Cryptocurrencies
19
Jul
aave beginners guide

This website has affiliate links. We may receive compensation if you visit partners we recommend. Read more about our advertising principles from the About Us page.

What is Aave? The Beginner’s Guide

Aave is the biggest crypto project with origins in Finland. It is a DeFi liquidity protocol where you can deposit crypto and earn yield for it. This is Aave beginner’s guide from an investor’s point of view. We’ll go through the history, technology, and investment potential of Aave.

Aave is a DeFi token

Let’s begin by placing Aave into the correct category. We like to divide the cryptocurrency market into three main categories: currencies, platforms, and tokens.

The best-known currency is Bitcoin. This category also includes coins such as Litecoin, Bitcoin Cash, and Monero. They are all built as P2P digital currencies and have no other significant features. Even if Bitcoin’s narrative has shifted towards digital gold, it fits this category.

Ethereum is the king of the platform category. These cryptocurrencies are also called frameworks and operating systems for distributed apps. You can think of platforms like iOS or Android. Cardano, Binance Smart Chain, and Polkadot are rivaling platforms.

Tokens are issued on these platforms. This is the category of Aave as well. Tokens are usually either utility tokens or governance tokens. They serve a role inside a specific decentralized application (dapp).

We can also go deeper into the token category and select a sub-category called DeFi (Decentralized Finance). Almost all DeFi tokens are governance tokens. Other popular DeFi tokens include Uniswap, Compound, and Maker.

The word Aave is Finnish and means a ghost. This is the only well-known project with Finnish background. The word Aave can refer to the app or its native token, which has a ticker AAVE.

Note, that this is not a user guide for the Aave app. This article is an overview of the Aave protocol for potential investors.

Aave was originally ETHLend

The founder of Aave is Stani Kulechov, who doesn’t have a typical developer background. Stani has a master’s degree in law from the University of Helsinki. He has also worked in a lawyer’s office.

In the beginning, there was just a handful of people involved. Aave was not launched by famous Silicon Valley VCs. Now there are dozens of people working on the project and the headquarters are located in London. Stani is still the CEO and the spokesperson of Aave.

Aave started as a project called ETHLend. It was launched on Ethereum MainNet in early 2017. ETHLend was also part of the ICO boom of 2017. The project collected 16,2 million USD from its ICO. This is when the LEND token was also created.

See the video below if you want a “blast from the past”. It shows how ETHLend worked.

ETHLend was a P2P loan service and one of the first DeFi protocols in the market. It was developed further in 2018, but the team realized quickly that P2P lending was a difficult concept to use. It was hard to match different lending and borrowing needs.

In 2018, other DeFi protocols started to emerge. The whole scene was still very much unknown, and even the word “DeFi” was barely used.

This was the time when Uniswap DEX was developed as well. It used a P2C (Peer-To-Contract) model. In a P2C model, a liquidity pool is created by the lenders instead of everyone trying to find a borrower individually.

ETHLend adopted the P2C model in late 2018. This is also when the protocol was re-branded to Aave. The LEND token was still used, though.

If you want to learn more about the project’s history and development, see the video below.

The year 2019 was quiet on the DeFi front. Even at the beginning of 2020, the liquidity pool of Aave had less than 10 million USD of funds. Fast forward to June 2020, and this number was already 100 million dollars!

The entire DeFi market exploded in the summer of 2020. The liquidity of Aave kept multiplying too and reached 1,5 billion dollars. In Jan-Feb 2021 there was another DeFi boom. The liquidity of Aave grew from 1,7 billion to 6 billion dollars.

There was a second DeFi boom later in 2021. This is when Aave reached 17 billion dollars of liquidity! It has been one of the top five DeFi protocols in previous years. Below is a ranking of the biggest DeFi protocols at the time of writing this article (7/2022).

aave defillama

The old LEND token was re-branded (migrated) to AAVE at the end of 2020. While this was done, the supply was cut by 100. A hundred (100) LEND tokens were converted into one (1) AAVE. This was part of a series of updates called Aavenomics.

Both LEND and AAVE have been excellent investments. The price of LEND went 40x in 2020, from about 0,01$ to 0,5$. Then it was migrated to AAVE at a price of 50$. AAVE skyrocketed more than 10x in early 2021 as well.

Aave updates in 2021 and 2022

The Aave protocol has received several major upgrades in the previous years. The Aave V1 was originally launched in early 2020. The first major upgrade, Aave V2, was launched already in December 2020. You can read more about that from this Aave blog post.

A new version is a bundle of bigger and smaller updates. These can be new features, smart contract optimizations, or interface updates. The latest version is Aave V3. It was launched in March of 2022.

Aave V3 had a long list of updates including a better user interface and transaction efficiency. The biggest feature was cross-chain liquidity. This gives makes it possible to move liquidity inside Aave between different blockchain versions. It’s a major upgrade since Aave is currently running on seven different blockchains.

