Aave (AAVE) Review: Is AAVE a Profitable Investment and Why Should You Invest in It
Aave is a DeFi lending system that facilitates the lending and borrowing of crypto assets for interests. The market is launched on the Ethereum ecosystem, and users of Aave explores the many opportunities to make profits. They can take loans and pay interest to lenders using crypto assets.
This DeFi protocol has simplified many processes of financial transactions on Aave. By eliminating the need for middlemen, Aave has successfully created a system that runs autonomously. All it takes to complete the lending and borrowing transactions are smart contracts on Ethereum.
One notable thing about Aave is that its network is open to crypto enthusiasts. The developers ensured that anybody could use the network without issues. That’s why both retail investors and institutional players in the industry loves Aave.
Moreover, the protocol is easy to use. You don’t need to be an expert in blockchain technology to navigate the interface. This is why Aave is amongst the top DeFi apps worldwide.
History of Aave
Stani Kulechov created Aave in 2017. The platform was borne out of his exploration of Ethereum to influence the conventional system of financial transactions. He carefully laid aside every technical barrier that could pose a limitation in using this platform by people.
At the time of its creation, Aave was known as ETHLend and with its token as LEND. From its initial coin offering (ICO), Aave produced over $16 million. Kulechov had the intention of putting up a platform to connect both borrowers and lenders of cryptocurrencies.
Such borrowers will only be eligible when they possess the criteria for any loan offer. In 2018, Kulechov had to make some adjustments and rebranded ETHLend due to the financial impact of that year. This brought the birth of Aave in 2020.
The relaunch of Aave came with the use of a special feature in the money market function. It initiated the introduction of a liquidity pool system that uses the algorithmic approach in calculating the interest rates on crypto loans. However, the type of crypto assets borrowed will still determine the interest calculation.
The operation of this system is set in such a way that there will be higher interest rates for assets in short supply and lower interest for assets in abundant supply. The former condition is favorable to lenders and spurs them to make more contribution. However, the latter is condition is favorable to borrowers to go for more loans.
What Aave Contributes to the Market
One of the main reasons for creating a market like Aave is to improve the traditional lending system. Every Decentralized Finance project aims at eliminating the centralized processes of our financial institutions. Aave is part of that grand plan that developers have to eliminate or reduce the need for intermediaries in the financial systems.
Aave has come to ensure a smooth flow of transactions without the need for intermediaries. In a typical traditional lending system, let’s say banks, for instance, lenders pay interest to banks for lending out their money.
These banks earn interest off the money in their custody; the liquidity providers don’t make any profits from their money. It is a case of someone leasing your property to a third party and bagging all the money without giving you any portion.
This is part of what Aave eliminates. Lending your crypto on Aave has become permissionless and trustless. You can complete these transactions in the absence of intermediaries. Moreover, the interests you earn from the process enter your wallet on the network.
Through Aave, many DeFi projects sharing the same goal have emerged in the market. The network helped to take peer-to-peer lending to a new level entirely.
Benefits and Features of Aave
Aave offers many benefits to users. The financial protocols boast of transparency, and that what many users stand to gain. When it comes to lending and borrowing, everything is clear and understandable, even to newbies in the crypto market.
You don’t have to wonder about the processes like we see in traditional systems that don’t allow access to their processes. They use your funds in ways that favor them but don’t care to share the earnings with you. However, Aave discloses the processes to its community to know everything happening in the network.
Some of the main features of Aave includes:
- Aave is an Open-Source Project
One good thing about open-source codes is that many eyes are on them and work tirelessly to keep them free from vulnerabilities. Aave’s lending protocol is open-source, making it one of the most secure platforms for financial transactions.
There’s a whole community of Aave maintainers reviewing the project to identify and eliminate vulnerabilities. This is why you can rest assured that bugs or other compromising threats, will not access your account on the network. By this, you’re not going to have issues about hidden fees or risks on Aave.
