Aave is a protocol that’s well known in the decentralized finance world. This protocol makes it possible for the user to access other open-source protocols as well as non-custodian protocols to create their own money marketplace. Down below we will be talking about what Aave is as a company, what Aave is as a protocol, and why it’s gaining traction in cryptocurrency world right now.
What is Aave?
The name Aave comes from aFinnish word that means ‘ghost’. The main reason as to why this project exist is to fill in the gap that other massive fintech companies such as PayPal, Skrill, and Coinbase left behind. Their main product is what we’re discussing right now, the Aave Protocol, an open-source protocol to create marketplace in Ethereum blockchain.
What is Aave Protocol?
The biggest product of this company is exactly what we’re talking about right now. The Aave Protocol. Released in January 2020, this protocol is an open-source, non-contained protocol that makes it possible for its user to create their own decentralized market in Ethereum blockchain.
Aave protocol works with depositors providing liquidity through cryptocurrency into what’s known as lending pools. This will make it possible for them to gain interest and as a result, profiting from it. Meanwhile, borrowers can obtain loan by taking advantage of the lending pools mentioned above.
Aave Protocol Features
1. Flash Loans
One of the most distinguishing features that Aave has is Flash Loans. With this, borrowers can get their loans without any collaterall. This makes it possible for the customized smart contract to borrow assets from reserve pool in one transaction.
Loan is done with the requirement that liquidity will be returned to the pool before the transaction is over. But, if it’s not paid for during that period of time, the transaction will be canceled, guaranteeing the safety of the reserve pool of the depositors.
This flash loan feature is designed for developers to get funding for arbitrage purpose, refinancing, or liquidation.
2. Rate Switching
Rate switching is another of the distinguishing features that Aave can offer to its user. This feature makes it possible for the borrowers to switch between rates while still maintain floating, something that’s very useful in a decentralized market that’s prone to change.
For a high rate, user will usually choose the fixed rate route, but if it’s unstable, user can also opt for floating rate instead to reduce the loan fee. Fixed rate itself can only be changed if the savings income rises above the fixed interest rate, resulting in the system becoming unstable by paying more than what’s needed.
If this happens, the fixed exchange rate will be stabilized back to a new fixed exchange rate. In other side, when variable interest rate is lower than fixed interest rate by 20%, loans will decline automatically to calculate the differences.
Cryptocurrency is indeed a complicated business, even more so with the amount of platform available for the users to choose, so we hope that our article about one of those platform Aave is useful in explaining what Aave is, how Aave works, and the features in Aave.