Originally launched as an Ethereum app, Aave has expanded in 2021 and 2022 to many of Ethereum’s scaling solutions. The first step was Polygon in the spring of 2021. Now Aave is also running on Arbitrum and Optimisim. Both are Ethereum’s Layer 2 scaling solutions. Aave can be also used at Avalanche, Fantom, and Harmony.

It’s possible to clone the Aave protocol to multiple blockchains because they are all EVM compatible. When a blockchain is EVM compatible it can process smart contracts built on Ethereum. Many Ethereum competitors are EVM compatible on purpose, so they can lure apps from Ethereum to their own blockchains.

In May 2022, Aave launched the Lens protocol. This is a very important project for the founder Stani Kulechov, who has been involved a lot. Lens makes it possible for developers to build distributed social media apps, such as Twitter. Users own their own profile and content on Lens.

Aave made a big announcement in July 2022 by revealing plans for the GHO stablecoin. We’ll dive deeper into this topic later in the article.

The price history of the Aave token

Next, we’ll go through the price development of the Aave token. You can see the real-time Aave price when scrolling down to the final chapter of this article.

As we mentioned earlier, the Aave token was launched in late 2020. Prior to this, it was known as Ethlend and with the ticker Lend, even if the whole project had been re-branded to Aave in early 2020. When the Lend token was migrated into Aave it had a price of about 53 dollars.

The first time Aave skyrocketed was during “the DeFi summer” of 2020. Back then it still used the ticker Lend. The price went from 0,02 dollars to about 0,5 dollars during the year 2020. It’s a 25x move. After that, the Lend -> Aave migration was done and 100 Lend tokens were converted to one Aave.

aave token price history

The second boom took place in early 2021. This is when there was a massive DeFi and NFT boom. Pretty much every Defi token reached the ATH price in May 2021. The ATH of Aave is about 667 dollars.

Aave crashed in the summer of 2021 along with the rest of the market. After this, Bitcoin and many other coins raced to new ATHs in November. But Defi tokens didn’t. Aave reached 400 dollars in August but started a downtrend in September which is still going on. This happened to almost all DeFi tokens despite the fact that the liquidity in the DeFi market kept going up.

Overview of DeFi

Aave is a lending protocol, which is part of DeFi meaning decentralized financial services. Let’s have a quick overview of DeFi.

In short, DeFi is all about decentralized applications built on smart contract platforms. Such apps are called dapps (Decentralized Apps). They run autonomously without any third-party interaction. Users are communicating with these dapps using Web 3 wallets like MetaMask.

DeFi used to be a synonym for Ethereum. This changed rapidly in 2021. There are popular DeFi apps running also on BNB Chain, Tron, Polygon, Solana, etc. Ethereum has currently (7/2022) about 60% market share of the DeFi liquidity.

chains

We are broadly talking about a financial revolution. DeFi brings financial services to anyone in the world who has a mobile phone and an internet connection. There is no KYC or other limitations. These kinds of services have never existed before.

DeFi can be divided into three sub-categories: lending services, decentralized exchanges, and others. The biggest apps in terms of TVL (Total Value Locked) are lending services. Aave has been one of the biggest DeFi applications since 2020.

What is Aave?

Let’s dive into the Aave protocol. How does it actually work? Since Aave is a lending service, it offers two main functions:

  1. Interest payments
  2. Lending

As mentioned in the history chapter, Aave uses liquidity pools. This means there are investors, who deposit funds into the Aave protocol. This liquidity pool is then accessed by people who want to leverage their crypto holdings with a loan. Loan takers also pay interest to liquidity providers (= lenders).

The picture below is from the Aave app. It shows different interest rates being paid at the moment.

aave assets

Yields vary based on supply and demand. Sometimes there are yields of 20-30% available for certain cryptocurrencies. Yields can move up or down fast, which is why it’s possible to take a long with a fixed rate. The Aave protocol earns money from the difference in the supply APY and the borrow APY – just like regular banks do.

Once you have made a deposit to Aave, you can loan funds against this collateral. This is a way to leverage your crypto portfolio. You can loan for example stablecoins and use them to buy more of your favorite coins. If your investments go up more than your borrow rate, you’ll end up making a profit.

It’s important to understand that the Aave token is not needed for regular transactions in the app. Transaction fees are always paid with the native token of the platform Aave is running at. If you use the Ethereum version of Aave, you’ll need Ether (ETH) for transactions. If you use Aave on Avalanche, you’ll need AVAX tokens.

Aave Safety Module, flash loans, and government

There are other features too in Aave besides the standard lending & borrowing.

Let’s start with flash loans, which were popularized by Aave. These are essentially super fast loans enabling large amounts of liquidity to be used. This is possible because flash loans are taken and repaid inside one Ethereum network transaction.

See the video below for detailed instructions.

Flash loans are made by creating a process, which consists of several operations chained together. If one of the operations fails, the whole process is reversed.

Flash loans create efficiency for the entire DeFi market. Trading bots can take advantage of arbitrage situations and make prices more precise.

Aave Safety Module and governance are part of the Aavenomics framework. This was launched in late 2020. Aavenomics describes in practice, how the Aave protocol is governed.

