Bitcoin and other cryptocurrencies were created by developers who thought central banks and governments had too much control over money. During the Great Financial Crisis, banks took big risks to make more money, and when they failed, central banks bailed them out. This showed how much power central banks had.
Bitcoin changed this by using blockchain technology, which is a system of rules enforced by code. No one could control or change Bitcoin. Anyone with an internet connection could use it as money and to save value. This was very important for people in countries with very high inflation, like Venezuela and Argentina. They could use Bitcoin instead of their bank accounts, which were quickly losing value.
Then came the Ethereum blockchain, which used the same technology as Bitcoin but allowed for more complex uses. It introduced smart contracts, which are like automatic agreements that don't need a middleman. This led to the creation of decentralized finance (DeFi), where people could do more complex financial transactions without needing a bank. This included things like DeFi lending protocols, where people could borrow and lend money through code.
The Aave protocol is a DeFi application that acts as a lending and borrowing platform on Ethereum. Users who deposit tokens like ETH or USDC can earn interest from borrowers.
For example, a DeFi market borrower that deposits ETH would like to get a loan in USDC. Aave only allows ETH collateral to borrow up to 82.5% of its value. If the borrower deposits 100 ETH worth $3,500 each, they can borrow funds up to $288,750 in the form of a crypto loan.
The smart contract will automatically sell the ETH collateral if their USDC loan value reaches 85% of the collateral value, preventing potential insolvencies.
For example, if ETH drops to $2,975, Aave will sell enough ETH to ensure USDC lenders get paid back the full $111,375 plus interest. So interests are relatively well-aligned between lenders and borrowers, arguably even more so than with traditional lending.
Aave also has some unique features like flash loans. Flash loans are quick loans that you don’t need to put up any collateral for, but you have to pay them back in the same transaction. These loans let you do advanced functions like arbitrage (buying and selling for profit), swapping collateral, and liquidation. These options aren’t available in regular banking.
Another important feature is Aave’s liquidity pools. Users can deposit their crypto into these pools. This way, there is always enough money available for borrowers, and lenders can earn extra income from their deposits. This system makes sure there is enough money to lend out and keeps everything running smoothly and safely.
Aave also works with other DeFi platforms and layer 2 solutions to be more useful and efficient. For example, Aave can be used with Polygon, which helps lower costs and makes it easier for more people to use. This compatibility means users can take advantage of many DeFi services at once, improving their returns and investment strategies.
In other words: Aave is a very useful and flexible platform in DeFi. Its flash loans give smart users more chances to make money with advanced moves. The liquidity pools make sure there is always enough money to lend, keeping things safe and stable. And Aave works well with other DeFi platforms and layer 2 solutions like Polygon, which helps lower costs and makes it easier for more people to use.
All digital assets and DeFi lending platforms carry risk. The main risks of using Aave are potential smart contract bugs and potential inability to liquidate collateral to ensure loans stay overcollateralized.
In regards to that, Aave has been running successfully without exploits since deploying in January 2020, attracting more than $18 billion dollars worth of value at its peak. This value essentially acts as a live bounty or safety module for any hacker to exploit its smart contracts if possible. The fact that it has not been hacked simply means the code works as intended.
To ensure the protocol is able to liquidate collateral before loans become bad debt, Aave imposes strict parameters on margin requirements.
Aave gives interest rates on stablecoins from about 6.26% to 7.3%, making it a strong choice for earning money in DeFi. During the last big market rise, these rates went over 10% because many people wanted to borrow more as prices were going up. This happened because lots of new investors and traders wanted to take on leverage.
Aave’s interest rates change based on how many people are borrowing and lending. If more people borrow, the rates go up to attract more lenders. This helps keep a good balance between borrowing and lending.
You can make even more yield with Aave by using Origin Dollar (OUSD). OUSD helps get the best returns by moving stablecoins to different high-yield strategies automatically. This means you don’t have to manage everything yourself, and you can earn more money easily.
In short, Aave’s flexible interest rates, along with the boost from OUSD, make it a great option for anyone looking to earn good returns on their stablecoins.
OUSD is a yield-bearing stablecoin, backed 1:1 by other stablecoins USDT, USDC and DAI. OUSD deploys these stablecoins to a list of curated DeFi protocols to earn yield for its users, one of them being Aave. Because OUSD utilizes a number of DeFi protocols for other activities such as market making or peer-to-peer lending, OUSD is able to automatically rebalance holdings between strategies to earn the highest yields. Currently, OUSD has been yielding approximately 7-10% for its users.
