Check out this guide to find everything you need to know about Aave, one of the most popular DeFi lending platforms.
Decentralized finance, also called DeFi, represents a better alternative to traditional financial institutions; centralized financing. DeFi is popular in the world of cryptocurrencies for trading and exchange, while excluding the use of third-party systems.
Aave lending platform is online servicewhich runs mainly on the Ethereum token blockchain. The platform deals mainly with the provision of interest, loans and credit services using a decentralized network for proper functioning.
It was founded in 2017 by Stani Kulechev and was originally called ETHlend, which allowed lenders to connect with users on the platform in a paired way. The system was then converted to a pool system after changing the name to Aave - derived from "ghost"; turning ETHlend into a major subsidiary within the new company. As of 2020, the ETHlend subsidiary is to be liquidated and all activities will be carried out independently under the management of Aave.
The firm had around 1,3 billion units upon release, selling just over 1 billion LEND units in local currency, raising a seed fund of over $ 16 million. However, the service decided to leave the rest to the founder and management team.
The service manages multiple smart contracts on its network with multiple codes to perform whatever actions the user requires. Like any other lending and borrowing system, this service requires the user to provide collateral at a value no less than the value of the borrowed altcoins.
The cryptocurrency is then provided in the form of Aave's "aToken" token, the value of which corresponds to the borrowed asset. However, the user can repay the debt in a cryptocurrency other than the borrowed one - this means that you can borrow in Ethereum and pay them back in DAI; provided that the digital currency is supported by the online service and the value is equivalent to the borrowed asset.
The platform supports nearly 20 different digital currencies.
What is Aave Lending Protocol and how does it work?
The firm operates using different segments that perform different functions, some of which are more important than others. “Protocol” is a feature that removes the individual tie between lender and borrower, allowing lenders to create pools, allocate assets, and ensure the fluidity of pools available for borrowing. It also ensures that the depositor receives interest on each type of borrowed funds and units of digital currency.
Likewise, it allows other users to borrow from pools, while applying and disbursing a loan is done in no time.
The service has two distinguishing features that have contributed to its huge success over other lending platforms - changing rates and instant loans.
Flash loans is a feature that allows users to borrow from pools without the need for collateral. Borrowed assets can only be used in smart contracts available on the platform, protecting digital currency providers in such a way that if the debt is not paid before the completion of the contract, all processes involved will be canceled by the service and the assets will be returned to the pool.
This helps protect yourself from defaulters and provide quick short-term loans to simplify trading processes for platform users, especially those without collateral to contact centralized financial institutions. This feature is so efficient and cost effective that the average minimum interest rate is 0,1%.
Most digital currencies are highly volatile. Aave understands this, which is why he created a rate switching feature that allows users to choose between fixed interest rates or different interest rates. Fixed rates are usually low and are considered safer for most people. However, look at the possibility of high yields at a contrasting low interest rate, “variation” is usually the preferred option. It is important to note, though, that the investment may not go as market research predicts, resulting in some losses.
How to use the Aave lending platform
Using the Aave lending platform, people have the ability to lend or borrow digital currencies, and the process does not require a third party or even the personal details of the first or second, unlike conventional financial companies.
The former benefit the most from this process, as their assets in the pool bring them income even if they are not there. The lending system is available on several fintech platforms around the world, with Binance being the most popular. Using Aave's LEND is very simple:
- The first step is to create an e-wallet if the user does not already have one. Every wallet that supports ERC-20 tokens automatically supports all LEND tokens;
- After the user receives the wallet, they must visit the company's website app.aave.com, create a user account, and then link the wallet to the platform account;
- Once this is done, the user will be required to deposit whatever form of digital currency he or she intends to use on the platform and the amount.
- Once the transaction has been approved by the service, it will continue to charge the user a certain transaction fee as required for the efficient operation and maintenance of the firm.
Finally, the process is complete, the user will be able to view their portfolio consisting of the value of available assets and the interest that each transaction or pool will generate.
This concludes the section on loans. However, the process involved in borrowing is a bit broader than that of making a loan, with a couple of commonalities - logging in and creating, as well as linking to an online wallet account.
- Once this is done, the user will check the upper right corner of the screen where the borrow option is located, click it, and then select “borrow”.
- The user is then required to select the form of cryptocurrency he wants to borrow and the cost.
- The user will then be given the option to choose the type of interest rate he or she wishes to incur, whether fixed or variable. Once accepted, the user can proceed.
- Full details of the choice made will be displayed on the next page, allowing the client to confirm how much he / she is going to borrow, the form of the interest rate and its cost. If the buyer is satisfied with the numbers, he / she can proceed by clicking "Submit". But if not, the Back option is available to go back and adjust some of the options already selected.
- After confirming the details, two pop-up windows will appear, both times select "continue" and the process will be completed.
Hack and predictor Aviator
The future of the finance and technology industry is headed towards fintech institutions using decentralized finance and digital currencies.
Aave lending platform helps bridge the gap between cryptocurrency holders who have surplus and want to lend, and those who need a loan. Aave is expected to become one of the leading FinTech institutions in the lending and borrowing system, given the success it has achieved in its three years of existence.
By the way, if you intend to use the service, but do not currently have the funds required to purchase cryptocurrency, on Kovan Testnet a test version is available that allows you to perform all operations using counterfeit money until you are ready to make use of the real platform.