DeFi in-depth exploration: one article to understand Aave’s past and present

Aave is a decentralized lending system that allows users to borrow, lend, and earn interest on crypto assets without the need for an intermediary. Aave in Ethernet Square run on the block chain, and intelligent use of contract system, the assets on the platform managed by a distributed computing network to run their software. Therefore, their users do not have to trust an institution or individual to handle their funds.

AAVE allows users to create loan pools, enabling them to lend or borrow 20 different cryptocurrencies. In order to borrow funds on Aave, users must provide collateral, and if they experience crypto market turbulence after lending, users must face liquidation risks. Aave also has other features, such as fast loans and other forms of debt and credit issuance, but in terms of user adoption and use, these are currently in the alpha stage.

As of September 6, AAVE is the 35th largest cryptocurrency with a market capitalization of 5.3 billion U.S. dollars, ranking 7th among all DeFi. Only behind other giants such as Uniswap , Chainlink , Terra and Pancakeswap. The price of AAVE is US$404.28, and it hit a record high of US$631.26 on May 18, 2021.


Aave is Finnish, meaning “ghost”, and was originally called ETH Lend when it was launched in November 2017 . ETHLend is a peer-to-peer lending system. While studying ETHLend extensively throughout 2018, the Aave team realized the inefficiency of peer-to-peer lending and decided to abandon it. As we know today, Aave switched to a P2C lending platform in 2018 and has been doing this ever since.

The founder and CEO of Aave is Stani Kulechov, who is the company’s main public profile. When Stani discovered Ethereum and its functions, he was studying law at the University of Helsinki. He began to explore how it affects the DeFi system and proposed ETHLend.



In 2017, Aave launched an ICO (Initial Token Offering), which raised $16.2 million in funding for them. The ICO allowed Stani to hire more developers to focus on improving the protocol.

In January 2020, Aave was launched on the ETH mainnet, supporting 16 assets. In July 2020, Aave received US$3 million in investments from Three Arrows Capital, Framework Ventures and Parafi Capital. Since then, Aave has received funding from Blockchain Capital, DTC Capital, Standard Crypto, Ventures, and Defiance Capital.

2020 is a decisive year for Aave. By the end of 2020, their TVL has soared from US$300,000 to approximately US$2 billion. The Aave token ($AAVE) is also the best performing asset in 2020 and has generated 5,000% revenue. Currently, the total value locked by Aave is approximately $18 billion.


What is the role of Aave?

Aave is a lending pool system that allows users to choose to borrow, lend and earn interest on 20 different digital assets without the need for an intermediary.

Users who want to earn interest will deposit the funds they want to lend and then collect them in the liquidity pool. When borrowers take out loans, they draw funds from these pools of funds. Lenders can trade or transfer these tokens in any way they see fit.

Aave issues two types of tokens to promote this activity, $AAVE (Native Tokens) and aTokens.

There are several ways to use the $AAVE token:

  • If users use $AAVE as collateral for borrowing, they will get discounted fees, and if $AAVE borrowers use token-denominated loans, no fees will be charged.
  • If a fee is paid, the owner of $AAVE can choose to review the loan before issuing it to the public.
  • Users who use $AAVE as collateral can borrow slightly more than any other digital asset.
  • Token holders can pledge $AAVE on the platform to obtain approximately 6% APY distribution.

aTokens tokens:

  • These tokens are minted when depositing, and destroyed when redeeming.
  • They are linked to the value of the underlying assets deposited in the Aave agreement at a ratio of 1:1.
  • aTokens provides lenders with “receipts” that allow them to collect interest on deposits.

In December 2020, Aave upgraded its platform to Aave V2. The upgrade brings the ability to repay part of the loan collateral without having to perform multiple transactions. By combining these operations into one transaction, users can save network fees (ETH transaction fees can be reduced by up to 50%), time and effort.

In addition, borrowers on the Aave platform can now issue a new token, just like aTokens for lenders. Tokens allow borrowers to manage borrowed tokens from their cold wallets. The update also brings stable borrowing and fixed interest rates, providing better predictability and avoiding temporary losses caused by market fluctuations. The data analysis website Support.token provides a more detailed V2 upgrade list (pictured below).


