Aave is an Ethereum-based decentralized money market application. Having a lot in common with Compound, Aave allows you to deposit crypto assets to earn interest, as well as borrow crypto assets for investment or other needs.
While the traditional financial ecosystem requires the role of financial institutions to lend and borrow funds, Aave automates the process with smart contracts on the Ethereum blockchain.
Through smart contracts, Aave bridges the need between lenders who want to earn interest and borrowers who need assets as investment capital.
Aave itself has a governance token called AAVE which gives the holder the right to vote on changes to the Aave protocol. In DeFi or decentralized finance projects, the presence of a governance token is needed to distribute authority to users so that the platform remains decentralized.
As one of the most popular DeFi applications, the AAVE token is one of the largest DeFi coins by market capitalization with a value of $3.6 billion as of July 2021. To find out more about AAVE, see the explanation below.
As of July 2021, Aave offered 28 crypto assets for lending and borrowing activities. How to start earning interest from depositing crypto assets or getting loans at Aave? Here’s the explanation.
To start earning interest on this app, the first thing you have to do is deposit a crypto asset. When depositing assets, users will receive aTokens, or tokens that represent the amount of the user’s balance in the protocol and earn interest over time. If you deposit USDT, you will receive aUSDT. If you deposit YFI, you will receive aYFI and other tokens as well.
Interest will immediately accrue on the user’s aToken. The user must exchange aToken to receive back the paid-in capital plus the interest earned.
2. Borrow funds with Aave
Aave also allows users to leverage or a technique to invest using borrowed money as capital. Before starting to borrow on Aave, users must deposit assets as collateral, and the amount deposited must be higher than the amount borrowed. This means that if you want to borrow $100 worth of crypto assets, you must first deposit assets that are worth more than $100. This is to minimize the risk of the lender if the price of the crypto asset being lent is dropping. Here is the example:
Example: You have 20 ETH (worth $4,600as of July 2021) and believe that the price of ETH will increase in the next 30 days. You want to buy more ETH, but don’t have enough funds. With Aave, you can deposit your 20 ETH and borrow 50% of that ETH value in Aave.
Let’s say that in Aave you borrow USDT assets, a stablecoin that has the same value as USD, with a loan interest of 1%. Thus you get USDT worth $2,300 or 50% of the value of ETH you deposited. With 2,300 USDT you borrow, you buy 10 ETH on the exchange of your choice. If after 30 days the price of ETH has increased by 25%, then the value of the 10 ETH you just bought will be $2,875.
You can sell the 10 ETH, return to Aave to repay the loan, and withdraw the ETH you previously deposited. With a loan of 2300 USDT plus 1% interest, it means that you have to pay 2323 USDT to Aave and get back the 20 ETH that was deposited. Thus, you make a profit of $2,875 – $2,323 = $552.
For users who want to make loans, Aave will ask them to choose a stable annual percentage rate (APR) or a variable annual percentage rate (APR). In Stable APR, the interest rate does not change and is suitable for borrowers who prefer to know the fixed amount of interest that must be paid.
While in Variable APR, the interest rate is determined by an algorithm based on the number of deposits and asset requests in the Aave protocol. So the interest rate can be smaller or larger than that offered by Stable APR.
For lenders, the interest rate given depends on the utilization of assets in the liquidity pool. If almost all the assets in the pool have been used, the interest rate offered will be higher so that more users are interested in depositing more capital.
If almost no assets in the pool are used, the interest rate charged will be lowered to attract more loans.
To use Aave, you need an Ethereum wallet that can interact with dApp/Web3 (like Metamask) and some ether (ETH). Once you have a wallet, you can directly link your wallet with Aave. One thing you need to remember, every transaction on the Ethereum blockchain requires a fee called a gas fee to be paid to the miners to finalize the transaction. Therefore, make sure you have enough ETH to run the transaction.
In April 2021, Aave officially partnered with Polygon, a protocol for connecting Ethereum-compatible blockchain networks, to overcome the high transaction fees and speed up the transaction process. Within 7 days after the launch of Aave on Polygon, the number of transactions on Aave jumped by more than 50%, while the number of active wallets interacting with Aave smart contracts increased by almost 20%.
AAVE is created by Stani Kulechov. Stani was studying law at the University of Helsinki when he first got into Ethereum and explored how Ethereum blockchain technology has had such a huge impact on traditional financial systems. Kulechov founded Aave in 2017, and to date, the total assets locked in the Aave protocol have reached $11.3 billion.
AAVE is currently among the top five DeFi tokens with the largest market capitalization of $4.1 billion. Currently, more than 12,914,000 AAVE coins are circulating in the market, with a maximum supply of 16,000,000 tokens. The price of one AAVE token as of July 2021 is $319. To check the current AAVE token price, you can click the following link.
After reading the explanation above, if you are interested in buying various crypto assets such as AAVE tokens, you can you can download Pintu, a crypto exchange app that has been registered with BAPPEBTI. With Pintu, you can start to invest in crypto from as little as IDR 11,000 and invest equal sums of assets at regular intervals with Dollar Cost Averaging (DCA) feature. Simply download Pintu and click the “DCA” feature that you can find on the app’s home page.
“How to DeFi?”, CoinGecko (2020)