What is AAVE and how does it work?

AAVE has recently become popular as a decentralized money lending protocol and has launched an operational Decentralized Finance (DeFi) solution. In this post, we’ll review AAVE’s features, some key steps in AAVE’s development, and make predictions about where AAVE will head in the near future.

What is AAVE?

AAVE is a decentralized system of smart contracts operating on the Ethereum blockchain, allowing users to borrow and borrow cryptocurrencies with confidence to create a financial market and earn interest.

The AAVE ecosystem consists of the AAVE Protocol, AAVE token holders, liquidity providers, Ethereum and DeFi wallet partners, developers, and projects contributing to AAVE. This variety of products is powered by AAVE tokens.

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AAVE protocol

The most important and essential aspect of the AAVE system is the open-source liquidity protocol launched on January 8, 2020. It was created to secure capital from smart contracts, improve capital flow within the DeFi ecosystem, and empower communities to make decisions. The main features of AAVE Protocol 2.0 are Flash Loans, aTokens, credit delegation, fixed-rate deposits, interest rate conversion, and AAVE governance. Let us now examine each in detail.

aTokens: ATokens are interest-bearing tokens, issued from deposits and lost upon redemption. A-Token pays interest directly to borrowers. In order to reduce transaction costs in AAVE 2.0, AToken has incorporated the EIP 2612 proposal, which pays fees in ERC-20 tokens, without gas approval.

Credit Delegation: Credit delegation is a function in which the depositor receives additional funds by delegating the loan limit when the AAVE protocol is used to earn interest only, not a credit loan. People receiving the loan limit can find their funds in a special Credit Delegation Vault. To protect their funds, the parties use an application called OpenLaw to enter into a terms agreement.

Interest Rate Conversion: This model was implemented to protect borrowers from interest rate volatility and allows them to switch between fixed and floating rates.

Transaction function: Even if the deposit cryptocurrency supported by AAVE is used as collateral, it is possible to trade using it. Users are also able to trade on margin, allowing them to take long and short leveraged positions and liquidity providers can increase their deposit weight.

Governance: AAVE Governance has been opened to allow AAVE token holders to delegate their votes to other addresses. Voters can sign messages from their Cold Wallet and participate in AAVE Governance.

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How does AAVE work?

Through the AAVE protocol, you can earn interest on digital assets and borrow cryptocurrency tokens in the form of stable interest rate loans, floating-rate loans, flash loans, etc. You can borrow and borrow more than 15 cryptocurrencies, including Dai (DAI), Ethereum (ETH), Chainlink (LINK), Tether (USDT), and AAVE.

1. Loan

Borrowers provide liquidity by depositing the raised funds into a pool. Each pool accumulates assets to prevent volatility. To avoid possible liquidity issues, AAVE has set up liquidity pools on Balancer and Uniswap so that borrowers can repay their funds at any time.

2. Borrowing

AAVE supports the concept of overcollateralized loans, like other DeFi loan systems based on Ethereum. This means that in order to borrow an asset, you must first lock up 50-75% more collateral than the loan amount. This protects the protocol’s funds when users fail to repay their loans. It is important for borrowers to maintain a collateralization ratio. Otherwise, the collateral will be automatically sold or liquidated to repay the loan. The interest earned on the investment helps to offset the interest accrued on the loan.

3. ATokens

Regardless of whether the deposited amount is a loan or borrowing, users receive interest-bearing ATokens from the exchange, which is linked 1:1 with the value of the underlying asset. Each AToken is based on one cryptocurrency asset. For example, when depositing Ethereum (ETH), users are given Ethereum (ETH) tokens. Tokens provided in this way can be freely stored, transferred, and traded. These exchange mechanisms give borrowers access to various cryptocurrencies without having to own them.

Borrowers will continue to receive interest on the deposited assets. Interest rates vary depending on the currency, loan supply, borrowing demand, and utilization. In addition, token holders receive a certain percentage of the fees generated by AAVE’s flash loan mechanism.

4. Flash Loans

What’s unique about AAVE is that users can get instant loans without collateral through Flash Loans, a borrowing mechanism designed for developers. Flash loans are made on the condition that the principal repayment must be made within one Ethereum transaction. If the loan is not returned to the pool on time, the transaction is destroyed. This ensures the safety of the funds in the reserve pool and prevents participants from taking various risks. Flash loans require a fee of 0.09% and the whole process is completed in about 13 seconds.

Flash Loans are used for:

• Arbitrage
• Refinance loan
• Self-liquidation
• Generate Trading Revenue
• Exchange cryptocurrencies automatically
• Cross collateral

Regardless of the purpose, the redemption mechanism is protected by code. This contributes to overall system security and allows users to borrow and lend money without having to rely on third parties.

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AAVE vs Compound – Similarities and Differences

Compound Finance and AAVE have been the biggest DeFi lending platforms and their biggest contenders since the launch of the AAVE Protocol. At first glance, they look the same, but there are a few differences.

What they have in common is:

• It is based on the same concept.
• Make an over-collateralized cryptocurrency loan.
• You can earn interest on your deposits.
• Have a governance token.
• There is an ERC-20 token that represents the underlying asset.

While there are many similarities between Compound Finance and AAVE, there are a few things that set them apart:

• The most notable feature of AAVE is its unsecured flash loans.
• AAVE offers a variety of tokens for borrowing and lending. AAVE has more than 15 tokens compared to 9 tokens in the compound.
• AAVE offers both fixed and variable rates through its interest rate conversion service, while Compound only offers floating rates.
• AAVE has a higher ratio to collateral. In AAVE, the borrower gets 75%, while the compound gives the borrower 66%.
• Compound has, on average, lower interest rates and lower loan fees than AAVE.
• The compound is easy to navigate and use even for beginners.
• To encourage participation, COMP is giving borrowers and borrowers a fraction of COMP tokens every second.

