What is AAVE?
When it comes to DeFi OGs, Aave Protocol is high up on the list. Not only are they among the first DeFi protocols, but they are also responsible for innovating the crypto space with the introduction of flash loans, and other services.
In 2017, a team of engineers sought to solve the problem of limited access to capital for individuals and businesses in the crypto market. To achieve its purpose, the platform had to be non-custodial, meaning users retain full control and ownership of their assets at all times, and they can withdraw them from the platform at any time without needing to go through a centralized intermediary.
Aave was one of the first DeFi protocols to make use of smart contracts in the context of financial operations. With smart contracts, there is no risk of a third party running away with users’ money, or ever worse, locking up the money for no reason. Furthermore, anyone can access AAVE regardless of their geography, political views, or religion — AAVE doesn’t require KYC.
To explain why AAVE protocol has maintained its OG status, let's see why dozens of DeFi projects choose to built on top of Aave?
The primary mechanism for securing the Aave Protocol is the incentivization of AAVE holders to lock tokens into a smart contract-based component called the Safety Module. The locked AAVE will be used as a mitigation tool in case of a shortfall event related to the Aave markets. A Shortfall Event occurs when there is a deficit. In the occurrence of a deficit, part of the locked AAVE are auctioned on the market to be sold against the assets needed to mitigate the occurred deficit.
The Safety Module (SM) was designed to reward AAVE tokens who deposit their tokens into the smart contract. In return, they will receive a tokenized position that can be freely moved within the underlying network. The holder of the tokenized position can redeem their share from the SM at any time, triggering a cooldown period of one week (which can be further extended by the governance).
Aave also a native token called AAVE. It works as a governance token for the protocol. AAVE holders will lock their tokens in order to vote on decisions regarding protocol parameters. It is a common system used within DeFi protocols that aligns the long-term interests of token holders' with the protocol.
AAVE mainly derives its value from lending and borrowing crypto assets. In exchange for the service provided, Aave receives a small fee that goes into maintaining the protocol. Upon consulting with the community, core developers are usually in charge of implementing the protocol upgrades. This ensures AAVE stays safe from hacks and the protocol adapts to the market conditions.
As the number of transactions increase, the fees quickly add up. A portion of these fees goes into the DAO, Safety Incentives and Liquidity Incentives.
The AAVE treasury is secured by a multisig that is being held by the core team and key members of the AAVE DAO. The development team aims to eventually transition to on-chain governance, giving the AAVE DAO complete control of protocol parameters.
The open nature of DeFi encourages protocols to cooperate and innovate. AAVE is a unique protocol that has been in the making since early 2017. However, the protocol can be vulnerable to hacks and exploits. As easy as it is for developers to review each others’ code, hackers can just as easily spot a vulnerability and take advantage of it.
The code is publicly available to verify. Those who are tech savvy can audit the code for themselves and see precisely what the smart contracts do. Less technical users can indirectly assess the safety of AAVE protocol based on audits and reports issued by technical community members – to this day, Aave has never been hacked.
Finally, Aave's health is determined by the amount of liquidity that is locked in the protocol. The liquidity of the protocol is measured by the availability of assets for basic protocol operations such as borrowing assets backed by collateral and claiming supplied assets along with accrued yield. While Aave is regarded as a top 3 DeFi protocol, there is still a degree of risk associated with pools that have limited liquidity.
Their success has been so gigantic, that even financial institutions have started to use the protocol in the form of Aave Arc. This represents a permissioned version built on top of Aave's smart contracts. While Aave Arc won't be covered in the following sections, it is good to know that the value of DeFi receives recognition from institutions that previously bashed crypto.
How does AAVE work?
Aave works by allowing users to borrow and lend assets across the DeFi ecosystem. Being one of the first DeFi protocols built on Ethereum, Aave has paved the way for many of the DeFi projects we see today. All interactions are mediated by smart contracts in a non-custodial fashion.
In addition to the traditional borrowing/lending services, Aave also implements some novel components to its protocol.
AAVE aTokens
aTokens on Aave are a type of ERC-20 token that represent the underlying assets that are being borrowed or lent on the platform. They are minted and redeemed automatically as users borrow or repay loans, and their value is pegged to the underlying assets.
When a user borrows an asset on Aave, an aToken is minted and sent to the user's account. The user can then use the aToken to trade, pay debts or perform other operations. The value of the aToken is the same as the value of the underlying asset.
