What is Aave?

Aave is one of today’s most well-known DeFi products. In other words, a decentralized crypto platform designed to assist users in lending, borrowing, and earning interest on crypto, without the need for or involvement of middlemen. 

Put simply, Aave enables users to get immediate crypto loans by using their other digital currencies as security. Users may also lend out their crypto assets to earn profit using the platform.

The protocol was originally built on the Ethereum blockchain, but has since grown to encompass blockchains like Avalanche and Fantom. 

Similar to a traditional bank, customers deposit money and earn interest. Those who borrow money will pay interest.

Since Aave decentralized (DeFi), there is no bank or loan manager involved in decisions. The intermediary is eliminated via programmable Smart Contracts. These are code that execute transactions once specific criteria have been satisfied.

Key Takeaways

Aave is a decentralized (DeFi) peer-to-peer lending platform.

Borrowers supply the liquidity made possible by loans. Users receive interest payments on money kept in the service. 

Anyone can borrow crypto using Aave’s fully automated lending service, free from the lengthy and time-consuming procedures used by conventional banks.

Aave puts money in the hands of Smart Contracts, which means that all transactions are automatically pushed through by the platform’s code, in contrast to traditional banks, which rely on credit and background checks to determine loan approvals and amounts for their clients.

Ethereum, Polygon, Avalanche, Arbitrium, Fantom, and many more blockchains are supported by Aave.

Some of the biggest security firms, including Sigma Prime and Trail of Bits, have reviewed the smart contracts code used by Aave. As a result, the possibility of a hack on the platform is low.

A Brief History

AAVE was founded in 2017 by Finnish techpreneur Stani Kulechov, who is currently the CEO of the company Aave headquartered in London. 

Aave was initially called ETHLend, which stands for Ethereum Lending. At its initial coin offering (ICO) held in 2017, ETHLend successfully raised $16.2 million in investment. 

During this time, the protocol’s earliest phases saw the sale of nearly 1 billion units of its native cryptocurrency, called LEND. The Aave team held the remaining 300 million tokens.

When compared to Aave, ETHLend was very different because it didn’t prioritize fund-pooling. On the contrary, it emphasized peer-to-peer lending and borrowing, departing from typical Aave instances you may see today.

In 2018,  the project’s name was changed from ETHLend to Aave, which means “ghost” in Finnish. The service’s operating model was modified in conjunction with the name change. It was simplified to give liquidity to the protocol using the new operational paradigm.

In January 2020, the protocol started functioning on the Ethereum network. The UK Financial Conduct Authority also granted it a license in 2020, designating Aave as the official electronic money institution. Since the commencement of the DeFi protocols, it has been one of the most important forerunners, and via its operations, it has set the course for the whole DeFi industry.

The Aave protocol runs on top of the Ethereum blockchain (like the majority of other DeFi protocols) without having its own blockchain. It presently supports a number of cryptocurrencies, and the services it offers are always expanding.

Benefits of Decentralized Finance

Solution to the Problems of Traditional Banking

In order to get a loan from a traditional bank or lending company, you’d need to provide collateral to guarantee that you can meet your payment obligations. Once approved, a loan is repaid (plus interest) according to its terms and conditions. Every month, you must return the principal to the bank or other financial institution together with interest.

Many unbanked people lack the credentials that banks require (identification and credit rating), which makes it difficult for them to qualify for financial products like mortgages and loans.

Banking institutions may also discriminate against people who travel frequently for work or residence, choosing to deny them access to financial services rather than take the chance that their increasingly frequent, adaptable life choices will be deemed fraudulent by the antiquated standards of legacy finance.

Anyone with a phone and an internet connection—both of which are widely used in places with limited infrastructure—are all that are required to enter the expanding world of Decentralized Finance. Aave eliminates the need for ID documents, giving everyone access to permissionless banking and financial services for the first time ever. Loans can be obtained without a credit score. 

