What is Aave: Crypto Lending and Borrowing from a Web3 Bank

Aave lending

Seamlessly borrow and lend cryptos through Aave’s decentralized finance platform

Aave is a popular decentralized finance (DeFi) platform that operates on various Layer-1 and Layer-2 blockchains, offering lending and borrowing services like a Web3 bank. As a lending protocol, Aave allows users to supply assets and earn passive income. With its user-friendly interface and intuitive features, Aave offers a seamless experience for individuals looking to maximize their asset potential. 


What is Aave?

Aave is one of the largest decentralized lending protocols built on Ethereum. Over years of development, it has expanded to various networks, including Optimism, Arbitrum, Polygon, Fantom, Harmony, and Avalanche

Aave revolutionizes lending and borrowing by harnessing the power of smart contracts, offering users enhanced efficiency and profitability. On DappRadar’s DeFi Ranking, Aave has firmly established itself as a leading player in the DeFi space. 

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Between 1 January and 28 June 2023, Aave has maintained a consistently stable Total Value Locked (TVL), ranging between $3.7 billion and $5.4 billion, reflecting the high level of trust and confidence placed in the platform by its users.

Aave TVL

In terms of user activity, Aave also demonstrates significant engagement. In June 2023, Aave recorded 3,860 unique active wallets (UAW) on its V2 platform, while its later-launched V3 platform attracted 39,740 UAW.

Aave V2 vs V3

How does Aave work?

Aave has undergone multiple updates, introducing innovative features that cater to users’ needs and enhance lending efficiency. These updates have propelled Aave forward, ensuring that the protocol remains at the forefront of the rapidly evolving DeFi landscape.

Features of Aave V2

Aave V1, the initial version of the Aave protocol, was released in 2017, offering decentralized lending and borrowing without intermediaries. V2 released in 2020, brought notable advancements.

It introduced variable and stable interest rates, flash loans for uncollateralized borrowing, efficiency mode to enhance earnings, and portals for seamless integration with other DeFi protocols. 

Overall, the upgraded Aave brought a significant improvement, particularly in terms of lending feature diversity and asset interoperability.

Features of Aave V3

Aave V3 is the latest version of the protocol, operating in parallel with V2. Its enhancements include the following:

  • Efficiency mode (E-mode) allows lenders to earn higher interest rates by depositing their assets into a single pool, optimizing their profitability. 
  • Portals enable seamless integration with other DeFi protocols, facilitating asset movement and access to new financial products and services. 
  • Isolation mode provides lenders with the option to isolate their assets from others in the pool, protecting them from market volatility. 
  • Gas optimization reduces transaction fees, making Aave V3 more cost-effective for users. 

Why is Aave popular?

Aave has gained popularity for several reasons. The platform enjoys the first-mover advantage, but that’s not all. One key factor is its strong emphasis on security. The protocol has undergone audits by reputable security firms, such as OpenZeppelin, PeckShield, and Quantstamp, which have found no major vulnerabilities. 

Another reason for Aave’s appeal is its innovative features, such as flash loans and the E-mode. With flash loans, users can borrow funds without providing any collateral, enabling them to quickly execute complex financial strategies. 

The E-mode feature in Aave enhances capital efficiency by allowing borrowers to maximize their borrowing power when collateralizing and borrowing assets within the same category. For example, if a user supplies DAI in E-mode, they can borrow assets like USDC or USDT with higher collateralization power.

Aave V3 e-mode

How to use Aave?

Primarily designed for lending and borrowing activities, the Aave protocol offers a user-friendly and intuitive interface.

Aave UI

To get started, simply supply your preferred asset and the desired amount. Once you have supplied your assets, you can start earning passive income based on the market borrowing demand. It’s a seamless way to put your assets to work for you.

Additionally, supplying assets to the protocol unlocks the ability to borrow against your collateralized assets, with interest earned offsetting the interest accrued from borrowing. This dynamic system actually provides the soil for what we call “yield farming”.

Once you borrow assets from Aave, you have the option to supply those borrowed assets back into the lending pool, earning additional interest or rewards. However, it’s essential to be mindful of the associated risks when engaging in these activities.

You have the flexibility to withdraw your funds from the pool whenever you need or choose to export a tokenized version of your lender position known as aTokens. These aTokens can be freely moved and traded like any other cryptographic asset on the Ethereum network.

Tokens in Aave’s ecosystem

In Aave’s ecosystem, there are two key tokens: AAVE (AAVE) and AAVE Ghost (GHO).

AAVE plays a vital role in governing and incentivizing various participants within the ecosystem, including liquidity providers, borrowers, holders, and users. By holding AAVE tokens, users gain voting power to participate in decision-making processes that impact the protocol’s functionality. 

Furthermore, AAVE holders can stake these tokens. The mechanism secures the protocol and rewards token holders, including Safety Incentives (SI) and a portion of the protocol fees. Stakers can freely trade their staked AAVE tokens after a cooldown period, and rewards are distributed in real-time when AAVE is withdrawn or transferred from the Safety Module.

AAVE token

GHO is an over-collateralized stablecoin and is pegged 1:1 to the U.S. dollar. Users can mint GHO by depositing assets as collateral at a specified collateralization ratio. Initially, GHO stablecoins were only minted against assets such as WETH, WBTC, USDC, and AAVE. But now, users can supply any asset available in the Aave Protocol to mint GHO.

What does the future look like for Aave

Amid the rising adoption of decentralized finance (DeFi), Aave emerges as a leading force in the ever-evolving landscape. With a focus on establishing global permissionless tokenized asset money markets, Aave aligns its goals with the growing demand. 

Furthermore, Aave strives for increased decentralization by empowering its community through robust governance mechanisms. Users actively participate in shaping the protocol’s future, influencing decisions, proposing fee adjustments, and driving the introduction of new features. Notably, the community-driven launch of Aave V3 exemplifies the collaborative nature of the project.

All in all, Aave has the potential to remain a pillar of the DeFi industry, serving as a key building block.

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