Decentralized finance is a fantastic yet challenging concept. The crypto community wants to hang the titans of traditional finance by their ties as they depose them, but they also want to do it with enthusiasm, fervour, and memes.
One such project is Ave. The business, which had its headquarters in East London’s startup district before the outbreak, offers loans and charges high interest rates for borrowing and lending cryptocurrency. The business, which is still in its early stages and is therefore quite risky, promises annual dividends that, in many cases, are considerably above 10%, allowing long-term cryptocurrency owners a means to use their money as they wait for the value of their virtual money piles to alter.
Additionally, Aave has a token that powers everything that is also called AAVE. AAVE can be earned by securing it within the system, and it can also be traded on exchanges like Bitcoin or Ethereum. Each day, its price fluctuates on exchanges. The market cap of AAVE changes wildly rather frequently because it is relatively small.
What is the Aave protocol?
Aave is an Ethereum blockchain-based decentralised lending protocol. On this platform, you can lend and borrow cryptocurrencies. As of this writing, the platform has cryptocurrency reserves totaling $3.2 billion.
Despite being developed by a group of programmers who primarily work out of London, Aave is decentralised and open-source in the spirit of the hacker ethic. Anyone with enough AAVE can vote on how the platform is administered through a system the platform amusingly refers to as “Aavenomics.”
One of the several lending marketplaces that erupted in the summer of 2020 was Ave. It competes with loan protocols like Maker and Compound. These are the top three protocols in a $25 billion market right now. Note: In 2020, this market had a meagre $1 billion in value. Maker had $4.64 billion in cash on hand as of January 2021, while Compound had $3 billion.
Aave asserts that it has a number of benefits over a big retail bank.
The first is simple: You can borrow money to buy cryptocurrency.
The second benefit of Aave is that no identity documentation is necessary. It doesn’t consider your credit history, won’t reject your application for a loan because you are bankrupt, and doesn’t harbour any prejudices based on your race or class, according to claims made against loan managers.
The third is the quick approval time for loans on Ave. You can apply for a loan with only the click of a mouse, and there is no additional approval from a third party necessary as long as you can demonstrate your ability to repay the amount.
What makes Aave so fascinating is this third benefit. If you can show the protocol that you can repay the debt, the protocol will allow you to take out substantial loans. In order to achieve this, you can either stake another cryptocurrency as collateral or
You cannot use these loans to, for example, purchase a home because this proof typically depends on another trading position (although the protocol’s creator, Stani Kulechov, says he hopes one day you might). However, you can place a very complicated trade on a different protocol using these flash loans. Given that these protocols may communicate with one another on blockchains and that data stored on blockchains is virtually impossible to fabricate, proving your ability to repay the loan is not difficult to do.
All of the stablecoin loan markets on Aave are the largest. A cryptocurrency with a value anchored to a particular asset is called a stablecoin.
The market with the highest value is for a stablecoin linked to the price of ethereum, valued $155 million. The second, for WBTC, a stablecoin linked to the price of Bitcoin, is likewise worth $155 million. These markets provide lenders with meagre yields on 0.8% and 0.02%, respectively, but borrowing costs (in terms of the Aave) are just 3.34% and 0.35%, respectively.
The best returns are provided by stablecoins that are tethered to the US dollar. TrueUSD, which gives a current annual return of 19.3%, is the cryptocurrency with the greatest return. The next two options are USDT, which offers 15.92%, and sUSD, which offers 17.68%.
The three stablecoins with the largest lending markets are USDT, a stablecoin pegged to the US dollar, with a lending market worth $35 million, DAI, a decentralised stablecoin that maintains its peg to the US dollar through a complex algorithm, and USDC, a stablecoin maintained by Coinbase and Circle, which has a market of $76 million and offers returns of 6%.
But keep in mind that this is the cryptocurrency market: Not only are these rates incredibly unstable, but the cryptocurrencies that underlie these loans frequently exhibit extreme volatility and lack of regulatory oversight. If the coin’s value falls to $0, a 100% yearly dividend is worthless.