Pool-to-Peer Lending Approach

In the early days of DeFi, users had to locate another user on the website who was willing to make a loan offer. To complete the deal, both parties had to agree on the loan’s terms and price. However, Aave instances demonstrate how much has changed since then. Peer-to-peer lending is disregarded in favor of the pool-to-peer lending strategy in the new approach to DeFi.

If you wanted to borrow an asset in the early days of decentralized finance, you had to locate someone on the network who would lend it to you—at a price and on terms you both agreed upon. Peer-to-peer loans are usually subject to credit risks. Many applicants for P2P loans have poor credit histories that prevent them from getting a loan. 

Aave chooses what is essentially pool-to-peer lending in place of the entire peer-to-peer lending procedure.

Users deposit digital assets into “liquidity pools”, which are funds that the protocol can lend out. Anyone who “provides liquidity” by adding their tokens to a pool receives new aTokens.

The liquidity pools is independent of credit ratings. A crypto liquidity pool facilitates direct trades at current market rates, which makes DEX trading simple. People who provide liquidity are compensated with prizes, interest, or a yield percentage on their digital assets. Audit information is transparent since they use publicly accessible smart contracts.

The Aave protocol allows users to deposit their cryptocurrency in liquidity pools for loaning out. A liquidity provider is someone who contributes tokens to the pool. They provide liquidity to the system in exchange for new aTokens (a stands for Aave).

Crypto assets deposited by lenders in the Aave liquidity pool are denoted by the aTokens. These are tokens that are created and burned upon the supply and withdrawal of assets to an Aave market. The smart contract of an Aave pool mints aTokens at a 1:1 ratio. atokens essentially represent your deposits on Aave. 

Along with interest on aTokens, the holders of aTokens would receive a portion of the flash loans on the Aave platform.

You won’t receive higher returns if you add tokens to a pool with excess liquidity. However, you might increase your chances of earning more if you deposit in a pool that requires it.

Rate Switching

The ability to modify lending/borrowing rates is another standout feature of the Aave crypto lending technology. Borrowers can choose between fixed and adjustable interest rates with the help of the protocol. Therefore, it may assist in lowering borrowing costs. Aave protocol is currently the most varied lending pool in the DeFi industry, with a diversified product range spanning industries like technology, games, and banking.

Internal Swap Service for Assets

All assets deposited on the platform, including those being used as collateral, are also provided with an easy-to-use internal swap facility by Aave. A clever adjustment that eliminates the need for customers to pay Ethereum gas fees in order to put in new assets for settlement allows loans to be repaid using the collateral itself.

Power in the Hands of Users

Smart contracts are being used to carry out Aave governance, allowing the community-backed votes of Aave token holders to enforce protocol improvements. This further prevents the risk of individual team members being isolated as points of failure and places control over the Aave network’s governance in the hands of its users.

Similar due diligence has been used by the platform to ensure the security of the lending mechanism. Assets are assigned a maximum “loan-to-value” ratio prior to being added to Aave, ensuring that liquidation of debtors is automatically enforced before their lending positions may become excessively leveraged.

How Does it Work?

To understand AAVE’s functioning in a simplified manner, let us break down its central mechanism and features one at a time. 

Lending and Borrowing on AAVE

Through a strong system of smart contracts, Aave connects lenders and borrowers, enabling users who wish to deposit cryptocurrency and earn interest to communicate with borrowers in a trustless way.

When lenders lock their cryptocurrency on the platform, it is kept in a public, open-source smart contract on the Ethereum blockchain that has been subject to security audits. This agreement serves as a pool of liquidity from which the platform’s borrowers draw money. The protocol can utilize this “liquidity pool” to lend money to other users. This sizable cryptocurrency pool enables the code to access and withdraw money for loans on demand and at scale. 

Depending on how long they lend their money out for, the lender is paid interest, and the rate may change depending on the state of the market. Anytime they want, individuals are allowed to remove all or a portion of their cryptocurrency.

Borrowers must submit collateral equal to the value of the cryptocurrency they want to borrow in order to obtain a loan. When they do, they are given an equivalent number of aTokens that are linked to the value of another asset (for example, borrowed ETH would be called aETH). 

