Aave is an open-source decentralized finance (or Defi) protocol, which runs on the Ethereum blockchain. It’s one of the most successful examples of landing platforms dedicated to crypto lending and borrowing. Crypto lending is a fairly new Defi phenomenon, thanks to which investors can lend and borrow cryptocurrencies. In return, the “lenders” then get interest payments, referred to as “crypto dividends”.

Founded by Stani Kulechov in 2017, Aave was originally called ETHLend and got its current name (which in Finnish means ghost) in 2018. Since the beginning, it has been a success, and soon it became one of the best Defi projects on the market. The project also has a native cryptocurrency, bearing the name of the platform.

How Does the AAVE Token Work?

Before investing in any crypto coin, it’s best to learn as much as you can about the project, how it works, as well as the philosophy, and the purpose behind it. In recent years, in the crypto universe, and specifically in the decentralized finance world, the AAVE token has become a very appealing option for investors, providing passive income.

Even though buying cryptocurrencies is never risk-free, if you are looking for a long-term investment, this token may be a good option. Mainly this is because if you use AAVE tokens as collateral for borrowing on the Aave system, you may get discounts on the loan fees, or other benefits, such as higher borrowing limits.

Furthermore, besides being exchange tokens, AAVE coins are governance tokens, as well. This means that if you hold this cryptocurrency, you will be able to vote and have a say in the proposed changes on the platform.

How does the Aave Platform Work?

In the simplest terms, the Aave protocol brings together two groups of investors, which can offer each other what the other needs. One group wants to lend crypto coins for a passive income, and the other group needs to borrow other crypto coins, as well as stable coins, to invest or carry out any operation.

To enable borrowing, the Aave platform allows users who want to act as lenders to deposit funds into liquidity pools. In other words, investors provide the necessary cryptocurrencies that other investors can borrow. Of course, the reason why they lend their cryptocurrencies is the possibility of earning interest.

Borrowers, on the other hand, have to post collateral to obtain new cryptocurrencies. This collateral can be another cryptocurrency, and it has to be overcollateralized. This means that if a user wants to borrow, they have to put more than they take because the markets come with great risk, due to cryptocurrencies’ volatility. If there is an important variation in the market, Aave may liquidate the collateral, and a penalty is paid.

Aside from AAVE tokens, the Aave uses so-called aTokens. Lenders get aTokens upon depositing tokens into a liquidity pool. For instance, if you deposit one DAI, then you will get one aDAI. aTokens are recognized by the Aave platform and they allow accurate tracking of payments.

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How can you Deposit?

To become a lender, or in other words, to deposit cryptocurrencies in a liquidity pool, you need to use a wallet. It’s worth mentioning that you can deposit any amount because there is no minimum or maximum amount. However, if you decide to be a lender, you should see how everything works, and until you get a clearer picture of the platform. Only then should you start depositing more significant amounts.

Final Words

Simply put, Aave is a platform that allows lending and borrowing cryptocurrencies. It does so by enabling users that want to lend to place their deposits in liquidity pools, which can then be given as loans to users that want to borrow cryptocurrencies and stable coins. Lenders can deposit various cryptocurrencies, upon which they receive aTokens, which are proof of the investment and can be stored, transferred, or traded.

The platform has a native token, the AAVE coin, which has been a popular cryptocurrency for some time now. AAVE can be exchanged but it’s also a governance token, giving holders the ability to vote on the rules of the platform. AAVE coins can be used as collateral for borrowing. Doing this can provide more favorable conditions for the loans.

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