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A brief history
Aave is a decentralized money market, allowing users to borrow and lend crypto without going to a centralized intermediary. Originally launched as ETHLend in 2017, AAVE has evolved into a leading project with an evolving set of features, such as flash loans and operating on multiple blockchains such as Polygon and Avalanche. The platform has gained popularity as a place where DeFi users can obtain flash loans. A flash loan allows a user to borrow a large amount of cryptocurrency without posting collateral, and then return the loan within the same transaction with the requirement that they pay the one-block interest fee.
AAVE in practice
To facilitate activity on the platform, Aave issues two types of tokens: aTokens, which are issued to lenders so they can collect interest on deposits, and AAVE tokens, which are the native token of Aave. When a user deposits their digital assets into liquidity pools, they then become funds that the protocol can then lend out. By depositing their tokens and thereby providing liquidity, the user receives new aTokens associated with the currency they deposited (ex. If a user deposits DAI to the liquidity pool, they receive aDAI in return). As a aToken holder, users get a cut of the platform's flash loans as well as interest on those aTokens. Holding AAVE tokens also provides benefits on the platform. First, through a program it calls the “Safety Module,” users can stake their AAVE to act as insurance in case of a liquidity deficit. Doing so earns these stakers more AAVE tokens, along with a percentage of the protocol fees. AAVE is also used in platform governance, and users who hold AAVE can receive discounts on fees attached to both borrowing and lending.