Aave is a decentralised finance (DeFi) protocol offering a new approach to cryptocurrency lending and borrowing. Launched initially as ETHLend by Stani Kulechov, it was rebranded to Aave, a Finnish term for "ghost", symbolising the protocol's aim to be innovative and transparent nature.
Aave operates on a liquidity pool model, allowing users to lend and borrow a variety of cryptocurrencies and real-world assets (RWAs) without the need for a centralised intermediary.
Tip
Aave is pronounced as "AH-vay." Think of saying a surprised "ah" followed by a "vay" as in "tray."
How does decentralised lending and borrowing work?
Aave offers a smart contract-based peer-to-peer lending system, where users can participate as suppliers or borrowers.
For lenders, it offers a simple way to earn interest on their cryptocurrency holdings, much like a savings account but with digital currency. They deposit their cryptocurrencies into liquidity pools, and in return, they receive interest as other users borrow these funds.
On the borrowing side, users can take out loans in various cryptocurrencies. However, to ensure trust and repayment, borrowers must first provide some of their own cryptocurrency as collateral. This collateral acts as a security measure, ensuring the borrower is committed to repaying the loan.
The entire process is governed by smart contracts on the Ethereum blockchain that manage the details: setting predefined rules, determining interest rates, and ensuring timely repayment of loans. This system provides security and efficiency, making the lending and borrowing process straightforward and transparent.
What sets Aave apart?
Firstly, Aave introduced flash loans. These are quick, uncollateralised loans that must be repaid within a single Ethereum block. This feature lets users borrow large amounts of cryptocurrency without upfront collateral, as long as they return it in the same transaction. It's opened new opportunities for quick investment strategies.
Another distinctive feature is the ability for borrowers to switch between fixed and variable interest rates. This flexibility helps manage risks and adapt to market changes, a rare option in other DeFi platforms.
Security and transparency are central to Aave. Its open-source nature allows anyone to interact with its interface and smart contracts. On top of that, regular audits and a bug bounty program increase trust and platform safety.
The role of AAVE tokens
Aave uses a unique dual-token system. Lenders receive aTokens as evidence of their deposit and interest. The native AAVE tokens are multi-functional. They act as governance tokens, offering voting rights in protocol decisions, and they play a key role in the platform's safety module, providing security and rewards for stakers.
Note
On Luno, you’re simply buying, selling, sending or receiving AAVE. The crypto assets held in your Luno wallets are not involved in lending or borrowing on the Aave network. If you’d like to participate in that, you can learn more on Aave’s website.
Tip
Keen to explore Aave a bit more? You can learn about AAVE basics and get all the latest cryptocurrency news on Luno Discover.
Want to know how to buy, sell, send, or receive AAVE? We’ve got answers in the following help articles:
This information is not intended to be nor does it constitute financial, tax, legal, investment or other advice; nor is it a call to trade. The information is intended as general market commentary for information purposes only. Before making any decision or taking any action regarding your finances, you should consult a qualified Financial Advisor.