What is AAVE? A Quick Guide

AAVE, a leading DeFi cryptocurrency, is a decentralized lending system that allows users to lend, borrow, and earn interest on crypto assets without the use of a middleman. AAVE, which runs on the Ethereum blockchain, is instead a smart contract system that allows these assets to be managed by a distributed network of computers running its software. This means that AAVE users do not have to rely on a specific institution or individual to manage their funds. They only need to trust that the code will run as intended.

The AAVE software allows users to create lending pools in which they can lend or borrow 17 different cryptocurrencies. Borrowers in AAVE, like those in other decentralized lending systems, must post collateral before they can borrow. Additionally, they are only allowed to borrow up to the value of the collateral they’ve put up. Borrowers are given funds in the form of an aToken, which is linked to the value of another asset. This token is then encoded, allowing lenders to earn interest on deposits. A borrower could post collateral in DAI and borrow in ETH. This allows a borrower to gain exposure to various cryptocurrencies without actually owning them.

AAVE also has added features, such as instant loans and other forms of debt and credit issuance that take advantage of blockchains’ unique design properties.

How AAVE works

AAVE can be best described as a lending pool system. Users deposit funds that they wish to lend, which are then pooled. Borrowers can then draw from these pools when they apply for a loan. These tokens can be transferred or traded at the discretion of the lender.

AAVE issues two types of tokens to facilitate this activity: aTokens, which are issued to lenders so that they can collect interest on deposits, and AAVE tokens, which are AAVE’s native token. The AAVE cryptocurrency provides its users with a number of benefits. AAVE borrowers, for example, are not charged a fee if they take out loans denominated in the token. Borrowers who use AAVE as collateral also receive a fee reduction. If AAVE owners pay a fee in AAVE, they can review loans before they are released to the general public. Borrowers who post AAVE as collateral can borrow a little bit more.

Loans on the Flash

AAVE enables certain loans, known as “flash loans,” to be issued and settled in real time. These loans do not require any upfront collateral and are processed almost instantly. Flash loans make use of a feature common to all blockchains: transactions are only finalized when a new bundle of transactions (block) is accepted by the network. It takes time to add each new block. On Bitcoin, this interval is approximately 10 minutes. It takes 13 seconds on Ethereum. As a result, an Aave flash loan occurs during that 13-second period.

The flash loan works as follows: a borrower can request funds from Aave, but they must repay those funds, as well as a 0.09 percent fee, within the same block. If the borrower fails to do so, the entire transaction is cancelled, and no funds are borrowed. As a result, neither AAVE nor the borrower takes a risk.

A borrower may want to use a flash loan to capitalize on trading opportunities or maximize profits from other Ethereum-based systems. To generate trading profits, it is possible to swap different cryptocurrencies automatically using flash loans.

Final thoughts

AAVE’s value is derived from its limited supply and the fact that it uses fee revenue to purchase AAVE and remove the cryptocurrency from circulation. Currently, 80 percent of the Aave system’s fees are used to burn AAVE. The remaining funds are used to repay lenders. AAVE token is trading at $314.80 at the time of this article.

If you enjoyed this article, you might also like to read: Aave Leads Booming DeFi Sector on Ethereum

Jay Speakman

I write about blockchain, crypto, NFTs and other disruptive technologies and innovations.