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Undoubtedly, blockchain technology has brought a lot of ways to the existing systems and even revolutionized the traditional financial systems. Once the financial systems that remained centralized for this whole time since its emergence it was under the control of authorities, and where customers had no control even over their assets. Now consider the decentralized finance system based on smart contracts that have brought drastic financial behavior changes.
Aave (AAVE) Protocol bringing evolution in finance
Ethereum-based Aave Lending Protocol is one of the emerging DeFi projects that have received so much adoption and wider acceptance all around. It’s a decentralized lending system that follows the traditional system of lending, borrowing, and earning interest but has a slight twist of decentralized features that require no intermediary. What? If it is too much for you, don’t worry; let us simplify it.
Take, for instance, the scenarios of taking loans in general from any bank, where you would need to show either your credit history or collateralize an asset already under authority. Bank takes your assets as collateral, gives you at least 80% of your asset’s value, and charges you specific interest rates that it gives back to its clients, who are account holders, after taking out its cut. In this process, the banking institution has all the control over your assets, loan amounts, and the authorities related to the terms and conditions.
How does the Aave lending protocol work?
The similar procedure Aave Lending Protocol follows while having no drawbacks like banks would have, reducing the tedious process and making the process smooth and frictionless. Since it’s based upon smart contracts, it makes the process easily accessible and reliable. Aave users do not require to depend upon specific institutions or intermediary persons to manage funds on their behalf; everything is open since it’s written code and can be executed on its own after fulfilling particular conditions. Fun fact, Aave in Finnish language means ‘Ghost’, where it means that the transactions, lenders and borrowers remain anonymous and private.
Aave Lending protocol lets users stake their specific digital assets and get quite high interest on their staking as an annual percentage yield (APY) upto 6%. Aave software provides the creation of crypto assets lending pools that makes users able to lend or borrow different 17 available cryptocurrencies on the platform, out of which five are stablecoins, and the other 12 include ethereum (ETH), Basic Attention Token (BAT), and decentralized (MANA).
Perhaps the best-known lending pool system, Aave lets the participants deposit the funds they wish to lend collected in a liquidity pool. The pool is available to access by the borrowers, who then can withdraw the amount as a loan as much as they want within the pool after fulfilling the required conditions. Such conditions are like putting about 120% worth of assets as collateral in order to take out digital asset loans.
Here’s Aave has an interesting feature called Liquidating Threshold that automatically liquidates the collateral in order to recover the value of the lent amount whenever the amount of collateral asset drops by about 82.5%. In such a case, the lender amount always remains safe. The number of AAVE tokens meant to be the governance token of the platform, where there are about 110,571 token holders, makes it quite decentralized.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
