What is Aave (AAVE)?

AAVE is the administrative token of the Aave lending platform. Aave operates in the decentralized finance (DeFi) sector. Aave is a decentralized lending platform that facilitates loans without a centralized operator. In addition to lending functions, Aave 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 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 application, but it has an administrative role, and users can also stake the token for extra yield.

What does the administrative token mean in practice? As its name suggests, a governance token was created to govern 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 tokens. Tokens of other DeFi services are also government tokens, like AAVE.

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

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 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, but this changed rapidly in 2021. Popular DeFi apps run also on BNB Chain, Tron, Polygon, Solana, etc. Ethereum currently has about 60% of the DeFi liquidity’s market share.

We are broadly talking about a financial revolution. DeFi brings financial services to anyone with 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 sub-categories: lending services, decentralized exchanges, and liquid staking. Lending services are the most prominent apps in terms of TVL (Total Value Locked). Aave has been one of the most significant DeFi applications since 2020. Read more about DeFi from our in-depth beginner’s guide.

What is Aave?

Aave is a decentralized lending platform that facilitates 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 investors deposit funds into the Aave protocol. People who want to leverage their crypto holdings with a loan then access this liquidity pool. 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, yields of 20-30% are available for specific cryptocurrencies. Yields can move up or down fast, so taking a long with a fixed rate is possible. The Aave protocol earns money from the difference in the supply APY and the borrow APY—just like regular banks do.

Once you have deposited Aave, you can loan funds against this collateral. This is a way to leverage your crypto portfolio. You can loan stablecoins, for example, 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 unnecessary for regular app transactions. Transaction fees are always paid with the native token of the platform Aave runs. 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 includes other features such as a safety module, flash loans, and an administration module. Let’s start with flash loans, which Aave popularized. These are essentially super-fast loans that enable 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 that consists of several chained operations. 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.

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

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.

The AAVE token is needed for AAVE governance. Token holders decide the protocol’s future, and the community or the development team proposes improvement. The more AAVE tokens you hold, the more voting power you have.

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

This concept is also used by other DeFi protocols. 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 has a rather unique 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, just a handful of people were involved. Famous Silicon Valley VCs did not launch Aave. Now, dozens of people are working on the project, and the headquarters are in London. Stani is still the CEO and spokesperson of Aave.

Aave started as a project called ETHLend. It was launched on Ethereum MainNet in early 2017 and was part of the 2017 ICO boom. The project collected 16,2 million USD from its ICO, also when the LEND token was 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 quickly realized that P2P lending was problematic. 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; even the word “DeFi” was barely used. This was also the time when Uniswap DEX was developed. It used a P2C (Peer-To-Contract) model. In a P2C model, the lenders create a liquidity pool 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. At this time, the project moved from P2P lending to P2C, which means liquidity pools. The LEND token was still used, though.

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

The entire DeFi market exploded in the summer of 2020. Aave’s liquidity kept multiplying, too, reaching 1,5 billion dollars. In January-February 2021, there was another DeFi boom. Aave’s liquidity grew from $1,7 billion to $6 billion.

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 most significant DeFi protocols when writing this article (7/2022).

At the end of 2020, the old LEND token was rebranded (migrated) to AAVE. While this was done, the supply was cut by 100. One 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$. Then, it was migrated to AAVE for 50$. 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 was significantly updated 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 a collection of various updates, such as additional features and improvements to the user interface and efficiency.

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

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 Labs (@aave) March 16, 2022

Aave V3 had many updates, including a better user interface and transaction efficiency. The most significant feature was cross-chain liquidity, which allows liquidity to be moved inside Aave between different blockchain versions. This is a substantial upgrade since Aave runs on seven blockchains.

Launched initially as an Ethereum app, Aave 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, which are Ethereum’s Layer 2 scaling solutions. Aave can also be 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 to lure apps from Ethereum to their blockchains.

In May 2022, Aave launched the Lens protocol. This is a significant project for the founder, Stani Kulechov, who has been involved extensively. Lens allows developers to build distributed social media apps, such as Twitter. Users own their profiles and content on Lens.

Aave made a big announcement in July 2022 by revealing plans for the GHO stablecoin. In May 2024, Aave revealed its vision for “Aave 2030” and for the V4.

The GHO stablecoin

In the summer of 2022, Aave announced its stablecoin, GHO. The announcement came just two months after Terra’s algorithmic UST stablecoin collapsed, sending 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. It would help if you instead compared Aave & GHO to Maker & DAI. The new GHO stablecoin will be minted after it is first overcollateralized, just like with DAI.

Aave will also include so-called facilitators. These are VIP users who have privileges in minting GHO. The Aave DAO, which is Aave’s governance body, gives them these privileges.

The GHO stablecoin also has additional exciting features. It will be possible to take a GHO loan with a fixed interest rate, which Aave DAO decides. 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 gets approval from the market.

Aave as an investment

The AAVE token has historically been a very profitable investment. The earlier you join the project, the more you can 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 you need Aave tokens to qualify for a loan or make 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, leading to higher demand for the token. That is how the native tokens of the smart contract platforms, such as Ethereum (ETH), BNB, and Cardano (ADA), work.

If you are considering purchasing AAVE, we recommend reading the beginner’s guide titled “How to Buy Aave?“. This guide provides you with step-by-step instructions on how to buy AAVE tokens. It is an excellent resource for individuals who are new to the process of buying AAVE and need clear guidance.

There is no direct link between the popularity of Aave (the app) and the token’s price. When you look at how Aave’s liquidity 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 it had more liquidity to govern. This is not how the market thinks, though. The price of the Aave token might crash while its liquidity is growing.

Newcomers will find investing more accessible 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, Aave is a challenging investment from an investor’s point of view. New projects like Lens are interesting, but how much impact do they have on the price of Aave, which is just an administrative token of the lending platform?

The same challenges apply to Aave and 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, mainly due to the collapse of Terra. Time will tell if there is room for small stablecoins as regulation tightens.