In general, Aves has more unique features than Compounds and offers more payment options, making AAVE a more viable solution.

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AAVE Token

The AAVE platform is powered by the AAVE token (formerly known as LEND) based on the ERC-20 standard. It was created to incentivize users to manage and evolve the AAVE ecosystem through voting and token staking.

From 2017 to September 2020, before the migration to the new currency began, LEND was the native token of AAVE. LEND tokens were swapped with AAVE tokens at a ratio of 100:1. The total coin supply has decreased from 1.3 billion LEND to 16 million AAVE, 130,000 AAVE tokens have been issued for redemption by LEND token holders, and 3 million tokens are held in the AAVE ecosystem to promote protocol growth.

AAVE tokens are designed to be deflationary. About 80% of the platform fee is used by the protocol, and the coins that become tokens from the fee are burned. Users can buy AAVEs on the exchange and earn AAVEs by depositing or borrowing. These coins can be stored in Ethereum compatible wallets such as MyEtherWallet or Metamask.

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AAVE Token function

The AAVE Token has several features and advantages:

Rate Discount

AAVE holders and borrowers will receive a discount on platform transaction fees when using AAVE as collateral.

Staking

AAVE tokens can be stored in the safe module of the AAVE protocol to provide insurance to depositors. Those who stake will receive a reward for staking and a protocol fee.

Suggestions

Users can make suggestions when changing platforms.

Voting

AAVE provides protocol-level governance to their holders and is used to determine AAVE Improvement Proposals (AIPs), new features, future protocol updates, and more.

In addition, AAVE holders may pay a fee to AAVE to further review the loan before it is made available to the general public. If the borrower takes out a loan denominated in AAVE tokens, the borrower will not be charged any fees.

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History of AAVE

Stani Kulechov founded the peer-to-peer lending platform ETHLend in November 2017 in response to a lack of loan applications on Ethereum. After that, several important events occurred in the ecosystem.

• November 2017: Initial Coin Offering (ICO) of ETHLend token LEND raised $16.2 million.
• September 2018: ETHLend underwent a rebrand, renamed AAVE to incorporate various platform features.
• 8 January 2020: We ETHLend is shut down, the protocol is changed to Abraham pools based on the company’s strategy in P2P lending and the main four was run on.
• July 2020: The AAVE platform upgraded the protocol’s internal capital requirements with a focus on security.
• September 2020: The initial phase of AAVenomics and LEND swapping for newly issued AAVE tokens has begun.
• December 2020: AAVE Protocol V2 is launched. Upgrades include gas optimization, credit delegation and liquidity mining (interest farming).

As the project evolves, we can expect to see a continuation of new major steps in the future.

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AAVE price history

AAVE price history begins with the Initial Coin Offering (ICO), when LEND sold for $0.0162 per coin. Since then, the token value has been steadily rising, and it started at $53.49 per coin in October 2020 and grew with steady performance until it reached $84.31 at the end of December. The AAVE’s highest price of $555.04 was recorded on February 10, 2021, during the bull run at the beginning of the year.

At the time of this writing, AAVE coin is 370 dollars 99 cents.

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What is AAVE’s future?

As of now, AAVE’s future looks very bright. The global cryptocurrency market capitalization has grown to over $1.7 trillion. From this, it can be assumed that the massive advertising surrounding digital assets will not decrease and the need for online loans in the form of cryptocurrencies will increase. AAVE is one of the most exciting projects in the DeFi industry, so we think AAVE will play a significant role in this niche.

Price forecast of AAVE token

It is difficult to say whether tokens are a good long-term investment in a highly volatile cryptocurrency market. However, some experts and analytics service providers are trying to predict AAVE’s future based on information from a variety of sources.

Longforecast predicts that AAVE will cost $928 in early 2022 and $1637 by the end of 2022. This represents a 344% increase. However, by 2025, two years later, it is predicted that it will decrease to $375.

The Digitalcoin platform is expected to close at $756 in December 2021, up $627. AAVE predicts that it will be $1,347 by 2025.

Wallet Investor expects a return of around +1,379.6% over a 5-year investment. In the long term, we expect the price of the AAVE to rise to $5,468 in 2026.

Trading Beast (TradingBeasts) is 2021 gotta finish will be added to $ 477 from 2022 to 2024 are expected to raise the price fluctuations within 800 to 1190 dollars.

Many analysts are optimistic that the AAVE Coin price will rise between 300% and 3,000%.

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Price factor of AAVE

Av’s price is affected by other factors. The first is the overall cryptocurrency market cap growth, which means higher currency adoption. The second factor is the hype surrounding the DeFi part of one of AAVE’s most promising projects. It is also important to lead the flash loan field. Another factor affecting the value of AAVE is coin buring, which lowers the supply and plays a positive role in price drivers. In addition, token price, usage, and popularity are related to user adoption of the AAVE platform and the success of the assets included in the AAVE platform.

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Conclusion

AAVE is a great solution for those who want to borrow or lend money without having to rely on banks or other central financial institutions. A decentralized approach and all processes protected by code make this platform transparent and secure. As the demand for these solutions has increased over the past few years, the coin price is fueling the use of the platform, and thus project capitalization is expected to grow as well, making AAVE a good investment.

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