What is Aave? The Beginner’s Guide

AAVE is the administrative token of the Aave lending platform. Aave operates in the decentralized finance (DeFi) sector. Aave is a decentralized lending platform, which means facilitating loans without a centralized operator. In addition to lending functions, Aave also includes other features such as a safety module, flash loans, and an administration module.

The founder of Aave is Stani Kulechov. The platform was established as ETHLend but rebranded as Aave in the fall of 2018. Version V3 of the Aave platform is currently in use. In the summer of 2022, Aave announced its own stablecoin called GHO.

The AAVE token has historically been a very profitable investment. Aave can be bought easily and safely at the Finnish crypto exchanges Coinmotion and Northcrypto.

AAVE is the administrative token of the Aave lending platform

AAVE is the administrative token of the Aave lending platform. Aave is one of the largest decentralized lending platforms in the market. The AAVE token is not needed to use the service. It has an administrative role, and users can also stake the token for extra yield.

What does the administrative token mean in practice? A governance token, as its name suggests, was created for governing the protocol. The holders of the AAVE can participate in the decision-making about the future of the service. The more governance tokens you own, the more decision-making power you have.

Basic information about the AAVE token:

The Aave lending platform is part of the decentralized financial services industry. All major DeFi apps have their own tokens. Tokens of other DeFi services are also government tokens, like AAVE.

The AAVE token is, therefore, not needed to use the Aave app. All transaction fees are paid in Ether if you use Aave on the Ethereum platform. If you use Aave on Polygon, you are paying transaction fees with Polygon’s native token MATIC.

The word Aave comes from the Finnish language and means ghost. It is the only well-known crypto project on the market that originates from Finland.

Aave is a DeFi lending platform

Aave operates in the decentralized finance (DeFi) sector. Aave is a DeFi lending platform, or more precisely, a liquidity protocol.

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 about 60% market share of the DeFi liquidity.

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?

Aave is a decentralized lending platform, which means facilitating loans without a centralized operator. The Aave app offers two main functions:

1. Interest payments
2. Lending

Aave uses liquidity pools to manage the assets available for loans. 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.

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 borrowing 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

In addition to lending functions, Aave also includes other features such as a safety module, flash loans, and an administration module. 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:

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 governance at governance.aave.com.

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

The founder of Aave is Stani Kulechov

The founder of Aave is Stani Kulechov. Stani is Finnish, and he also has a rather special background in the crypto world. 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.

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.

ETHLend became Aave in 2018

The platform was established as ETHLend but rebranded as Aave in the fall of 2018. This was the time when the project moved from P2P lending to P2C meaning liquidity pools. The LEND token was still used, though.

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).

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 versions V2 and V3

Version V3 of the Aave platform is currently in use. It was officially introduced on the Ethereum blockchain in January 2023.

The first “full version” Aave V1 received a significant update already in December 2020. At that time, Aave V2 was released. You can read more about the V2 update from this Aave blog post. The new version is practically a collection of various updates, such as additional features and improvements to the user interface and efficiency.

At the time of writing the article, Aave V3 is already in use. It was introduced in March 2022.

1/ Aave V3 is here! 👻  
The most powerful version of the Aave Protocol to date, V3 brings groundbreaking new features than span from increased capital efficiency to enhanced decentralization. Read what's new in V3 in the thread below👇or visit https://t.co/H3jTyKRqNs to dive in! pic.twitter.com/LXzn7660nA

— Aave (@AaveAave) March 16, 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 Optimism. 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 GHO stablecoin

In the summer of 2022, Aave announced its own stablecoin called GHO. The announcement came just two months after Terra’s algorithmic UST stablecoin collapsed and sent the entire crypto market into chaos.

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.

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

The AAVE token has historically been a very profitable investment.  The earlier you have joined the project, the more you have been able to enjoy its profits.

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 DeFi apps.

There are opposing views on 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.

Long uni (Uniswap), short eth (Ethereum)

Expresses my hunch/worry: The coming "Cosmosification" of Ethereum, via L2s, won't be kind to eth holders. But, it is bullish for successful DeFi tokens on Ethereum.

If the thread gets likes and retweets, I'll convert to blog post

— Meher Roy (@MeherRoy) July 6, 2022

In summary, it can be stated that Aave is a challenging investment from an investor’s point of view. New projects like Lens are interesting, but how much of an impact do they have on the price of Aave, which is just an administrative token of the lending platform?

The same challenges apply not only to Aave but also to other DeFi governance tokens. If the coin is not needed to use the application itself, it is difficult to estimate its demand.

The GHO stablecoin can bring leverage to Aave in the coming years. At the moment, it is still too early to predict its effects. The tightening regulation in the EU and US is also focused on stablecoins, especially due to the collapse of Terra. Time will tell if there is room for small stablecoins in the market as regulation tightens.

How to buy Aave

Aave can be bought easily and safely from the Finnish crypto exchanges Coinmotion and Northcrypto. You can deposit euros quickly with a SEPA transfer or using a debit card. After that, you can buy Aave with a couple of clicks.

The best exchanges for buying AAVE:

There is also a lot of support for Aave in popular wallets. Trust wallet mobile wallet and Exodus desktop/mobile wallet are great free wallet options. The MetaMask browser extension, of course, too. The Ledger Nano X cold wallet provides ultimate security.