Everything you need to know about the DeFi project Aave (AAVE.X)
What is Aave?
If you have stumbled across this analysis, you are probably wondering “what is Aave?”. Well, Aave (formerly ETHLend) is a DeFi cryptocurrency (Decentralized Finance) that operates on the Ethereum (ETH.X) blockchain and allows their users to lend, borrow, and earn interest on their cryptocurrency assets. Users are able to do this through a “centralized Intermediary”, which will be discussed later.
Aave uses a “Decentralized Autonomous Organization (DAO)”, which means that Aave is decentralized by nature and allows their community to participate in large decisions.
Aave currently has a 24-hr trading volume of $320M, and Aave’s price is $402 (USD).
History of Aave:
Aave was originally created in 2017, and at this time their project was under a different name. In 2017, the project started out as “ETHLend” and was able to raise $16M from their ICO (initial Coin Offering). Since then, they have rebranded their project to be “Aave” which translates to “ghost” in Finnish.
Aave was rebranded in September of 2018, and they launched the “Aave Protocol” in January of 2020.
Aave is an ERC-20 token, which means that Aave does not use their own blockchain, but rather runs on Ethereum’s blockchain.
In order to obtain an Aave token, users need to migrate their LEND tokens. I will break down how this works in steps.
1. Enter the Aave app and go to the migration pool
2. Approve the migration transactions allowing LEND tokens to migrate to AAVE tokens.
3. Upgrade your LEND to AAVE
4. Now you have your AAVE tokens!
The migration ratio is 100 LEND to 1 AAVE (1 LEND = 0.01 AAVE)
LEND tokens have proposal, voting, and decision rights to decide on new features, additions, assets etc. The LEND tokens are also gradually “burnt” based off of the fees gathered by the Aave Protocol.
Token Launch and Distribution:
As previously mentioned Aave’s ICO was in November of 2017 and raised them $16M. This ICO issued 1.3B tokens which were distributed to both the investors (holders) and the Founders & Project. This was split 77% to their investors, and 23% to the Founders and the Project.
It is favourable that a good majority of the tokens are held by the community, as it is less likely that a scam or a “rug-pull” will occur to this token. Furthermore, the larger number of coins that are held by the community, the larger the potential for higher returns (due to the founders not being able to sell large sums on every run).
Aave is a limited supply token, which means that they cannot just make more tokens. There is a set amount of Aave (1.3B) that can be mined, and after they are all mined no more coins can be created. This is good as it is deflationary by nature, especially when factoring in Aave burning their LEND tokens.
Shift from P2P to Pool-Based:
Originally, when Aave was ETHLend, they adapted a peer-to-peer (P2P) strategy in which there was a direct relationship between the loaner and the borrower.
Since then, Aave has switched over to a pool-based strategy where lenders provide liquidity (by depositing their crypto) into a pool contract. Borrowers can borrow out of the pool contract (by placing collateral). When the loan is paid back with interest, the interest is split among the lenders in that pool. This method allows for instant loans, which is more convenient for both parties.
Aave offers flash loans, which can be given out without collateral. These flash loans are designed to be used by developers to build tools and test them with the crypto in the flash loan, once the test is over the transaction is reversed and the developer sees if their tool works properly. These loans can also be used to avoid collateral liquidation penalties.
Aave allows borrowers to switch between fixed and floating interest rates.
This is revolutionary because historically interest rates in the DeFi space have been volatile, which makes it difficult to calculate the costs of borrowing for borrowers. However, by allowing rate swapping, more people will be willing to borrow as the rates Aave offer are safer as the borrowing cost may be locked in (if the borrower chooses to do so).
This will make borrowing and lending crypto easier for all parties involved and can capture the growing market of crypto investors who are actively borrowing and lending their cryptocurrencies.
Aave’s Blockchain social media Project:
On July 18th, 2021, Aave announced that they are working on and are planning on releasing an Ethereum-Based Social Media platform that is said to be a Twitter Alternative.
Furthermore, Stani Kulechov (Founder/CEO of Aave) said that users will be able to monetize the content they post and govern their own rules.
This social media project is seen by some as a “distraction” as Aave is not fully focusing on building and evolving their own cryptocurrency to meet the changing needs of crypto investors. Furthermore, this project is kind of a direct shot at Jack Dorsey (CEO of Twitter) who said that he is planning on decentralize Twitter and use Bitcoin’s blockchain to do so.
Many projects have already been launched attempting to bring a social platform onto Ethereum’s blockchain, however none have been successful thus far. Can Aave be the first to break this “social media barrier” using Ethereum’s blockchain? I guess we will have to wait and see.
Aave Pro Launch:
On July 6th, 2021, Aave revealed their DeFi platform “Aave Pro”, since then Aave has renamed this platform “Aave Arc”, which is expected to launch in the coming weeks.
Aave Arc is geared toward institutional investors rather than retail investors. This stems from various institutions expressing their demand for such a platform geared toward them. This platform has a lot of potential especially when considering the sheer amount of capital that some of these institutional clients have accumulated. If Aave is the first to break into this Institutional space in DeFi, they will achieve a “first-mover advantage” and likely become the trusted/best platform for Institutional DeFi investments.
Historically, many people have complained about Aave’s high “gas fees”. This is due in large part to them operating on the Ethereum blockchain, which has been known to have high transaction fees.
However, in April of 2021, Aave combatted this problem by building on Polygon’s (MATIC.X) Layer 2 platform. This is a very big step in the process of making DeFi, and especially Aave accessible and usable by all investors and not just their large institutional investors.
The fact that Aave was able to address this problem and find a solution quickly shows their desire to listen to their community and improve upon their protocol to make it the best option at any and every time.
Aave Safety Module:
Aave has a “Safety Module (SM)” that is in place to help them avoid a “Shortfall Event”. Essentially the safety module is in place as a last-resort safety measure that should help them fight off any cyberattacks on their token. These liquidity attacks are most common in the DeFi space and have destroyed protocols that did not have the proper measures in place.
Aave requires people to deposit (stake) their Aave tokens into this Safety Module so that the safety module can successfully defend against attacks. In return for these users staking their Aave tokens, Aave rewards them with Safety Incentives and fee distributions.
This extra measure of security is very important to keeping their protocol safe, and it helps to reduce the risk of investing or having your money on Aave’s platform.
· Centralized Intermediary: A mediator for two parties that acts as a single point of failure or control over their activities. Essentially centralized intermediaries act as middlemen.
· Burning Tokens: Purposefully taking a token out of circulation. This is typically done by sending the crypto to a “lost wallet”. This increases the scarcity of the token, and if done in large quantities can increase the price of the token in question.
· Lost Wallet: Crypto Wallets which are inactive, and no-one can access due to lost passwords and/or being locked-out due to too many password guesses.
· Gas Fee: Essentially a gas fee is the fee that users pay to validate their transactions on Ethereum’s blockchain.
· Decentralized Autonomous Organisation (DAO): A DAO is a smart contract that allows the community (holders) of a coin (protocol) to make decision via voting rights. These members vote on key changes to a protocol making the protocol fully democratized.
· Shortfall Events: A shortfall event is a state of deficit for liquidity provides that can stem from smart contracts bugs/flaws, failure to capture liquidation opportunities, and/or oracle failures causing improper liquidations.