- Diverse Lending Pools
Users of Aave are provided with multiple lending pools to invest and earn rewards. On the network, you can choose any of the 17 lending pools to maximize your earnings. Aave lending pools include the following;
Binance USD (BUSD), Dai Stablecoin (DAI) Synthetix USD (sUSD), USD coin (USDC), Tether (USDT), Ethereum (ETH), True USD (TUSD), ETHlend (LEND), Synthetix Network (SNX), Ox (ORX), Chainlink (LINK), Basic Attention Token (BAT), Decentraland (MANA), Augur (REP), Kyber Network (KNC), Maker (MKR), Wrapped Bitcoin (wBTC)
Aave users can provide liquidity to any of these lending pools and make a profit. After depositing their funds, borrowers can withdraw from the pool of their choice through loans. A lender’s earnings can be deposited into his/her wallet, or they can use it to trade.
- Aave Doesn’t Hold Cryptocurrencies
This benefit is great for investors who’re concerned about hackers. Since the protocol uses a “non-custodial” approach to its operations, users are safe. Even if a cybercriminal hacks the network, he/she can’t steal crypto because there’s none to steal.
Users control their wallets which are not Aave’s wallets. So while using the platform, their crypto assets remain in their external wallets.
- Aave Protocol is Private
Like other decentralized protocols, Aave doesn’t require the submission of KYC/AML (Know Your Customer and Anti Money Laundering) documents. The platforms don’t work with intermediaries. So, all those processes become unnecessary. Users who uphold their privacy principles over everything else can invest on the platform without compromising themselves.
- Risk-Free Trading
Aave offers many opportunities for users to borrow any cryptocurrency without having to own them. You can also make profits in the form of rewards on Aave without trading any of your assets. By that, a user can use the platform with little or no risk.
- Diverse Interest Rate Options
Aave provides multiple interest options for users. You can choose the variable interest rates or go for the stable interest rates. Sometimes, it’s best to switch between the two options depending on your goals. The important thing is that you have the freedom to achieve your plans on the protocol.
How Does Aave Work?
Aave is a network consisting of many lending pools to utilize for profit. The main aim of creating the network was to minimize or eliminate the challenges of using traditional lending institutions such as banks. This is why Aave developers brought in a method combining lending pools and collateralized loans to ensure a seamless transaction experience for crypto enthusiasts.
The process of lending and borrowing on Aave is easy to understand and follow. Interested users who wish to lend out their funds make deposits to a choice lending pool.
Users who’re interested in borrowing will draw funds from the lending pools. The tokens drawn by the borrowers can be transferred or traded based on the lender’s directives.
However, to qualify as a borrower on Aave, you must lock a certain amount on the platform, and the value must be pegged in USD. Also, the amount a borrower will lock must exceed the amount he/she aims to draw from the lending pool.
Once you’ve done that, you can borrow as you wish. But note that if your collateral falls below the threshold stipulated on the network, it’ll be placed for liquidation so that other Aave users can buy them at discounted rates. The system does this automatically to ensure positive liquidity pools.
There are other features that Aave leverage to ensure a seamless user experience. Some of these strategies include:
Oracles on any blockchain serve as links between the outside world and the blockchain. These oracles gather real-life data from outside and supply it to blockchains to facilitate transactions, especially smart contract transactions.
Oracles are very important to every network, and that’s why Aave utilizes Chainlink (LINK) oracles to arrive at the best values for collateralized assets. Chainlink is one of the trusted and reliable crypto platforms in the industry. By leveraging the platform, Aave ensures that the data from the oracles are accurate because Chainlink follows a decentralized approach in its processes.
- Liquidity Pool Reserves Funds
Aave created a liquidity pool reserve fund to protect its users against market volatility. The fund helps to convince lenders of the safety of their funds deposited into several pools on the network. In other words, the reserve serves as an insurance cover for the lender’s funds on Aave.
While many other peer-to-peer lending systems were still struggling against volatility in the market, Aave took a step to create a backing against such situations.
- Flash Loans
Flash loans changed the whole decentralized finance game in the crypto market. Aave brought the idea into the industry to enable users to take loans and pay fast without collateral. As the name implies, Flash loans are borrowing and lending transactions completed within the same transaction block.
People who take flash loans on Aave must pay it back before mining a new Ethereum block. But bear in mind that failure to pay back the loan cancels every transaction within that period. With flash loans, users can achieve many things within a short time frame.
