Decentralized Finance (DeFi), is a complicated yet rewarding ecosystem. If you have not yet explored the money-making options in DeFi then this is your sign to learn and invest on the DeFi platform. DeFi refers to financial applications that offer financial instruments and enable users to undertake digital financial transactions with each other without any intermediary involved.
Aave is one such DeFi application, it is amongst the earliest DeFi protocol and top DeFi cryptocurrencies in the present market.
What is AAVE?
Aave is a decentralized market protocol non-custodial in nature that enables users to borrow by paying a variable interest, lend, and earn passive income through earning interest on the crypto assets offered for borrowing without any interference from any central authority or intermediary. In short, it is an open-source lending platform. Open source platforms allow building other third-party applications or services to interact with the protocol.
Aave means Ghost in Finnish. It was developed by Stani Kulechov, current CEO of Aave, in 2017. Its ICO raised $17.86 million. Aave’s Whitepaper was launched in January 2020, and its version 2 was launched in August 2020. The V2 mainnet was streamed in December 2020. The V3 of Aave was launched in January 2022.
Aave provides an opportunity for people excluded from the traditional banking systems to borrow and lend crypto assets.
Aave runs on the Ethereum Blockchain, its native token Aave is an ERC-20 token. Aave protocol runs os smart contracts that manage the assets through software running on a distributed network of computers, in simple words these smart contracts control the funds and accordingly disburse instant loans. The smart contracts give the Aave protocol the freedom to operate and manage their funds without placing their trust in a particular institution or person. The only reliance and requirement for the protocol to work effortlessly depend on the execution of a well-written code in the smart contracts.
Over 17 cryptocurrencies can be used in creating lending pools for depositing and borrowing from the pool. They include ETH, MANA, etc,.
The AAVE protocol’s strategy is pool-based i.e., lenders provide liquidity to a pool under a pool contract (Deposit Crypto assets in the liquidity pool). At the same time, borrowers can apply to borrow funds from the pooled funds by putting up collateral against the loan to be borrowed. Due to the pool-based nature of the protocol, the loan to be borrowed is not matched with any individual deposit fund, instead, the loan relies on the collateral and the amount of funds available in the pool. The loan is completely dependent on the state of the pool.
Funds cannot be borrowed without the collateral, borrowers must compulsorily post collateral. The amount that can be borrowed will be limited to the value of the collateral attached.
In case the value of the collateral decreases or the value of the loan/ debt increases, the liquidation process is activated. 50% of the borrower’s debt is repaid by a liquidator and that value plus liquidation fees is recovered by the liquidator from the borrower’s collateral.
To avoid liquidation borrowers can increase the value of collateral posted by depositing more collateral or by repaying part of the loan.
There is an algorithm in place to decide the interest rates:
A. As the availability of the amount of funds in the pool decreases the interest rate rises. The interest rate for borrowers thus depends on the availability of the amount of funds at a specific time in the pool i.e., on the cost of money.
B. For lenders the algorithm has a safeguard in place, maintenance of a liquidity reserve ensuring guaranteed withdrawals at any given time. The interest earned by lenders matches the earn rate.
How does Aave work?
Users participating in the protocol, deposit funds in the liquidity pool. Borrowers can borrow funds required from such liquidity pools.
Aave issues two tokens for the lending process and borrowing, aTokens are issued to lenders which facilitate earning and collecting interest on their deposits, and the other token is the native token of the protocol – AAVE.
AAVE holders can receive a discount on fees on posting collateral in AAVE. Loans requested in AAVE are excluded from the fee charged for borrowing loans.
AAVE is the governance token for the protocol, they are used to vote and decide on the results of Aave Improvement Proposals (AIP). AAVE holders can stake AAVE and earn staking rewards, incentives, and fees from the protocol.
One of Aave’s unique features is Flash Loans. Loans that are processed instantly and require no upfront collateral are called flash loans. Flash loans are only finalized when the block on the blockchain is accepted by the network. But the liquidity provided to the borrower has to be returned within one block transaction otherwise the entire transaction is void.
Borrowers can use flash loans to exploit arbitraging opportunities.
Even with all the features and advantages Aave still lacks user tools to match the user experience of Web 2 services, tools, and push notifications.
What does the AAVE collaboration with EPNS have in store?
Under this pilot collaboration, EPNS will equip Aave with Web 3 decentralized push notifications. EPNS will send decentralized notifications to the users of Aave i.e., real-time updates to their linked digital wallets. All the Aave users need to do is subscribe to the Aave channel on EPNS to receive push notifications.
The collaboration will send users notifications about:
A. New assets/loans becoming available.
B. Approval of governance proposals (AIP)
C. Decline in health factor of the loan (Value of collateral decreasing or Value of loan borrowed increasing)
D. Risks related to being liquidated and thus avoiding penalty
E. Interest rates on borrowing and lending exceeding preset thresholds
EPNS and Aave will help each other in meeting ever-changing user requirements and bring to the new user tools offered by Web 2 applications like receiving instant push notification updates.
The push notifications will save users from liquidations penalties, and give them opportunities to arbitrage by receiving instant updates about new assets available on the platform. The AAVE holders can vote on the governance proposals within the set frame as there are chances to miss notifications received from centralized communication channels.
This collaboration will grease the wheels for both the protocols in meeting user requirements and user engagement.
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