Decentralized finance has been at the center of the cryptocurrency blaze recently, and the liquidity pool is an essential aspect o...
Check out this guide to find everything you need to know about Aave – one of the most popular DeFi lending platforms.
Decentralized finance, also referred to as DeFi, provides a better alternative to traditional financial institutions; centralized finance. DeFi is popular in the world of cryptocurrencies for trade and exchanging while eliminating the use of a third-party system.
Aave lending platform is an online service that runs mainly on the Ethereum token blockchain. The platform deals mainly in rendering interest, borrowing, and lending services using a decentralized network to properly function.
It was founded in 2017 by Stani Kulechov and was initially known as ETHlend that allowed for lenders to reach users in a pairing fashion on the platform. The system was then changed into a pool system following the change of name to Aave – derived from “ghost”; making ETHlend a major subsidiary under the new company. As of 2020, the ETHlend subsidiary is to be scrapped, with all activities independently run under Aave.
Upon its release, the firm had about 1.3 billion units, selling just over 1 billion units of its home currency LEND, gathering an initial fund of over $16 million. The service, however, decided to retain the rest for the founder and the running team.
The service operates several smart contracts on its network, with several codes in place to carry out any action demanded by the user. Like every other lending and borrowing system, the service requires the user to put up collateral with value not less than the value of altcoin borrowed.
The cryptocurrency is then given in form of Aave token “aToken” which value is of the borrowed asset. It is, however, possible for the user to repay debt in a different form of cryptocurrency than the kind borrowed – meaning that you can be lent in Ethereum and can pay 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 has almost 20 different supported digital currencies.
The firm works using various segments performing a different function from the others, with some more important than the rest. “Protocol” is the feature that eliminates the one-to-one lender to borrower connection, giving lenders the power to create pools, deposit assets, and supply fluidity in the pools available for borrowing. It also ensures that the depositor gains interest off every borrowed kind and unit of digital currency borrowed.
In the same vein, it enables other users to borrow from the pools, with the application and grant of loan executed in the shortest possible time.
The service has two distinct features that have contributed to its immense success ahead of other lending platforms – Rate Switching, and Flash Loans.
Flash Loans is a feature that enables users to borrow from the pools without the need for collateral. The borrowed assets can only be used on smart contracts available on the platform, protecting the suppliers of digital currencies in such a way that if the debt is not paid off before the contract is completed, all processes involved would be undone by the service and the assets would be refunded to the pool.
This helps to safeguard from defaulters and provide quick short-term loans for easy trading processes for users on the platform, especially for those who do not have collateral to approach centralized financial establishments. This feature is so efficient and cost-effective, having a mean minimal interest rate of 0.1%.
Most digital currencies are highly volatile. Aave recognizes this, which is why it has created the Rate Switching feature, which allows users to choose between fixed interest rates or varying interest rates. The fixed rates are usually low and generally considered to be safer for most people. However, look at the possibility of high returns with a contrasting low-interest-rate, the “varying” is usually the preferred option. Although it is important to note that the investment may not go as the market study predicts, resulting in some loss.
Using Aave lending platform, people have the option of lending or borrowing digital currencies, with the process not requiring a third-party member or even the personal details of either the former or the latter, unlike regular finance companies.
The former benefit most from this process, with their assets in the pool generating revenue for them even in their absentia. The lending system is available on several fintech platforms around the globe, with Binance being the most popular of the lot. Making use of LEND by Aave is very simple:
Finally, the process is complete, the user will then be able to view their portfolio, consisting of the value of assets available, and the interest that each transaction or pool will generate.
That concludes the lend section. The process involved in borrowing is however a little more extensive than to lend, with a couple of similarities – the log on, and the creation as well as linking to the online account of the wallet.
The future of the finance and tech industry is headed towards fintech establishments using Decentralized Finance, and digital currencies.
The Aave lending platform helps to bridge the gap between cryptocurrency owners who have excess and wish to lend and those who are in need who want to borrow. Aave is projected to be one of the leading FinTech establishments that deal in the lend and borrow system given the success it has gained over the three years of its existence.
By the way, if you intend to make use of the service, but currently lack the funds required to purchase cryptocurrency, a test version is available on Kovan Testnet, which allows you to carry out all operations using fake money until you are ready to make use of the real platform.