One important use of flash loans is to utilize arbitrage trading. A user can take a flash loan of a token and use it to trade on a different platform to make more profit. Also, flash loans help users to refinance their loans incurred in a different protocol or also use it to swap collateral.
Flash loans have enabled crypto traders to engage in yield farming. Without these loans, there wouldn’t have been anything like “Compound yield farming” found in InstaDapp. However, to use flash loans, Aave takes 0.3% charges from users.
Users receive aTokens after depositing funds in Aave. The amount of aTokens you’ll get will be the same value as your Aave deposit. For example, a user who deposits 200 DAI into the protocol will get 200 aTokens automatically.
The aTokens are very important on the lending platform because they enable users to get interests. Without the tokens, lending activities won’t be rewarding.
- Rate Switching
Aave users can switch between variable and stable interest rates. Stable interest rates follow the rate average for a crypto asset within 30days. But variable interest rates move with the demands arising in Aave’s liquidity pools. The good thing is that Aave users can switch between the two rates depending on their financial goals. But bear in mind that you’ll pay a small Ethereum gas fee to make the switch.
- Aave (AAVE) Token
AAVE is an ERC-20 token for the lending platform. It entered the crypto market four years ago towards the end of 2017. However, it was bearing another name because then, Aave was ETHLend.
The token is a utility and deflationary asset on many exchanges in the industry. Amongst the platforms where AAVE is listed is Binance. According to its developers, the token may become a governance token for the Aave network quickly.
How to Buy AAVE
Before we move to how to buy AAVE, let’s Xray some reasons why you may want to buy AAVE.
Here are some of the reasons to buy AAVE:
- It helps in your investment in decentralized platforms for lending and borrowing cryptocurrencies.
- It’s a means to spread your investment strategies on a long-term basis.
- It offers you the opportunity of earning more cryptocurrencies through lending.
- It encourages more application development on the Ethereum blockchain.
It is very easy and simple to buy AAVE. You can use Kraken if you’re resident in the USA or Binance if you’re a resident of Canada, the UK, Australia, Singapore, or other parts of the world.
Here are the steps to follow when buying AAVE:
- Sign up for your account on any platform you choose
- Make your account verification
- Make a deposit of fiat currency
- Buy AAVE
How to save AAVE
The use of both software and hardware wallet permits you to store your cryptocurrencies. Either as a lender or a borrower in cryptocurrency, you must understand that not every wallet is compatible with the Aave native token (AAVE).
Since Aave is on the Ethereum platform, you can easily store the token in an Etheruem-compatible wallet. This is because AAVE can only be held in an ERC-20 compatible wallet.
Examples include MyCrypto and MyEtherWallet (MEW). Alternatively, you have the option of using other compatible hardware wallets such as Ledger Nano X or Ledger Nano S for the storage of AAVE.
You shouldn’t make a hasty decision before you choose a crypto wallet for tokens. The type of wallet you decide for AAVE should depend on what you have in your plans for the token. While the software wallets offer the opportunity to make your transactions easily, the hardware ones are known for their security.
Also, hardware wallets are preferable when you want to store crypto tokens for the long term.
Predicting the Future of AAVE
Aave displays their roadmap on their page, given that it focuses on transparency. So to know more about the development plans of the protocol, visit the ” About Us” page.
However, as for what the future holds for Aave, crypto experts forecast that the token will keep rising in the future. The first indicator that Aave will grow, is the fast-rising growth in the market capitalization of the industry.
The next indicator has to do with the growing hype surrounding the protocol. Many users are singing its praises and thereby attracting lots of investors to the protocol. Even though Aave has a strong competitor in the Compound Protocol, there’s still hope for it. Each of these two giants has distinguishing characteristics which set them apart from each other.
For instance, while Aave has a wider range of tokens for users to explore, Compound only offers USDT. Also, Aave offers the opportunity for users to switch between stable and variable interest rates.
But that’s not obtainable with its competitor. Moreover, Aave welcomes newbies with mouth-watering interest rates not found on other protocols.
Flash loans are also another good point for Aave as it’s the leaders where the transaction is concerned. With all these and more, the protocol is positioned to be a leading global platform that facilitates seamless lending and borrowing.