AAVE Crypto: What is AAVE? Crypto Borrowing and Lending Explained

AAVE CryptoYou know how when you buy a car that’s just a little too expensive but it’s really nice so you do it anyways well to do it you have to get a loan from the bank you tell them they can have the title to the car until you pay off that loan that way if you don’t pay the loan they can come and take your car.

Or what about if you’re getting ready to buy your first house well for most people you definitely need a mortgage you put up a down payment of twenty percent so that way you can borrow the other eighty percent and then make payments on it well the money for the car and the money for that house come from a bank they lend money knowing that you will pay high interest on it and they give that interest to their lenders well, of course, the bank takes their cut well ave is the cryptocurrency version of that bank.

What is AAVE Crypto ?

Aave is a decentralized finance application that allows people to lend and borrow cryptocurrencies in turn for getting and paying fees.

Aave is basically peer-to-peer lending using cryptocurrencies as the asset that is traded. however, Aave uses an algorithm to determine lending rates and match the lenders to borrowers.

Aave also has an associated Aave token which is an ethereum token that powers the governance on their platform in short the idea of this token is that token holders get to vote on changes to the application as time goes on around 2017 there was a team of developers who were creating something called ethlend they essentially created an mvp platform that matched lenders to different borrowers and it wasn’t automatic the borrowers had to wait around for a lender to meet the two big problems that they faced were liquidity which is the amount of money in the system and actually matching borrowers to lenders.

So, during the start of 2020, they overhauled ethlend creating Aave the creator said the cryptocurrency bear market was the best thing to help them pivot their product.

Aave utilizes smart contracts which are just pieces of code that get ran automatically based on certain conditions to run the platform.

Now if you’re new to smart contracts you should definitely go read our article on it where we break it down really simply.

Aave this time instead of using peer-to-peer lending where a borrower had to match with a lender Aave used a peer to a smart contract method so lenders could deposit money into a smart contract and earn interest and also borrowers could deposit their collateral into another smart contract and borrow from any smart contract they wanted to borrow from they used new algorithms in the smart contracts to determine the loan rates based on how much liquidity was in each smart contract that was really confusing but by the way.

What is AAVE? Crypto Borrowing and Lending Explained

Aave is a Finnish word that means ghost they stuck with this for the branding because when you lend your money or borrow your money it’s all anonymous no banks regulate it nobody else can see what you’re doing and specifically you don’t know who is on the other side of that smart contract so that’s how Aave was formed.

What AAVE do?

Lending Returns

What is AAVE? Crypto Borrowing and Lending Explained

If you go to app.aave.com markets you can see the current rates for borrowing and lending for example if you look here you can see USDT which is tether is offering a pretty decent deal and then you can also see that ethereum is offering quite a low rate this is because tether is a stable coin and it won’t move much in price but ethereum is very volatile at the moment so with lending comes borrowing and so how this works is you lend your crypto to Aave and they pay you interest on it we won’t get into the technicals of how that actually works though however with lending comes borrowing.

Collateralized Loans in Aave

Let’s move on to over collateralized loans whenever you borrowed 80% of your house to make payments on it the house was collateral this means if you couldn’t pay the loan back the bank would just kick you out and take your house in short you gave them collateral that they can take if you don’t pay well crypto loans don’t necessarily work like this.

If you want to borrow crypto you have to be over collateralized this means if you want to borrow $100 you must give the bank $120 for most people you might think this is crazy why in the world would you give someone more money than you want to borrow especially if you already have that money well imagine this if I gave you a $100 worth of ethereum and you lent me $80 worth of tether which is a stable coin pegged to us dollar you use that $80 for a few months and then you decide to pay it back and get your eth well by then ethereum has doubled in price and so you cash out your $100 of ethereum but you actually get $200 worth of value because ethereum raised in price this is a double-edged sword though because Aave has something called a liquidation threshold where they will automatically sell your collateral to cover the loan that you have created this way investors never lose money.

Let me use an example so you put up a $100 of ethereum and what is called the maximum loan to value of ethereum is eighty percent which means you can borrow 80% of that $100.

So, you decide to borrow 80 dollars of tether well if that ethereum price drops to more than 82% and a half percent of its value which is the liquidation percentage Aave will automatically take your ethereum and pay back the lender however you get to keep that 80% that you borrowed.

How Leveraged Lending is Possible with Aave?

Aave you can create a very leveraged position which is essentially borrowing on steroids and to understand this we’re gonna go over an example really quick so let’s say you have a $100 of ethereum you deposit your ethereum to Aave and withdraw $80 worth of USDC which is an ethereum stable token you take that $80 worth of USDC go over to UNI Swap and then trade it out for more ethereum which you then go back to Aave and deposit.

So, now you’ve deposited $180 of ethereum but you can still take out 80% of that $80 that you deposited which is $64 of USDC so now you take that sixty-four dollars of USDC trade it for more eth, and then add it back to your account in Aave so now you have $244 of ethereum that you’ve borrowed against even though you only had an original one $100 so if eth goes up to ten percent you gain twenty-four dollars and forty cents compared to if you didn’t create that leveraged position you would have only gained $10.

However, if the price of ethereum goes down all I can say is you’re screwed if you pass the liquidation threshold next

How to Payback Loans in Aave ?

You just have to log into Aave and repay the loan every now and then just a little bit Aave loans aren’t like traditional loans where you have to pay it all back by a certain date here’s what the official Aave website says now the question is when do i need to pay back the loan Aave says there is no fixed time period to pay back the loan as long as your position is safe you can borrow for an undefined period.

however, they say as time passes the accrued interest will grow making your health factor decrease which might result in your deposited assets becoming more likely to be liquidated.

What is Aave Flash Loans ?

It is a new feature that they have that is actually one of their main selling points we’ve actually been working on an entire article on flash loans.

In short a flash loan is a cryptocurrency loan where you can borrow up to millions of dollars without putting up any collateral here’s the catch though a flash loan must be paid back in the same cryptocurrency block that it was borrowed in well you might be wondering why would you need a loan that you have to pay back almost immediately well let’s say you could buy ethereum at Binance for one dollar and sell it to coinbase for a dollar and a penny each time you did that you would make a penny imagine if you use millions of dollars to do that millions of times.

This is one example of why you might want to take out a flash loan even though you’d have to pay it back in around 13 seconds if you use the ethereum network.

Now there’s a lot more to flash loans but this article is about Aave and we’ve covered almost everything there is to know about it at this.


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