The aToken’s code includes interest so that the protocol will know how much is due when the borrowers want to recoup their loan. Borrowers are not required to pay back their loans within a specific time frame, but the longer a loan is maintained, the more interest will accrue.

The protocol also determines a “health factor” that contrasts the safety of the asset that is deposited with the asset that is borrowed. The borrower’s collateral is in danger of liquidation once the health factor drops below 1, which would result in Aave reclaiming the posted collateral.

Since transactions are automated by smart contracts, lending and borrowing occur almost instantly. However, this also means that there is no one to plead for extra time or explain a challenging scenario if you are unable to repay your loan on time. 

Your assets will be liquidated exactly as specified by the code by the smart contract that controls the protocol’s decisions, without any hesitation.


The AAVE Token

Aave was created on the Ethereum network, which also serves as the basis for many other cutting-edge DeFi solutions. The Aave network’s tokens are ERC-20 tokens because they use Ethereum to execute transactions as well.

The AAVE cryptocurrency token, which gives holders platform discounts, participation in governance, and voting rights, powers what is now a fully-fledged decentralized liquidity system. It is also recognised as a liquidity or staking token throughout the DeFi sector (as well as within the Aave dApp), enabling owners of AAVE coins to generate passive revenue.

A decentralized autonomous organization, or DAO, is the governance model of choice for the Aave protocol. One thing about Aave is very obvious: those who own AAVE tokens only have access to functions related to the protocol’s administration and functioning.

Aave chart

via coingecko

Flash Loans

The flash loan, a brand-new and thrilling replacement for the over collateralized loan, is made possible by the upgrading to Aave v2. Aave is the first DeFi lending protocol to offer the benefit of flash loans, which allow users to borrow money and then repay it along with a fee of 0.09% within the same block. If a flash loan is not repaid within the same block, it is automatically reversed and is not recorded in the ledger for that block.

Flash loans were initially only accessible to people with the technological know-how to create and carry out a smart contract that requests and repaid the loan. By automating this procedure as of 2020, the Furucombo DApp enables individuals without prior developer skills to “become a (crypto) whale without any capital.”

Arbitrage between stable coins (where users might be able to take advantage of a price difference between, say, USDC and DAI without having any starting capital) or self-hedging (where traders make a second trade that goes against the bet made in the first, to protect against losses) are examples of possible uses for this technology.

Flash loans do not demand any collateral.

The Future

Aave has emerged as a promising DeFi application for the coming generation. 

Aave attracted notice in the cryptocurrency community with the launch of flash loans, which are smart contract loans that you may obtain without collateral and are in addition to lending, staking, and yield, protocols that are included in typical DeFi applications.

Aave does more than just lend money.

Lens Protocol, a decentralized social network protocol based on the Polygon network, was introduced in February 2022. A proposal to develop GHO, a yield-generating stablecoin that is fully collateralized by cryptocurrencies and is similar to MakerDAO, was approved by the community in August 2022. Aave intends to charge interest on GHO loans, which will aid in funding its DAO.

By early 2023 Aave circulates more than USD 20 billion worth of assets in the DeFi domain.

We may be talking about Aave in the future as one of the most cutting-edge decentralized finance protocols in the present dApp market if it continues to rise the ranks of DeFi protocols and solidify its utility in the crypto realm.


DeFi’s ascent in the field of mainstream finance has been particularly notable in recent years with the expansion of Web3.0 trends. Decentralization is becoming the norm, and the Aave crypto lending protocol is the perfect example of how DeFi is continuing to  revolutionize the financial industry. 

The most remarkable feature of the protocol is that it eliminates the middlemen and fills the gap between borrowers and lenders. People with cryptocurrency assets can add their holdings to the protocol’s liquidity pools to establish a pool of money for borrowers. 

The terms and conditions of the loans, including the interest rates and the timeline for repayment, are specified through smart contracts. 

The AAVE token also contributes to the overall value of the protocol by playing a crucial part in its administration.