What is Aave
Aave is an automated decentralized lending platform designed to allow users to borrow and lend cryptocurrencies using smart contracts, and without intermediaries.
In order to borrow an amount, Aave users must deposit more value than they want to borrow – that way, if the borrower defaults, the platform liquidates the collateral if its value drops too much.
The project’s cryptocurrency is traded under the symbol AAVE. It can also be staked on the Aave platform.
How does Aave work?
As previously mentioned, users can deposit cryptocurrency as collateral and borrow other cryptocurrencies up to a certain percentage of the value of the collateral. This is known as the loan-to-value (LTV) ratio, and Aave limits the amount borrowed to 80% of the current value of the pledged collateral.
The smart contracts used by Aave calculate the terms of the loan, collect the deposited collateral, and distribute the borrowed cryptocurrency.
For lenders, Aave allows users to deposit cryptocurrency into the platform and earn interest, which is paid by borrowers.
Rather than connecting lenders and borrowers directly, Aave offers liquidity pools where users can deposit cryptoassets, and these cryptoassets are made available to borrowers. This means that Aave users do not have to trust a specific institution or person to manage their funds.
Aave’s software allows the lending or borrowing of 17 different cryptocurrencies.
A borrower can post collateral on DAI, for example, and borrow in ETH. This allows the borrower to gain exposure to different cryptocurrencies without owning them directly.
To facilitate this activity, Aave issues two types of tokens: aTokens, issued to lenders so they can collect interest on deposits, and AAVE tokens, which are Aave’s own token.
The AAVE cryptocurrency offers its holders several benefits. For example, AAVE borrowers are not charged a fee if they take out loans denominated in the token. Also, borrowers who use AAVE as collateral receive a discount on fees.
AAVE holders can further review loans before they are released to the general public if they pay a fee to AAVE. Borrowers who post AAVE as collateral can also borrow a little more.
Flash Loans
AAVE allows certain loans, called „flash loans,“ to be made and settled immediately. These loans require no upfront collateral and are made almost instantaneously – in other words, they are borrowed and repaid within the same block.
These loans are designed to allow users to take advantage of arbitrage trading opportunities in the crypto market.
Adding each new block takes time. For Bitcoin, this interval is approximately 10 minutes. For Etherium, it is 13 seconds. Hence, Aave’s instant lending takes place in this 13-second period.
This type of loan works like this: the borrower can request funds from Aave, but must repay those funds and a fee of 0.09% within the same block. If the borrower fails to do so, the entire transaction is canceled, so no funds were ever borrowed.
How do I borrow from Aave?
To borrow cryptocurrency on Aave, users can link a digital wallet to the platform and search a list of assets that support deposits. Deposits offer a fixed annual percentage yield (APY) that is paid in the same asset in which it is deposited.
For example, if a user deposits ETH, the interest is paid in ETH.
Users will need to first provide cryptocurrency to the platform as collateral. Once the collateral is deposited into the liquidity pools, users actually earn interest on those deposits.
Once the funds are deposited, users can search the supported cryptoassets to borrow, and Aave automatically calculates how much they can borrow. Since each cryptoasset has different characteristics, Aave dynamically calculates the amount available based on the value of the cryptocurrency deposited, the value of the asset, and the volatility of the asset.
After selecting the cryptocurrency, users can confirm the transaction and the cryptocurrency will be deposited into their linked wallet.
Loans have no repayment period, but repayment must be in the same form as the cryptocurrency that was borrowed. This means that if a user borrows $100 worth of USDT, they will have to pay it back in USDT (plus interest).
Liquidation of the loan
If the collateral value of a cryptoloan on Aave falls below a certain LTV, the platform can automatically repay a portion of the loan through liquidation. This process involves the sale of up to 50% of the pledged collateral to pay off the loan and return the LTV within the loan agreement.
Liquidations are handled by „liquidators“ – consumers who can pay off the loan and claim the collateral (plus a 5% bonus).
What are Aave’s fees?
Aave has several fees on the platform, including lending fees and network fees:
- Aave Loan Fees: Aave loans have variable and fixed rate fees, with fees ranging from 2% to 30%+ APY or more.
- Instant Loan Fees: Charges a fee of 0.09% per transaction.
- Network Fees: Aave requires payment of network fees for all transactions (gas). These fees are for node operators (nodes) and validators on the Aetherium network.
How do I buy AAVE?
1. Choose a crypto exchange
There are numerous cryptocurrency exchanges and exchanges that range from easy to use systems to complex dashboards for advanced traders.
Because AAVE is so popular, you’ll be able to purchase the token on most cryptocurrency exchanges, but it’s advisable to stick to a few of the more popular exchanges like Binance, Kraken, Coinbase, etc. Different platforms come with different fees, security measures, and may include other features, so it’s a good idea to do your research before signing up.
2. Create an account and confirm it
Start with account registration, which is completely free on the aforementioned platforms. For added security, 2FA – two-factor authentication – is also enabled. This way, you and your device are the only ones who can grant access to the account.
You are then taken through a KYC process, which is providing personal information – ID card/passport/driving license details, proof of address (e.g. bank statement or utility bill).
After completing these steps, you are ready to buy, sell and trade Aave (AAVE), as well as avail of various services such as steaming.
3. Fund your account
Once your account has been registered and verified, you need to fund the account so you can start taking advantage of the platform’s buying and trading services.
The main deposit options are:
- Credit/Debit Card
- Bank deposit
- Peer-to-peer (P2P)
Where to buy AAVE?
