What is Aave?
Aave is the native cryptocurrency token of the Aave decentralised lending system.
Launched in 2017 and initially called ETHLend, the lending platform issued 1 billion native tokens, called LEND.
The company renamed itself Aave, the name by which its native tokens are now generally termed, although they are still sometimes referred to as LEND.
The Aave platform provides a place to lend and borrow digital currency, where borrowers need to place collateral before they can borrow funds.
The Aave token gives holders discounted fees, with plans to also make it a token of governance.
How Does Aave Work?
Aave provides a money market platform based on Ethereum blockchain technology. It employs a system of smart contracts which are managed by a decentralised network of computers.
Lenders can lend digital assets to earn interest. To this end the platform operates around lending pools. Lenders will provide funds in to lending pools, from where borrowers can borrow providing they have posted enough collateral.
The lenders are issued with aTokens in order to collect the interest earned on the funds loaned.
By using the native Aave cryptocurrency borrowers can forego fees when they take out a loan in the digital currency.
Furthermore, borrowers who use Aave tokens to post collateral will be subject to a discount on fees and can be allowed to borrow slightly more than when using other digital tokens.
When borrowing from a lending pool you get the choice of applying a fixed or variable interest rate on the loan. Another feature of Aave is the ability to switch between interest rate types, switching to a more favourable rate and thereby providing more control on the loan.
It is possible to take out a loan without collateral in certain instances. Termed flash loans it makes use of how transaction bundles are only finalised once a block is complete and verified.
As the name suggests the time limit of a flash loan is miniscule, usually seconds, as this is the time taken to complete a block of transactions on the chain. The borrower must pay back the funds plus interest in the time frame of the flash loan or the whole transaction is cancelled.
What Are the Use Cases for Aave?
Aave opens the prospect of loans to those without bank accounts or access to financial institutions.
It also does away with the need for a credit rating to borrow as you can access funds at Aave provided you have the appropriate collateral.
Aave opens up the possibility of fast, cross-border banking to all, hoping to increase levels of financial inclusion worldwide.
By using the native Aave token, network users can take advantage of platform offers and various discounts on fees.
Decentralised finance platforms, while still in their infancy, have been gaining traction over the last few years.
By holding the Aave cryptocurrency users have the prospect of owning governance tokens which will provide them a voice in the future direction of the Aave protocol.