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Simply Explained

Simply Explained: Aave

Updated: Jul 25, 2024
Published: Jan 3, 2022
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 Aave is a lending and borrowing system that allows users to borrow, lend, and earn interest on crypto assets, without the need for intermediaries.

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Let's take a closer look at what Aave is and how to use it.

What is Aave?

Aave is a lending and borrowing protocol built on the Ethereum network, its governance token is the ERC-20 token AAVE. An ERC20 token is used for creating and issuing smart contracts on the Ethereum blockchain.

On Aave, the process is completely decentralised. The protocol runs on the Ethereum blockchain and uses smart contracts that allow a distributed network of computers to manage these assets. This means users don't need to put their trust in a middleman to manage their funds.

Users who wish to lend out their assets put them in a pool from which others can borrow. Through these lending pools, users can borrow or lend 17 different cryptocurrencies, including MANA and ETH.

It's important to note that borrowing on Aave is always against collateral and not credit. In the crypto world, collateral is the cryptocurrency asset pledged as a guarantee that the loan will be repaid.

How does it work? 

Put simply, Aave is a system of lending pools. Users can deposit the assets they want to lend, and these assets are then combined in a pool. Borrowers can draw from those pools if they want to take out a loan.

The future 

Aave is expanding into multiple chains, including Avalanche and Fantom, which are decentralised, permissionless, open-source smart contract platforms for DeFi apps. This movement will help the project maintain its position as one of the main contenders in the decentralised lending business.

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What are the risks? 

However, as with any crypto project, it's not without risk. Aave's risk is if demand is not sustained on chains other than Ethereum, as the project is associated with the idea of "multi-chain."

What is Cryptonary's take on Aave? 

Aave is a solid contender in DeFi, and lending markets will likely remain one of the largest sectors in this system.

As of now, the token's economic model indirectly benefits holders through revenue, as there is a buy-and-burn mechanism. It derives value from its limited supply. The system uses revenue to remove (burn) cryptocurrency from circulation. The constant burning of tokens reduces the supply and is expected to increase the price if demand remains the same.

There is currently no direct fee-sharing in play, however, this could be and will likely be voted into existence by token holders in the future.

We believe AAVE will remain in the Top 100 assets for multiple years to come.

How to use Aave to borrow crypto and earn interest

Using Aave to borrow crypto and earn interest is simple. To get started, go to the app and connect your wallet. Then, select “deposit” and choose the asset you’re depositing. Then, decide the amount you wish to deposit and click continue.

Once you’ve finished your deposit, you have 3 options:

1. Keep your crypto in Aave’s liquidity to earn interest (this starts automatically after you’ve deposited)

2. Borrow crypto (the more you deposit as collateral, the more you can borrow)

3. Swap crypto through Aave swap

Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make, and only you are accountable for the results.

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