When a user repays a loan, the aToken is burned and the underlying asset is returned to the lender. This process of minting and burning aTokens helps to maintain the value of the aTokens and to ensure that the total supply of aTokens matches the total supply of underlying assets on the platform.
The concept of tokenized assets is not new, but Aave's implementation of aTokens is unique in the sense that it is specifically tailored to the lending and borrowing use case. By tokenizing the assets, Aave is able to provide a more efficient, transparent, and trustless way to manage and transfer ownership of assets on the platform.
Aave's implementation of aTokens also enables users to access liquidity in a more flexible way, and allows them to borrow or lend assets without having to go through the hassle of transferring the underlying assets. This is particularly useful for volatile assets, where the value can change rapidly, or for assets that are difficult to transfer or trade.
Aave's aTokens concept also enables the creation of a decentralized and open-source lending market, where users can lend or borrow assets with other users without the need of intermediaries. It also allows for more efficient use of resources, and liquidity and can help to ensure that there is always liquidity available for borrowers.
AAVE Flash Loans
The concept of flash loans on Aave was inspired by the need for a more efficient and flexible way to access liquidity. Flash loans are a type of unsecured loan that must be repaid within a single transaction, which makes them useful for arbitrage and other short-term trading strategies.
The team at Aave recognized that traditional lending systems, which often require collateral and credit checks, can be slow and cumbersome, and can create barriers to access for some users. Flash loans, on the other hand, allow users to borrow funds without collateral and without imposing KYC, making it more accessible for everyone.
Flash loans on Aave are also useful for users who want to take advantage of market inefficiencies or to perform other types of financial operations that require a large amount of liquidity. For example, flash loans can be used for arbitrage, which is the practice of buying and selling a crypto asset simultaneously in different markets to take advantage of price differences.
A flash loan is a type of loan that is made available for a very short period of time, typically a few seconds or minutes. During this time, borrowers can access the funds and make a trade on a DeFi platform. The key feature of a flash loan is that it must be repaid in full before the loan period expires, with interest. If the loan is not repaid, the transaction is rolled back and the borrower is not charged any interest. This allows for high-risk, high-reward financial transactions to take place on the blockchain.
GHO Stablecoin
The latest addition to Aave protocol is its own stablecoin. GHO is an overcollateralized stablecoin that is fully backed and transparent.
Anyone can mint GHO in exchange for collateral. Interest rates are defined by the Aave DAO and repaid interest is redirected to the DAO instead of the asset suppliers. This means AAVE stakers profit from the GHO interest rates as opposed to the liquidity providers.
How to make money on AAVE?
Did you just skip the entire article to this section?! Ok, just make sure you have understood the risks of dealing with magic internet money. This means if you mess up, there is no customer support to save you. Luckily we've covered some of the safety aspects in the beginning.
With Aave, your gains are limited only by the amount of upfront capital you are willing to put up. Whether you start with $100 or $10,000, the mechanics of the protocol stay the same. You can choose to stay in one liquidity pool, or become a rotatooor and constantly rotate your assets to the highest paying pool at the time. Ultimately, gains are determined by the capital efficiency of your funds. On Aave, you can be a happy yield farmer or a DeFi wizard.
AAVE Borrowing
Borrowing is a useful way to increase your purchasing power while maintaining exposure to our collateral. Let's say you own some ETH and you are looking to buy BAL. By borrowing via Aave you get to post your ETH as collateral and buy BAL.
Each token will have a variable APY that represents the cost to borrow the asset. In our example, let's say the APY for BAL is 10%. This means you will have a 10% interest to pay for borrowing BAL.
Keep in mind that the interest rate can be either stable or variable. The variable rate will change over time and could be the optimal rate depending on market conditions. You can switch between the stable and variable rate at any time through your dashboard.
Here's how you borrow on Aave:
Open the Aave app
Navigate to the "Markets" tab
Select the asset you wish to borrow
Input the amount of TOKEN you choose to borrow. The collateral required will adjust based on your borrowing amount
Approve the transaction
Done!
There is no fixed time period to pay back the loan. As long as your position is safe, you can borrow for an undefined period.
In order to avoid the reduction of your health factor leading to liquidation, you can repay the loan or deposit more assets in order to increase your health factor.
AAVE Lending
Lending is a fairly safe way to earn passive income on the supplied crypto assets. Funds can be withdrawn at anytime – just make sure there is enough liquidity (not borrowed) in order to withdraw, if this is not the case you would need to wait for more liquidity from suppliers or borrowers repaying.
