assets. This allows you to take advantage of new investment opportunities or even to meet unforeseen expenses.
How do I borrow crypto-currencies with Aave?
First of all, you need to deposit funds with Aave as collateral. Refer to the previous section to learn more about this.
Once in front of the list of the available assets, select the one you need, plus click on the “Borrow” button at the bottom right.
Then enter the desired amount according to your collateral. Then select a stable or variable rate and confirm your transaction. Aave allows you to change the type of rate selected at any time thereafter.
The following capture summarizes the interest rate for a deposit, the stable rate, and the variable rate of USDT on Aave. Thus, when choosing a stable borrowin, the interest rate is set to 9.08% when writing these lines. The variable borrowing offers a lower interest rate of 7.52%:
What is the difference between stable rate and variable rate?
The stable rate
Stable rates act as a fixed rate in the short term but can be rebalanced in the long term according to changing market conditions. Therefore, opting for a stable rate makes it possible to plan the amount of interest to be paid in advance.
A rebalancing of stable rates is unlikely but occurs if the average borrowing rate is below 25%, and the utilization rate is above 95%.
The variable rate is the rate based on supply and demand in Aave. The variable rate will change over time and is more advantageous, depending on the situation.
What is the AAVE used for?
The AAVE is the true engine of the Aave ecosystem, acting as a utility token. In particular, it can be used to reduce the costs of Aave‘s various services and give rights over the protocol’s governance.
AAVE is used to vote and decide on the outcome of Aave Improvement Proposals (AIP). Also, AAVE is eligible for staking as part of the protocol’s security module. This provides security for depositors and allows passive income generation.
AAVE tokens used to pay for Aave fees are automatically burned. This naturally reduces the number of tokens in circulation, which in turn increases its scarcity.
Aave's fundraising efforts
The Aave project raised a total of $24 million over 2 funding rounds, while the LEND token was still in use.
In November 2017, Aave received a public ICO, which raised $16.5 million. Note that at the time of this fundraiser, the LEND token was priced at only $0.017270 (representing an AAVE token at $1.7270).
Subsequently, in July 2020, Aave received support from several investment funds, enabling it to raise an additional $7.5 million. The project was supported by DTC Capital, Parafi Capital, Three Arrow Capital, and Framework Ventures.
Team and partners
According to the official list of Aave team members, the team consists of 18 people. Let’s take a look at the background and missions of its main members:
Founder and CEO of Aave, Stani Kulechov is a seasoned entrepreneur with extensive experience in developing solutions for the blockchain industry. He holds a Master of Law degree from the University of Helsinki. Stani Kulechov advises numerous blockchain projects and is a frequent speaker at conferences on FinTech and Ethereum’s smart contracts.
Chief Operating Officer of Aave, Jordan Lazaro holds a degree in risk management and international politics from Paris X Nanterre.
Director of Compliance at Aave, Ville Valkonen holds a key position in the development of the company’s products. In particular, he is in charge of technical support for the startup.
From left to right: Stani Kulechov, Jordan Lazaro Gustave and Ville Valkonen
For a company whose business is based on decentralized finance, Aave has entered into a number of partnerships:
- Chainlink: the decentralized network of oracles provides Aave with reliable data on asset prices.
- MYKEY: a wallet that integrates Aave’s DeFi products into its ecosystem.
- RealT: Aave brings mortgages on Ethereum to this real estate tokenization platform.
- Gitcoin: Aave organizes online hackathons on the theme of Web 3.0.
- Tether: Aave improves its decentralized flash loan solutions with stablecoin USDT issuer.
How to buy AAVE?
With its large capitalization, the AAVE token is available on many platforms such as Binance, OKEx, Huobi, Uniswap, HitBTC, and ProBit.
For trading comfort, especially facilitated by the platform’s high liquidity, we recommend that you use Binance to buy and sell AAVE.
Explanations for buying AAVE on Binance
- Register with Binance
- You will receive an email and will have to click on a link to verify your account.
- Deposit funds on the platform
- Click on the Market menu and look for the pair BTC/AAVE
- All you have to do is buy AAVE for the amount of your choice.
- Congratulations 🎉 You are now in possession of AAVE tokens!
Here is an overview of AAVE’s current position in the cryptomoney market:
How to store your AAVE tokens?
The AAVE being an ERC-20 token, the solutions to store it are numerous. The safest way to store your AAVE tokens is undoubtedly to use a hardware wallet. The most famous wallets of this type are those from Ledger.
For users of Trezor portfolios, these also support AAVE.
If you don’t need a physical wallet, it is also possible to store AAVE on web wallets dedicated to Ethereum’s ecosystem, such as MyEtherWallet (MEW) or MetaMask.
Notes and opinions on the AAVE protocol
A true flagship of decentralized finance, the Aave protocol is a must for any sector follower. In addition to borrowing cryptocurrency and the possibility of generating passive revenues, other DeFi applications are based on Aave.
The most famous of these is undoubtedly Aavegotchi, a community project that takes up the Tamagotchis concept, but with a DeFi and NFT sauce. These virtual companions bring the famous CryptoKitties up to date, with many unique features that I invite you to discover in our project presentation.
In the future, Aave is thinking big and intends to conquer the whole of Europe. Indeed, since August 2020, the Financial Conduct Authority (FCA), the UK’s financial policeman, has granted Aave an electronic money institution license. This license authorizes the startup to provide payment services in the same way as Coinbase and Revolut.