AAVE is the largest decentralized money-market protocol built on Ethereum and deployed across 6 different Layer 1 and Layer 2 networks. It allows users to supply and borrow a wide range of crypto assets in a secure and permissionless environment. The platform has over $3.5 billion in assets locked on the protocol and had as much as $18 billion at the peak of the bull market.

AAVE Overview

Platform Highlights

  • Largest DeFi borrowing and lending protocol with over $3.5B in value locked on the platform.
  • Available cross-chain on Ethereum, Avalanche, Arbitrum, Polygon and other networks.
  • Launching a stablecoin called AAVE Ghost (GHO) designed to drive more value to investors and stakers.
What is AAVE?
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Table of Contents

How does AAVE work?

AAVE works by allowing users to supply assets and borrow against them. A user can deposit their cryptocurrency holdings into the AAVE protocol, becoming a liquidity provider and earning interest in exchange for providing funding. Borrowers are able to leverage their cryptocurrency holdings as collateral, receiving loans denominated in ETH or stablecoins such as USDC or DAI.

The platform utilizes a risk assessment engine, allowing users to manage their exposure to market volatility. Additionally, AAVE also provides flash loans and allows users to create their own money markets or lend against them.

AAVE Optimism V3
AAVE Optimism V3 Supply & Borrow Markets.

What are the benefits of using AAVE?

The key benefits of using AAVE include: access to high yield savings accounts, flexible collateral management, low-cost access to liquidity for DeFi users, flash loans for arbitrage opportunities, and its presence cross-chain. Additionally, AAVE provides a safe and secure platform with robust governance mechanisms protecting user funds with their staking and insurance module.

AAVE is a great tool for cryptocurrency traders, investors and institutions alike. It provides a secure and efficient way to access liquidity in the DeFi ecosystem, allowing users to take advantage of market volatility without sacrificing security.

How high are the supply yields on AAVE?

The yields on AAVE's available markets will vary depending on on-chain activity and demand for borrowing.  At the time of writing, AAVE’s supply rate for ETH on Ethereum mainnet is 1.59%. This is very low compared to historical yields because demand for credit in decentralized finance (DeFi) has decreased significantly as the bear market continues to worsen.

That said, the yields on AAVE are still competitive compared to other money-market protocols and have minimal smart contract risk. Furthermore, the yield may be higher if you’re staking specific tokens like aLINK or aDAI, which is currently at 10% and 7.5%, respectively. You can view the top 10 pool APYs below provided by DefiLlama.

AAVE Yields
AAVE Yields - Provided by Defillama.

AAVE platform fees

AAVE charges three different types of fees: borrowing, lending and flash loan fees. The borrowing fee is 0.09% per year for ETH-based assets, while the lending fee is 0.04%. The flash loan fee is also low at just 0.09%.

There are also variable fees to supply and withdraw assets from the protocol depending on the network you use. For example, gas fees on the Etheruem blockchain are relatively high due to the high-demand for blockspace. Whereas Layer 2's cost significantly less and are generally under $1 to deposit or withdraw cryptocurrencies from the AAVE protocol.

What is the AAVE (AAVE) token?

The AAVE token (AAVE) is the native utility token of the platform. It is used for governance and to incentivize liquidity providers, borrowers, holders and users of the platform. Using AAVE tokens, users can vote on proposals that will impact how the protocol functions, such as increasing or decreasing fees and introducing new features.

Additionally, users who stake AAVE receive revenue from the protocol and higher yields when they supply assets in the protocol. AAVE stakers will also receive revenue from the forthcoming AAVE stablecoin (GHO), which is expected to be released in Q1 2023.

AAVE Price vs Protocol Fees
AAVE Price vs Protocol Fees - Provided by Tokenterminal.

What is the AAVE Ghost (GHO) Stablecoin?

The AAVE team has announced an over-collateralized stablecoin product called AAVE Ghost (GHO). The stablecoin will be pegged 1:1 with the US Dollar and users can mint it at a certain collateralization ratio relative to their deposited assets. The GHO stablecoin will only be mintable against WETH, WBTC, USDC and AAVE when initially launched.

The GHO stablecoin will also be available on AAVE’s Layer 1 and Layer 2 deployments, allowing users to take advantage of the reduced gas fees.

Is it safe to use AAVE?

Using AAVE, a decentralized lending protocol, may be safer than using centralized lending platforms. This is because decentralized lending platforms like AAVE operate on a trustless and transparent blockchain network, making them resistant to traditional threats of financial malpractice like seen with FTX and Celsius. Additionally, the transactions and lending activities on AAVE are verifiable on the blockchain, providing an additional level of transparency and security.

However, as with any financial decision, it's important to do your own research and due diligence before using any lending platform, including AAVE, and to be aware of the potential risks associated with using these platforms.

Final Thoughts

In conclusion, AAVE stands as a prominent decentralized money-market protocol, offering a secure and permissionless environment for users to supply and borrow crypto assets. With over $3.5 billion in locked assets and cross-chain availability, AAVE provides users with high yield savings accounts, flexible collateral management, and low-cost liquidity access. The platform also boasts flash loans for arbitrage opportunities, robust governance mechanisms, and the upcoming AAVE Ghost stablecoin.

Despite inherent risks in the DeFi space, AAVE remains a valuable tool for cryptocurrency traders, investors, and institutions seeking to navigate market volatility securely and efficiently.

Co-Founder & former Investment Banker (Finance MBA) turned Full-Time analyst and Head of Research at Buy Bitcoin Bank. Left traditional finance to pursue my interest in digital assets and decentralized finance.