Here's how you lend on Aave:
Open the Aave app
Navigate to the "Markets" tab
Select the asset you wish to lend
Input the amount of TOKEN you choose to lend
Approve the transaction
Profit!
You can supply any amount you want, there is no minimum or maximum limit. Still, it's important to take into account that for really low amounts it is possible that the transaction cost of the process is higher than the expected earnings.
AAVE Flash Loans
Flash loans are a feature designed for developers, due to the technicalities required to execute one.
To do a Flash Loan, you will need to build a contract that requests a Flash Loan. The contract will then need to execute the instructed steps and pay back the loan + interest and fees all within the same transaction. It's best to consult the Aave documentation for the necessary tools.
AAVE Staking
Staking on Aave is different than on blockchains. Its purpose is to help serve the Aave protocol in case of a liquidity crunch.
Tokens staked go into the Aave Safety Module, which will use up to 30% of the funds to cover any shortfall. In exchange for staking AAVE, users receive stkAAVE, which can be redeemed for the underlying AAVE.
The initial staking rewards are 550 AAVE/day to be split between the stakers. Any adjustments in the staking rewards are initiated by the Aave DAO.
Here's how to stake on Aave:
Open the Aave app
Navigate to the "Stake" tab
Input the amount of AAVE you choose to lend
Approve the transaction
Profit!
You can initiate the withdrawal anytime. There is, however, a cooldown period that you need to activate that requires sending 1 transaction. After the cooldown period passes there is a 2 day window to unstake! If you do not unstake during that period you will need to activate the cooldown again.
Additionally, AAVE stakers are eligible for a discount on minting GHO stablecoin.
GHO Stablecoin
The primary method of making money on GHO is arbitrage. This method is encouraged by the protocol as it helps peg the value of GHO to $1.
If GHO were to be valued > $1, the market would arbitrage the value back to $1 as it would be profitable to swap GHO for other stablecoins. If GHO were to be valued < $1, then it would be profitable to pay back debt, and will result in GHO total supply decreasing as debt is repaid will help the peg to be restored.
The GHO pool functions differently from existing assets, but to the borrowing process works similarly as other assets on the protocol.
Here's how you mint GHO:
Open the Aave app
Head to the "Markets" tab
Search for "GHO" and click "Borrow"
Click "Borrow" and sign the transaction
With your newly minted GHO you can buy other assets and wait for the arbitrage opportunity to show up. This strategy is recommended for advanced users as they need to keep an eye on the value of their collateral. If the Health Factor goes down, users have to supply more collateral or face liquidation risks.
Price Prediction for AAVE — Can it hit $1000?
Buying and hodling AAVE — the native token of the Aave protocol — is one way of potentially making money on Aave.
AAVE is used as a governance and gas token. This means the value of AAVE is tied to the growth of the protocol.
Aave is regarded as a blue chip DeFi token. This is because Aave is being used by regular DeFi users and financial institutions alike. Although the institutional version is a separate product, it shows the overall quality of the protocol.
By looking at its current price, it’s natural to think about the chance of AAVE hitting $1000 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.
Let’s examine the potential growth of the AAVE token by analyzing its tokenomics. AAVE Chain’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} AAVE tokens being in circulation today, that means a price of {PRICE} per AAVE.
How did we come to that calculation? It’s quite easy, the price of a AAVE token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each AAVE coin.
By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of AAVE at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for AAVE to hit that price.
At a price of $1000 per token, that means the current market cap of AAVE would equal ${{CIRCULATING_SUPPLY} * 1000}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $1000.
Now let’s shift our attention to the fully diluted market cap.
Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.
The fully diluted market cap represents the total value of a coin if all tokens were in circulation. AAVE Chain’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} AAVE which means that no more coins above that number will ever be created.
These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.
How does this impact the price of AAVE Chain? Taking into account the current price of a AAVE token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. AAVE coins that have been burned are not taken into consideration because they have been permanently removed from circulation.
Whether it seems gigantic or not, the number we came to above only takes into account the current price of a AAVE token. Doing the same calculation but with a price of $1000 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 1000} for the Aave protocol fully diluted market cap.
These are all crucial details to know when calculating if AAVE can reach the price of $1000 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.
The future of AAVE depends solely on its growth as a network used by tens and hundreds of millions of users. Technically, the price of AAVE can reach $1000 and beyond by 2030.
If you’re looking to add some AAVE to your portfolio, the most trusted places to get some are Binance and Coinbase.
