What Is AAVE, and How Is It Used in Crypto Loans?

What Is AAVE, and How Is It Used in Crypto Loans?

One of the biggest lenders of Crypto, AAVE, possesses a token, AAVE, with one of the largest market caps than competitors such as Compound and Maker. In this excerpt, we will highlight how AAVE is being used to loan out cryptocurrency.

The Basics of Lending with AAVE

AAVE is a lending-based protocol that permits users to lend to others or borrow Crypto through a decentralized system. Users are allowed to deposit the funds in storage, known as liquidity pools. Then, the protocol is then responsible for lending out these funds. Last month, the firm approved using a decentralized stablecoin known as GHO.

Since AAVE is a DeFi lending protocol, users who lend funds end up receiving interests while those borrowings have to pay. When starting, the AAVE protocol was the first to build on an Ethereum blockchain and the token ERC20 was used to process transactions. From then on, AAVE has expanded to Avalanche, Fantom and Harmony.

It is also important to note that, since AAVE uses DAO, the people in control are those who hold the AAVE token and those who vote with it.

The AAVE Lending Process

Traditionally, the first step of acquiring a loan is visiting a bank with lots of money. The bank will then ask you to provide collateral for the loan, complete some paperwork, and then you are handed the loan. You will then have to pay a principal alongside interest to the bank each month. However, in DeFi 2.0, all middlemen are eliminated from the equation. The process is fully decentralized, and computer odes known as smart contracts are the ones responsible for all the heavy work. Essentially, one can obtain a loan from individuals other than traditional financial institutions. However, collateral still has to be provided, hence other crypto tokens.

The main issue that arises from this is the problem of over-collateralization. Since the price of crypto assets is highly volatile, you will be forced to collateralize a high amount than what you are borrowing. In addition, when there is a price fluctuation and the price of your collateralized Crypto is not more than your loan, the protocol can liquidate as cover for your loan.

Today, AAVE has around thirty Ethereum-based pools. These include Tether, Gemini dollar, DAI, and Stablecoins. In addition, the firm also offers pools with assets from the real world, such as real estate.

The Essence of Borrowing Crypto?

The most common transactions involving Crypto are mostly buying and selling of Crypto. However, some traders opt to buy Crypto for arbitrage purposes. This is where you seek to make money by noting the different trading trends in different exchange sites. Yet, sometimes this difference is minimal, and you’d have to trade a large volume to make a decent return.

To help users with this, AAVE has come up with loans known as AAVE flash loans, which need no collateralization. You must borrow the crypto trade to add profit and then pay the initial sum you borrowed.

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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.