Decentralized Finance is one of the most useful real-world applications of cryptocurrency around. There are many different Decentralized Apps, or dApps, available for use right now. Aave, one of the most famous liquidity protocols in DeFi, allows users to borrow crypto, earn interest on their crypto, participate in staking, and even vote for changes in the protocol.
How does Aave work, though? In this guide we will go over how to use this DeFi platform to its full capacity.
How Does Aave Work?
Aave has many features that allow users to invest their cryptocurrency in a variety of different ways. This includes borrowing crypto, lending crypto, or earning interest (yield farming). These are all popular ways to use DeFi.
Since the Aave protocol is decentralized, the company does not control the policies of the pools. This is governed by owners of Aave tokens, $AAVE. This is called a Decentralized Autonomous Organization, or DAO for short. You can buy and sell these tokens on exchanges, like Coinbase, in order to gain voting rights on new proposals for the platform.
How Do You Earn Interest on Aave?
Though you can buy $AAVE tokens on the market, you do not have to own $AAVE in order to earn interest from crypto deposits on Aave!
Aave supports many different cryptocurrencies from different blockchains, however the largest market is by far the Ethereum blockchain pool. There is over $1 billion worth of Ethereum in Aave’s liquidity pools.
Different crypto currencies offer different rates for depositors. For example, depositing Ethereum only earns 0.79% APR, as of November 2022, however depositing Tether ($USDT) can earn over 12.83%!
It should be noted that some tokens are offering very high rates, including APRs over 100%. This is due to the amount of borrowings nearing the total amount of liquidity in the pool. This typically only happens for smaller cryptocurrencies.
To earn interest on Aave, you simply need to connect your preferred crypto wallet, like Metamask, and deposit your preferred cryptocurrency into the pool to start earning interest.
How Do You Borrow Money on Aave?
Similarly to earning interest, all you need to borrow money on Aave is some existing cryptocurrency in your wallet. Unlike traditional loans, there are no credit checks or personal requirements in order to borrow money.
All loans on Aave do have collateral requirements, though. This means that you must give some crypto to the protocol to borrow more crypto. Each crypto has a certain LTV (Loan to Value) which is the amount you are allowed to borrow.
For example, right now ETH has an LTV of 82.50%, meaning you can borrow .825 worth of ETH for every 1 ETH you deposit. This is very useful for arbitrage opportunities between different crypto liquidity pools, or even for shorting specific currencies.
What is Aave Staking?
In addition to voting rights, holders of $AAVE can stake their tokens to secure the protocol. Staked tokens go into the Safety Module, where it is held in reserve in case of a shortfall event. A shortfall event occurs when there is a deficit somewhere in the Aave protocol. When this happens, the Safety Module is used to cover the deficit.
The Aave documentation goes further into the technicalities of the Safety Module, however what is important to know is that you can earn rewards through staking. The rate changes semi-often, however you can earn up to 6.37% on staking $AAVE tokens.
The Premier DeFi Protocol
Aave is one of the safest and most used DeFi protocols on the internet. Not only are there safety measures in place to mitigate risk, it is completely transparent. All of the information on how the protocol works is readily available, and users can actively adjust the protocol through governance voting.