Aave is a money market based on the Ethereum blockchain. Aave allows users to borrow crypto through loans and allows users who lend to receive interest on funds.
Aave is an AMM(Algorithmic Money Market) which means the interest is charged by an algorithm depending on the assets in a pool. If there are fewer assets in a pool the interest rate goes up to incentivize lenders, and if the pool is dry interest rate is lowered to incentivize borrowing.
Aave also allows for flash loans, which means you can take quick loans with no collateral as long as they are returned in the same block.
Aave also offers lenders the option to receive the funds back in a different form of currency than the one they lent.
This is an example retrieved from the Aave app of the DAI dashboard. It has key indicators and detailed statistics that help users determine the status of this particular asset in the market.
Total Borrowed: The total amount of this particular asset borrowed from the platform. When the percentage of this asset increases the APY and APR both go up along with it.
Available Liquidity: The total amount of this asset available to borrow in the lending pool. Contrary to the amount borrowed when the liquidity percentage rises the APY and APR move in the opposite direction.
Reserve Size: The total amount of this asset in this pool. Whether it is available to borrow or not.
Utilisation Rate: The percentage of the pool being borrowed by users. When the percentage increases the APY and APR both go up along with it.
Deposit APY: The annual percentage yield for the asset you have deposited in the lending pool.
Stable borrowing/ Borrowing APR: The interest rate for the assets you have borrowed. The stable rate is a fixed rate in the short term that stays relatively stable but can be changed to a rate that fits market demand more closely in the long term.
Variable Borrowing/ Borrowing APR: This interest is tied to the market demand for the asset and is more volatile than the Stable Borrowing APR.
Maximum LTV: Maximum Loan-to-Value ratio stands for the max borrowing power available for a specific collateral. As an example let's use DAI, if the LTV of the collateral asset deposited is 75%, the user can borrow up to 0.75 worth of DAI of the currency in question for every 1 DAI worth of collateral they deposit.
Liquidation Threshold: This determines the point where the asset borrowed will be considered undercollateralized and liquidation could occur for each collateral. If a collateral has a liquidation threshold of 77%,
it means that the loan will be liquidated when the debt value is worth 77% of the collateral value.
Liquidation Penalty: Liquidators repay all or just a portion of the outstanding amount of the asset that was borrowed and undercollateralized. In return, they can buy the collateral asset at a discount and they get to keep whatever the price difference is as a bonus. Which is a penalty the borrower suffers.
Health Factor: This indicates the safety of your loan. It is calculated from the proportion of your collateral against the amount you borrowed. To keep it above 1 to avoid liquidation you can deposit more assets or pay back the loan.
How to borrow on Aave?
This is the dashboard for users looking to borrow on the platform. The display shows no borrowing power available due to no collateral having been deposited.
The limit set for the amount you can borrow is directly tied to the value you have deposited and the available liquidity provided. You cannot borrow an asset if there is not enough liquidity available or if your health factor is not at the appropriate level. Every collateral option available and its parameters for borrowing are in the risk parameters section.
For those who want to borrow and are more technically inclined Flash Loans are available. These loans give you access to borrow any available amount of assets without putting up any collateral, as long as the liquidity is returned to the protocol within the same block transaction. To execute a Flash Loan, you will need to build a contract that requests a Flash Loan. The contract will then need to execute the instructed steps and pay back the loan + interest and fees all within the same transaction.
There are so many different ways to utilize the Aave token and the amazing platform they have developed. You can provide liquidity on the platform and earn passive income from it. When looking to gain capital quickly you can use the Borrowing option to obtain liquidity without selling your assets. When looking to borrow with no collateral you can execute Flash loans which are loans with no collateral returned within the same block transaction. If you are looking for passive returns while holding the Aave token you can stake Aave, and you will receive incentives from the Safety Module. The option to swap deposited assets gives you more flexibility in your portfolio.
The Aave token has two distinct purposes.
Aave is a decentralized pool-based lending strategy. The contract allows lenders to provide liquidity by depositing their crypto into a pool. This pool can also be borrowed from by placing collateral into the platform. There is no P2P lending so borrowing and lending happen instantly and funds can be retrieved faster. An algorithm decides the rates of pools depending on the state of the pool and whether it has high or low liquidity.
Aave is an innovation that will give the Defi space the true liquidity and lending system needed to compete for head to head with traditional finance. It is nowhere close to truly surpassing the traditional alternative but it is a step in the right direction for Aave, a step in the right direction for Defi, and a step in the right direction for the crypto world.