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DeFi decrypted: Aave and LEND

DeFi decrypted: Aave and LEND

Explainers DeFi

17 Aug 2020

Aave is a lending application that gives users a way to lend and borrow a range of cryptocurrencies using both variable and stable interest rates. It is named after the Finnish word for “ghost”, representing their focus on creating a transparent and open infrastructure for decentralized finance.

The company started out in 2017 as ETHLend which held an ICO raising a total of $16 million selling LEND tokens. The founding team rebranded the company as Aave in 2018 but kept LEND as the name for their native token.

Aave’s goal is to pick up where traditional fintech players like PayPal and Skrill left off, maximizing the potential of DeFi applications to create money markets on the Ethereum blockchain with a wide variety of platform features.

What is Aave?

As a DeFi lending protocol, Aave is similar to Compound but with a few distinctive features that push the boundaries of financial innovation. Flash Loans, flexible rates and credit delegation are all new services and hallmarks of Aave as a leader in the push for greater DeFi expansion.

But let’s start with the basics. Using Aave, people can lend and borrow cryptocurrencies in a decentralized and trustless manner meaning there is no central authority that administers the platform. Instead, smart contracts effect actions taken by users and enforce the rules through self-executing code when certain conditions are met.

Like other lending protocols, users deposit funds into a pool from which they can then borrow. Users need to lock in an amount of collateral that is higher than what they intend to borrow, to protect lenders against negative price fluctuations. Additionally, each pool reserves a percentage of funds to hedge against volatility within the protocol, which also makes it easier for lenders to withdraw their funds at any point in time.

Currently Aave offers 19 assets for lending and borrowing including LINK, USDC, USDT, ETH, DAI, SNX, WBTC, KNC and BAT. When users deposit funds into one of the asset pools available on Aave, they are given an equivalent amount of aTokens in return which allow them to earn interest on their deposits. For example, if you deposit 500 MKR into the MKR pool, you receive 500 aTokens in return which you can redeem at any time. Interest is accrued by the second which you can view in real-time.

What makes Aave an innovative DeFi player

Aave has rolled out a number of truly innovative platform features which has helped it build a name for itself and set the pace for developing the next generation of DeFi apps.

Flash loans

Flash loans are possibly the most famous contribution Aave has made to the DeFi space to date. This function allows users to borrow large amounts of cryptocurrencies with no collateral at all. As you can image, lending requiring zero collateral has quickly become one of the main features Aave has to attract a huge customer base fast.

Instead using collateral to guarantee repayment, Flash Loans rely on the timing of the borrower’s repayment. The loan is only approved if it is paid back in full within the same Ethereum block it was issued. If the loan is not paid back in time, the entire transaction fails.

As DeFi continues to expand, there will likely be a large number of reasons why people would take out such a short loan, but for the time being the primary use cases for Flash Loans are the ability to quickly seize arbitrage opportunities, refinance loans in other lending protocols or swap collateral currently deposited in other pools. Aave charges a flat fee on Flash Loans giving it a steady revenue stream as demand for service keeps growing.

Flexible rates

Most DeFi lending platforms only offer users fixed interest rates, but on Aave people have a choice between stable and variable interest rates. Users can change between these rates using the Swap Rate feature, adding a unique layer of flexibility to lending using DeFi protocols. Adding to that, you can even take out a 10x leverage position on that trade, which essentially creates a derivates market for interest rate swaps.

Credit delegation

In a groundbreaking move, Aave recently launched credit delegation as a new feature available on the platform. This allows users to set up credit lines that can be drawn down by other users as a form of per-to-peer lending. The delegator sets the terms such as the amount of capital that can be drawn against what interest rates and what the repayment conditions are.

On Twitter, Aave founder Stani Kulechov said credit delegation expands the DeFi narrative from deposit capital to source capital, scaling into financial debt markets worldwide and making it the backbone for global finance.

LEND token

Originally LEND was the utility token for the ETHLend platform, but since the rebranding LEND has taken on additional use-cases including platform governance as Aave moves closer to the decentralized model as an organization. Governance operations powered by LEND are things like voting on proposals made by the development team, setting interest rates, liquidation configurations and listing new assets.

Traders have reaped massive gains with LEND, which is up 174% from $0.15708 to $0.430221 today. LEND is not the only DeFi token that’s booked triple-digit growth. COMP, ADA, RUNE, SNX and BNT have all secured huge gains in the last few months. Some of that growth may be speculation, but the price rise of LEND may be fueled by actual usage of the Aave platform which currently has over $670 million of value deposited as collateral for lending. For context, LINK is the largest market on Aave at $177 million, and the LINK token has risen 515% on a year to date basis.

Altogether, Aave is proving to be an innovative player in the DeFi space developing novel services and quickly overshadowing other lending platforms. And it’s only just getting started.

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