Publication date: Oct. 16, 2024
What is Aave?
Aave (AAVE) is a cryptocurrency and platform specifically designed for lending and borrowing digital assets. Originally started as ETHLend in 2017, Aave was later renamed Aave to expand the platform to a wider range of services. What makes Aave unique is that it allows users to borrow crypto assets without the need for a traditional financial institution. Instead, users work with so-called "liquidity pools," which are funded by other users. This allows users to earn interest on deposited crypto assets.
The protocol offers several lending options, including popular tokens such as DAI, USDC, and ETH. The platform also offers unique features, such as "flash loans" - loans without collateral that must be repaid within the same transaction.
How does Aave work?
Aave is a platform where users can borrow and lend without traditional intermediaries. Borrowers use collateral to borrow assets, and these assets are provided by other users who deposit crypto into the liquidity pools. When borrowers repay their loan and interest, the interest is divided among the providers in the liquidity pool based on how much they contributed.
One of Aave's innovations is the ability to choose between fixed and variable interest rates. This is a great advantage in volatile markets, where users can benefit from choosing the best strategy based on market conditions
History of Aave
Aave began in 2017 under the name ETHLend, founded by Stani Kulechov. He developed the platform to solve the lack of lending options on Ethereum. In 2020, ETHLend underwent a rebranding to Aave, a name that means "ghost" in Finnish. This new name reflected the platform's expansion into lending with multiple asset types and not just Ether.
In July 2020, Aave launched V2, which brought new features such as switching between fixed and variable interest rates and improving collateral management. The platform gained even more momentum with the launch of Aave V3 in 2022, which improved the scalability and security of the system, and added support for new blockchains and Layer 2 solutions
What's going on at Aave?
Recently, Aave has gone through several major developments, including the launch of Aave V3. This version made several improvements, including more efficient capital requirements and better risk management. In addition, Aave has announced new collaborations, like through Coinbase to introduce cbBTC (Coinbase Wrapped Bitcoin), which should bring further liquidity to the platform.
Aave has also been able to increase its market share due to increased demand for loans during crypto-market volatility, generating millions in revenue daily through liquidation fees. This revenue stream highlights the platform's resilience during market turbulence.
Price development of Aave
Aave's share price was around $50 at launch, but thanks to DeFi's explosive growth, AAVE rose to a high of more than $600 in the 2021 bull market.
Important technology updates, such as the introduction of Aave V2, which offered enhanced functionalities such as faster liquidations and lower gas fees, further boosted AAVE's value. Collaborations with major stablecoins such as USDC and expansion into new blockchains, including Avalanche and Polygon, have strengthened Aave's ecosystem, further driving demand for AAVE. However, market volatility and increasing regulatory pressure on DeFi platforms drove the price down through much of 2023.
By the end of 2023, the price fell to around $60 after which, on balance, an upward trend followed. The chart below shows the price trend over the past 12 months.
Advantages of investing in Aave
- 1. Passive income through lending: Users can earn interest on their deposited cryptocurrency in the liquidity pools.
- 2. Innovative lending options: Aave offers "flash loans," which allow borrowers to leverage capital quickly and without collateral.
3. Interest rate flexibility: The platform lets users switch between fixed and variable interest rates depending on market conditions.
4. Proven track record: Aave has proven its technology and scalability since 2020 and has strong collaborations within the industry.
5. Continuous innovation: With the launch of Aave V3, the platform continues to improve and add new capabilities.
Disadvantages of investing in Aave
- 1. Fluctuations in price: The value of the Aave token can fluctuate significantly, which can lead to losses.
2. Complexity of the platform: Using Aave requires a good understanding of cryptocurrencies and the risks of borrowing and lending.
3. Risk of smart contract errors: Although Aave is well secured, there remain risks in errors in smart contracts, which can cause significant losses.
4. Regulatory uncertainty: Aave operates in a rapidly changing regulatory environment, which creates risks, especially for financial innovations.
5. User risks: "Flash loans" can be abused by malicious parties, which can negatively impact the stability of the platform.
Disclaimer: Investing involves risk. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. They are therefore for educational purposes only.