The Safety Module was launched with the AAVE token in late 2020. Aave users can loan funds into this module and earn interest. If something unexpected happens and the protocol runs into liquidity problems, the Safety Module will use a maximum of 30% of these funds to cover any losses.

Buy Aave from these exchanges:

Exchange Most liquid trading pairs Rating Link
AAVE / USDT, AAVE / BUSD, AAVE / BTC, AAVE / ETH, AAVE / BNB + many more. Buy AAVE
AAVE / USD, AAVE / USDT Buy AAVE
AAVE / EUR, AAVE / USD, AAVE / USDT, AAVE / USDC, AAVE / ETH + many more. Buy AAVE

Aave governance is where the AAVE token is needed. Token holders make decisions about the future of the protocol. Improvement proposals are made by the community or the development team. The more AAVE tokens you hold, the more voting power you have.

You can dig deeper into the governance at governance.aave.com.

This is the concept used by other DeFi protocols as well. DeFi tokens are almost exclusively governance tokens.

The GHO stablecoin

Aave made an interesting announcement in July 2022. It is going to launch a stablecoin with a ticker GHO. This is, of course, referring to the English word ghost. The announcement came just two months after the collapse of Terra’s UST stablecoin.

However, a clear distinction must be made here; GHO is not an algorithmic stablecoin like Terra’s UST was. You should instead compare Aave & GHO to Maker & DAI. The new GHO stablecoin will be minted after it’s being overcollateralized first, just like is the case with DAI.

Aave will also bring so-called facilitators into the mix. You could see them as VIP users, who have privileges in minting GHO. These privileges are given by the Aave DAO meaning the governance body of Aave.

GHO facilitators

The GHO stablecoin has also additional interesting features. It will be possible to take a GHO loan with a fixed interest rate, which is decided by Aave DAO. The interest payments will also go to the Aave treasury.

It might be possible that Aave stakers (remember the security module) could get a GHO loan at a lower rate than regular users. This could have a positive impact on the Aave token price. Time will tell if GHO reaches approval by the market.

Aave as an investment

There is no doubt that Aave has been an excellent investment even if the previous 12 months haven’t been that great. The sooner you have invested the higher profits you have enjoyed. Especially those investors who already invested while the ticker was Lend.

If you are interested in investing in Aave we recommend watching the review below.

How should one look at Aave as an investment? First, we must underline one thing. Aave is a governance token, not a utility token. Some uninformed investors might think that you need Aave tokens for qualifying for a loan or making transactions in the app. This is not true.

It’s much easier to estimate the value of a utility token because you can make some connections between the popularity of the app and the token price. The more utility there is, the more transactions are made. This will lead to higher demand for the token. That is how the native tokens of the smart contract platforms work, such as Ethereum (ETH), BNB, and Cardano (ADA).

There is no direct link between the popularity of Aave (the app) and the price of the token. When you look at how the liquidity of Aave is growing (or shrinking), it is often going in the opposite direction than the token price. Yet, many investors try to value DeFi tokens based on the app’s liquidity.

It’s no surprise investors fall into this trap. It’s easy to think that the governance token would be more valuable if there were more liquidity for it to govern. This is not how the market thinks, though. The price of the Aave token might crash at the same time its liquidity is growing.

Newcomers will find it easier to invest in the operating systems of apps, such as Ethereum, BNB Chain, Cardano, Avalanche, etc. Then you don’t need to make calls for individual dapps. This tactic was very profitable in the 2021 bull market. Smart contract platforms made more profits than the DeFi apps.

There are opposing views for this, though. Some analysts are confident that the value will go to the apps and Layer 2s in the next bull market. Check this Twitter thread.

In conclusion, we can say that Aave is an interesting but challenging investment. New projects like Lens are intriguing, but how much do they contribute to the price of the Aave token?

Investors will face the same valuation challenges with all DeFi tokens. It’s not that Aave is unique in this sense. The true value (or price) of DeFi tokens is very difficult to set. You can try and read some data from sites like duneanalytics.com to get you further in your analysis.

The previously mentioned GHO stablecoin could be a boost for Aave in the coming years. At this point, it’s too difficult to judge. One should also keep in mind that stablecoin regulation will tighten all around the world. Time will tell if smaller and non-USD-based stablecoins will be allowed to exist.

Aave price and how to buy Aave

Aave is available in the most popular cryptocurrency exchanges. We recommend the market leader Binance. You can deposit using SEPA transfers or credit cards.

Buy Aave from Binance

Aave token can be also bought at FTX or Kraken. Both are popular and reliable exchanges.

There is also strong support for Aave in popular wallets. TrustWallet (mobile) and Exodus (mobile & desktop) are great choices. MetaMask is a popular browser add-on. Ledger Nano X and Trezor Model T offer ultimate safety.

Follow Aave on Twitter at @AaveAave. You should also follow the founder, StaniKulechov, who is very active on Twitter. The official website is aave.com. There is also a Reddit community at reddit.com/r/Aave_Official/.

eToro banner