Token Economics (model)

In July 2020, Stani Kulechov, founder and CEO of Aave, announced the token economics “Aavenomics” of the protocol. The Aavenomics upgrade will convert every 100 $LEND tokens into 1 $AAVE token, with a maximum total supply of 16 million. The upgrade was voted on by governance and passed by almost 100% unanimously. Through a new vote, 13 million of the 16 million tokens were redeemed by LEND holders, and the remaining 3 million entered the Aave ecosystem reserve, which was described as “allocated to the protocol as deemed appropriate by governance Incentive Guidance Fund”.

In addition, the security module is started together with the token rebase. The security module acts as a collateral mechanism for tokens to act as insurance in the event of a shortage. This brings token agriculture to $AAVE, in which stakeholders can obtain security incentives and a certain percentage of agreement fees.

Within 4 months (October 2020) after the release of Avenomics, the $AAVE transaction premium was approximately $50. At the beginning of 2020, LEND will be priced at US$0.02. Even with reduced supply and a rebalanced price of $2, AAVE still rose by 2,400% in just 4 months.

The whole reason for the launch of Aavenomics is to make Aave more decentralized through the governance of token holders. Quoting the official announcement: “The goal of Aave Tokenomics is to create a Shelling Point through its incentives and policies. The growth, sustainability and security of the agreement take precedence over the goals of individual stakeholders.”


Security issues/audit

According to Token Sniffer, Aave includes an agency contract with the possibility of agreement utilization. The proxy contract allows developers to change things into a blockchain protocol, which is how Aave V2 can achieve it. Just like how Facebook finds errors and provides updates to fix them, proxy contracts allow developers to update the “immutable” blockchain protocol when problems are discovered. The problem with agency contracts is that, theoretically, hackers can change or manipulate agreements that benefit them (for example, stealing funds) by using and exploiting the agency contracts deployed for specific agreements.

Having a proxy contract brings a slight loophole to Aave, but it also brings flexibility and options to make the protocol better based on the governance votes of the token holders.

In order to reduce risks through agency contracts and other forms of hacking potential, Aave has a bug bounty campaign where anyone can try to use their agreement to find vulnerabilities. If they find vulnerabilities, users will receive monetary rewards based on the severity of the vulnerabilities found, ranging from $100 to $250,000. Aave also continues to be audited by various auditing platforms:


Roadmap, progress

The momentum that Aave started in 2020 will continue until 2021. In order to start 2021, Aave successfully launched the V1 -> V2 migration tool. With the support of Lightning Loan, users can transfer their liquidity positions from version 1 to version 2 almost seamlessly. Flash loan is a way to borrow digital assets without collateral. On March 16, 2021, Aave released its first AMM (Automatic Market Maker) market. The AMM liquidity pool allows Uniswap and Balancer liquidity providers to use their LP (liquidity provider) tokens as collateral in the Aave protocol.

In 2021, Aave narrowed its focus on scalability and explored “new frontiers.” Aave’s multi-market approach allows it to penetrate these new areas. Establishing synergy with other projects is one of DeFi’s main assets. Aave is using this to build markets in all important areas of cryptocurrency. Their latest example of cutting-edge scalability is a sidechain with polygon implementation. This implementation brings extremely fast and almost free transactions to Aave. In addition, Polygon is powered by Chainlink, which brings flagship security to Aave in the protocol price feed. The synergy between Polygon and Aave allows more accessory options to fit the network, which increases the scalability of Aave and Polygon.

As of this writing, integration on the Polygon blockchain is the last big thing Aave has done. So far, apart from scalability and attempts to reduce ETH price fees, there have been no more announcements about what will happen, which is their main focus in 2021.


Aave is the flagship product in the Ethereum ecosystem and is setting standards for other P2P lending protocols. With the explosive power of the past year and eight months, we can only hope that they can continue to define new areas in the DeFi field with energy. Aave is so important in DeFi that Grayscale is always looking for Aave’s next trust, showing how much trust and motivation they have gained.

At the time of writing, the last fascinating tweet from founder and CEO Kulechov was to meet someone in the meta universe. As you can imagine, what will happen as Aave continues to grow into a bigger and better lending market? Maybe we will also meet Aave in the meta-universe.


Original source | RFCapital


Posted by:CoinYuppie,Reprinted with attribution to:
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