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The decentralized finance (DeFi) lending network known as Aave is built on the Ethereum blockchain. Aave eliminates the need for an intermediary by directly connecting cryptocurrency borrowers and lenders.
The Ethereum blockchain serves as the foundation of the decentralized finance (DeFi) lending network known as Aave. It enables you to obtain immediate cryptocurrency loans using other digital currencies you already own as security. Additionally, it enables users to profit by lending out their cryptocurrency.
Just like at a bank, those who deposit money get interested and those who borrow money pay interest; however, there is no bank manager or loan manager making decisions. The intermediary is eliminated via smart contracts, which are collections of code that automatically carry out transactions when specific criteria are satisfied. Deposits are made into something called a “liquidity pool,” which the protocol can utilize to lend money to other people, and this is the main mechanism that makes Aave work. This sizable cryptocurrency pool enables the code to access and withdraw money for loans on demand and at scale. Since transactions are automated by smart contracts, lending and borrowing occur almost instantly. However, this also means that there is no one to plead for extra time or explain a challenging scenario if you are unable to repay your loan on time. Your assets will be liquidated exactly as specified by the code by the smart contract that controls the protocol’s decisions, without any hesitation.
A group of programmers led by Stani Kulechov developed Aave. It debuted in November 2017 as ETHLend before changing its name, which in Finnish means “ghost,” in September 2018. Along with competitors Compound and Maker DAO, the protocol has since developed to become one of the most popular bitcoin lending mechanisms available (the precise leader fluctuates all the time). Aave has more than $6 billion in total value locked (TVL) across all chains as of this writing.
Asset lending on Aave
Users can provide Aave with a small number of assets, including stablecoins like tether (USDT) or USDC, as well as tokens like BAT, MANA, and others. The annual rates of return differ depending on the asset, the blockchain, supply and demand, and finally, the Aave version you are utilizing. There are currently three iterations of the protocol: Aave version 1, version 2, or version 3. Each one improved the network. Aave v2 continues to be the largest public loan market, with $5.29 billion in TVL, according to analytics platform DeFi Llama. Comparatively, Aave v3 has $1.47B in TVL. Aave Arc, a permissioned DeFi lending system utilized by businesses like Binance and Coinbase, is the largest market for Aave.
Aave introduced its own governance token, AAVE, in October 2020. The currency was introduced during the summer’s “yield farming” mania, which allowed traders to produce governance tokens using several protocols. The governance module of the protocol uses this token. Holders can vote, for example, on what assets to include in the lending markets of the protocol.
Aave does more than just lend money. Lens Protocol, a decentralized social network protocol based on the Polygon network, was introduced in February 2022. The lens is an “open, composable social media protocol that allows anyone to create a non-custodial social media profile and construct new social media applications,” according to Aave founder Stani Kulechov. He expressed his hope that Lens would promote a “better and more compassionate user experience” on social media in an interview with CoinDesk. A proposal to develop GHO, yield-generating stablecoins that are fully collateralized by cryptocurrencies and are similar to MakerDAO, was approved by the community in August 2022. Aave intends to charge interest on GHO loans, which will aid in funding its DAO.