AAVE - What is AAVE Crypto and What Does It Do?

Introduction

Lending and Borrowing are fundamental financial activities that play a big role in the traditional financial industry. To bring these important activities to the blockchain, several new protocols have been created, and one of the notable ones is AAVE.

In this article, we’ll take a look at AAVE, one of the DeFi 1.0 Giants that led the way to the lending and borrowing sector in DeFi.

What is AAVE?

Aave stands out as a decentralized crypto platform that facilitates cryptocurrency lending and borrowing. The platform harnesses the power of smart contracts, which are automated sets of instructions, to seamlessly manage various aspects of the lending and borrowing processes. These instructions are pre-set to govern fund distribution, collateral management, and fee computation.

A distinctive feature of Aave lies in its specialization in overcollateralized loans. This entails borrowers providing cryptocurrency assets of higher value than the sum they intend to borrow. This strategic approach offers a layer of protection for lenders, mitigating potential losses stemming from loan defaults. 

Through AAVE, users can engage in a diverse array of strategies, spanning from straightforward passive income approaches to more intricate leveraged portfolios. In the latter, users have the capacity to deposit collateral, thus securing the ability to borrow funds and invest in other assets.

The New AAVE Stablecoin

Stablecoins are one of the most profitable businesses in the crypto industry. Tether and USDC have billions of dollars in deposits and use part of it to invest in other financial assets, such as government bonds and even recently a small portion of Bitcoin!

Knowing the potential, AAVE launched recently its own native stablecoin GHO, which can be minted on the platform by providing collateral on the Ethereum blockchain.

The potential success of the stablecoin could boost the usability and revenue of AAVE, which can also affect its token price in the future!

Tokenomics

The AAVE token has dual roles: governance and staking.

Governance

AAVE holders participate in a decentralized decision-making process. They vote on proposals and suggest improvements through Aave Improvement Proposals (AIPs), shaping the platform's rules, safety measures, and upgrades. Changes are executed through smart contracts, ensuring community-approved alterations.

Staking

AAVE holders can stake their tokens in the Safety Module, a safeguard within the lending system. This module helps manage any funding shortages by auctioning some staked AAVE tokens. In return for securing the system, stakers earn Safety Incentives, either in AAVE tokens or a share of platform fees, contributing to platform stability.

• Also, with the launch of the new stablecoin GHO, AAVE stakers receive a discount on the borrowing fee of the stablecoin!

AAVE has a maximum supply of 16 million tokens, and the distribution is the following:

Initially, the distribution was entirely centralized, allocating 77% of tokens to investors and advisors, and 33% to founders. However, a significant shift occurred in 2020, transforming AAVE into a decentralized platform. Further insights into this transition can be explored here.

Final Thoughts

AAVE is one of the big guys in DeFi, containing an insane market share and a lot of approval from users, which explains the billions of dollars that are locked in the protocol.

On Kassandra, you can easily gain exposure to AAVE through our tokenized crypto portfolios like Polygon Ecosystem managed pool, Arbitrum Ecosystem pool, along with other community pool options like Best of Avalanche pool.