Decentralized finance or DeFi is currently one of the fastest-growing segments in the cryptocurrency market and Aave is one of the projects that have benefited the most from the opportunities in this space.
Aave is a DeFi lending protocol built on the Ethereum network and it is completely decentralized thus no central authority is involved. The project went live as ETH Lend in 2017 and rebranded to Aave in 2018. It supports borrowing and lending for more than 17 cryptocurrencies and provides multiple types of loans such as uncollateralized loans, flash loans, and rate switching among others.
Aave provides crypto holders with a method of participating as lenders by providing cryptocurrencies to smart contracts. The platform is overcollateralized at any given time, meaning that there are more funds in the platform than the amount of money being borrowed. Such an approach is important because it makes sure there is always solvency such that lenders do not lose their investment.
Lenders also get to see the rate of returns that they get for lending on the platform in the form of an APY rate which fluctuates depending on the amount of market demand and supply. Borrowers have the current variable rate and stable percentage rate. Lenders can provide liquidity to lending pools by linking their Metamask accounts to transfer the cryptocurrency they want to lend to the Aave protocol.
Crypto traders can collateralize their existing cryptocurrencies to borrow another cryptocurrency that they believe will gain value over time. Users can also take out uncollateralized flash loans through flash swaps offered on the Aave platform. Flash loans are ideal for rapidly taking advantage of arbitrage opportunities in the market.
The AAVE token came into existence in 2020 through a redenomination of the previous token called LEND. AAVE’s initial supply was 16 million tokens, out of which 13 million were distributed to the platform’s community, and the remaining 3 million tokens were put in the platform’s reserve. The LEND migration also ushered in AAVE staking which enables an insurance plan called Safety Module designed to act as an insurance plan to protect the Aave protocol from shortfall events.
In case a black swan event takes place, 30% of the staked tokens are slashed. AAVE token holders also have the privilege of participating in the protocol’s governance and structure. AAVE has been so successful since its launch that it became the most popular DeFi lending platform in the world in August last year and has since then been in the top three DeFi platforms. Its performance has also been crucial for the AAVE token’s growth.
AAVE token is currently trading at $283.92 and is down by 6.33% in the last 24 hours and 8.39% in the last 7 days.
AAVE traded as low as $84.65 at the start of January 2021 and peaked at $668 during the Bull run that ended in May. Part of its impressive growth comes from the fact that a large supply of the token is in the community and also the low supply of tokens. Most of the yields gained on the Aave protocol are as a result of the lending of assets on its platform, thus making it less deflationary than many other DeFi protocols which constantly print more tokens. AAVE staking is also an important source of growth for the token.
AAVE is rapidly growing into one of the top cryptos thanks to the above factors and an increase in institutional support could further fuel more growth in the future. Its market cap is currently at $3.6 billion and could increase with an influx of institutional investors with deep pockets, thus the possibility of reaching new highs.
Sydney has 20+ years commercial experience and has spent the last 10 years working in the online marketing arena and was the CMO for a large FX brokerage.
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