What is the AAVE token?
A token is also part of the protocol. Aave first offered this under the name LEND and used the $16 million from the inaugural sale in 2017 to finance platform development. These LEND coins were converted into AAVE, the platform’s current token, in October 2020 by Aave. AAVE has a market cap of $3.2 billion, a value of $266, and investors exchange $1 billion worth of the coin per day as of January 2021.
Since AAVE is an ERC-20 token, the Ethereum blockchain is used to power it. The token cannot be mined, in contrast to Ethereum or Bitcoin. You must, however, earn it. By purchasing AAVE on exchanges and then staking it inside the protocol’s “safety module,” you can make money. Essentially, this means that in the event that depositors lose their funds, AAVE
AAVE can be used to add to its governance protocol. This enables you to stake (lock up) your AAVE and cast a vote for the network’s direction.
How does AAVE compare to Bitcoin?
The market size, risk profile, and intended use of AAVE are all very different from those of Bitcoin.
First, Aave (and its token, AAVE), is a blockchain application that uses Ethereum. The Bitcoin blockchain, on which Bitcoin operates, is a unique and distinct blockchain. Bitcoin is the Apple iMac if Aave is a computer software that runs on your PC.
In other words, earning AAVE is entirely different from earning Bitcoin. The process of mining bitcoins on the Bitcoin network entails setting up a very powerful computer to run specialised software that cracks complex mathematical riddles. You could mine Ethereum but not AAVE because the Ethereum blockchain handles transactions in AAVE.
Second, nothing… happens with Bitcoin. The blockchain can only process transactions; it is merely a coin. However, Aave is merely one of many ways that programmers might leverage the Ethereum blockchain to build new kinds of goods and applications. The lending protocol Aave is one example; other protocols include those for decentralised exchanges and derivatives.
Third, Bitcoin has a much larger market cap than Aave. AAVE’s market cap of $3 billion is dwarfed by Bitcoin’s $572 billion market size as of January 2021. The market’s most dominating coin is unquestionably bitcoin. 62% of the market is accounted for by Bitcoin, while 0.3% is accounted for by Aave.
The effectiveness of the loan process that AAVE powers is crucial. The price of AAVE could drop if the Aave lending protocol fails or is vulnerable to hacking. The price of AAVE might rise if Aave and JPMorgan agree to offer crypto loans to all of their clients. Additionally, whereas Aave has only been operating for a short while and lending protocols are still novelties, Bitcoin has been around for almost ten years and is considerably more tried-and-true.
Even if AAVE is distinct from Bitcoin, it should be emphasised that the two are not entirely separate.
The price of all other cryptocurrencies is significantly influenced by Bitcoin, the cryptocurrency with the largest market (by a wide margin). Because Bitcoin is the most popular token on the market, there is a good risk that AAVE will also suffer if Bitcoin fails. AAVE’s price might also suffer if Ethereum, the cryptocurrency that drives the blockchain on which AAVE is stored, crashes (it is difficult). However, due to its magnitude, Bitcoin might be less vulnerable if AAVE crashes.
How to buy AAVE
AAVE can be purchased most easily through cryptocurrency exchanges.
The largest market for AAVE as of January 2021 is Coinbase Pro, the sophisticated exchange operated by San Francisco-based cryptocurrency startup Coinbase. The following exchanges are home to the largest markets: Binance, Uniswap, Kraken, KuCoin, Gate.io, and Gemini.
AAVE can be purchased in a number of different currencies. You can purchase AAVE on Coinbase, FTX, Kraken, and Gemini with US dollars. The majority of exchanges allow you to purchase AAVE tokens using other cryptocurrencies including Bitcoin, USDT (Tether), and Ethereum.
Utilizing a cryptocurrency brokerage like Wealthsimple, which will handle the acquisition of these tokens on your behalf, is an additional option.