The other protocols OUSD use besides Aave are
Yield from OUSD is directly sent into the users’ wallets, similarly to how a savings account works. All strategies employed by OUSD are market neutral, meaning that there are no speculative positions that may result in large drawdowns. Since OUSD is a smart contract powered application, the protocol is 100% transparent and auditable 24/7 on the blockchain.
In contrast to the uncertainties regarding centralized exchanges and lending platforms, OUSD users can relax knowing that OUSD’s reserves can always be verified onchain.
OUSD is currently the number one yield generating stablecoin in DeFi, helping beginners and experts alike make the best risk-adjusted yields on their stablecoins.
OUSD can be bought directly through the Origin dapp, through decentralized exchanges such as Uniswap, or centralized exchanges such as Kucoin or Gate. If users do not have a crypto wallet, they are required to set one up to hold OUSD. Users who intend to store more than $1000 worth of tokens are generally recommended to use a hardware wallet like a Ledger.
Aave is a standout lending and borrowing protocol, but it still faces competition from several other platforms, each offering unique features and capabilities.
It’s worth taking some time to understand these competitors, as it will help to highlight Aave's position and the alternatives available to users in the DeFi ecosystem.
Compound Finance is one of the most notable competitors to Aave. However, Compound has stricter parameters for borrowing, which can make it a more conservative choice for users seeking stability.
While Aave supports a wide range of assets, Compound's asset support is more limited, which might restrict users looking for a broader selection of tokens to lend or borrow. Despite these limitations, Compound's strict borrowing parameters can be advantageous for those looking for a more secure environment with well-defined borrowing limits.
Another competitor is Morpho, a peer-to-peer lending protocol integrated with OUSD. Unlike Aave, which uses a peer-to-pool model where users deposit assets into a collective pool, Morpho matches lenders directly with borrowers. This peer-to-peer approach can potentially offer more personalized lending terms and improved efficiency.
By directly connecting lenders and borrowers, Morpho aims to optimize the lending process and enhance the user experience. This direct matching can reduce the spread between lending and borrowing rates, potentially making it more attractive for both parties involved.
Notional Finance takes a different approach by focusing on fixed-term lending. Unlike Aave and Compound, which allow lenders to withdraw their assets at will unless the borrower utilization rate is excessively high, Notional requires lenders to lock in their deposits for a specified period.
This fixed-term model can provide more predictable returns for lenders, as they know exactly how long their funds will be locked and what interest they will earn.
However, it also requires a commitment from lenders, which can be a drawback for those seeking liquidity and flexibility. Borrowers on Notional benefit from fixed interest rates, which can be an advantage in volatile markets where interest rates on other platforms might fluctuate.
In sum, these competitors each bring unique features to the DeFi lending space:
Whether it’s Compound’s strict borrowing parameters, Morpho’s peer-to-peer matching, or Notional’s fixed-term commitments, users have multiple options to consider when choosing a DeFi lending platform. These alternatives allow users to find a platform that best fits their specific requirements and risk tolerance.
Is using Aave safe?
As addressed before, Aave has some risks in regards to smart contracts and collateral liquidity. However, given its robust performance in the most volatile market in the world, we believe Aave token is among the safest protocols to use on Ethereum.
What is a liquidity pool and how does it work on Aave?
A liquidity pool on Aave is a smart contract where users deposit collateral like ETH or USDC. These deposits create a pool of crypto assets that borrowers can access. Liquidity providers earn interest from the borrowers' fees, while the smart contract ensures that the pool remains overcollateralized to prevent defaults.
How do flash loans work on Aave?
Flash loans on Aave allow users to borrow assets without depositing collateral, provided the borrowed amount is returned within the same transaction. This feature is useful for arbitrage opportunities, refinancing positions, or exploiting temporary price discrepancies in the market. Flash loans are a unique aspect of DeFi that traditional finance does not offer.
What are the risks of borrowing assets on Aave?
Borrowing assets on Aave involves risks such as smart contract bugs and potential liquidity issues. Users must deposit collateral to secure their loans, and if the value of their collateral drops, it may be liquidated to maintain the loan's overcollateralized status. This system helps protect both lenders and borrowers, but it's important to be aware of market volatility.
