One of the promises of the decentralized internet is a financial system that doesn’t play by conventional rules. On the decentralized web, financial transactions can be completed based on completely new parameters and timescales.
Our token of the week, AAVE, is a protocol built to deliver these decentralized financial tools to everyone. Here’s a closer look.
Launched in 2017 and based on the Ethereum network, AAVE is a decentralized lending platform. The platform allows anyone to lend crypto assets to earn an interest. These assets can be borrowed by others on the platform.
Interest rates for these transactions are often far better than traditional banks. This allows users to borrow certain assets cheaply while earning lucrative returns on other assets.
At the time of writing, the platform’s assets exceed $14.5 billion, making it one of the most successful projects in the emerging field of decentralized finance or DeFi.
The core use case for the AAVE protocol is the ability to lend or borrow crypto assets. Traditional banks simply cannot deal in these assets yet and centralized platforms have counterparty risks associated with them. As a decentralized, open source platform, AAVE allows users to lend and borrow these digital assets without the need to prove their identity or provide a credit report. Instead, the loans are based on overcollateralization – locking up an asset that is worth more than the loan.
The AAVE protocol also allows users to borrow without any collateral if they can prove that the assets will be returned. Since digital assets on the Ethereum network can interact with each other, the protocol allows a user to take a substantial loan for zero collateral as long as it is used in a transaction that returns the borrowed asset right away. This technique is called a “flash loan” and is considered the greatest innovation of the AAVE protocol.
AAVE has also pioneered the concept of “credit delegation.” This new feature allows a user to lend a digital asset on the platform and earn extra returns by delegating their credit to other users without the need for collateral. These loans are enforced with either legal documents off-chain or smart contracts on-chain.
Although the protocol was created by a group of developers in London, it operates as a decentralized system with open participation from users. Users can buy AAVE tokens that allow them to vote on how the platform is managed and how the framework is evolved over time. Effectively, the platform is operated by these governance tokens. The team refers to this as “AAVEnomics.”
At the time of writing, each AAVE token is worth $300 and the collective market capitalization of the platform is $3.8 billion.
Last week, the co-founder of Aave, Stani Kulechov, revealed that the Aave protocol has built a “private pool” for institutions to “practice” before getting involved with the DeFi ecosystem. The private pool will include know-your-customer (KYC) and anti-money laundering (AML) restrictions to help financial institutions experiment with DeFi while complying with local regulations.