Crypto Currencies

What is AVE? Is it good to invest? Or is it a scam?

Aave is a decentralized finance or DeFi protocol based on Ethereum that is dedicated to the algorithmic lending sector, being one of the most successful in the early years of this new phenomenon.

Aave is a project born in Finland in 2017, where this word has the meaning of ghost. It's not bad at all for this project which aims to connect lenders and borrowers directly under the anonymity of the network.

At its beginnings , it was called ETHLend, whose name clearly indicated that it was a lending project. The name change took place in 2018.

Since its inception, it has been a success, becoming one of the best-known DeFi projects on the market, and it continues to be, still occupying the top positions in terms of popularity and turnover in the market for this type of token.

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This project is also listed with its own cryptocurrency, AAVE, which provides the right to discuss and vote on proposed changes to the current project. Seen from this angle, it is almost as if it were a participation in this platform.

types of loans in aave
As can be seen, interest is high for deposits, but even higher for those who borrow

What is the reason for the success of this platform?

Several factors have allowed Aave to position itself as one of the key projects in the world DeFi. One of them may be that it was one of the first platforms to be launched, but that's not enough. It must have a purpose and this generates a high demand.

In principle, the system was intended to be a pure loan management environment between those who have excess cryptocurrency and others who want more so they can get additional capital for a while.

Later, this evolved into a more complex system based on liquidity and algorithmic protocols that adjust the market according to user needs. From this point of view it can be considered as an automated credit market.

AVE price

How does the AVE work?

The first thing is that it is necessary to create a system of liquidity funds so that they can be loaned out.

For this there are investors who are those who put the necessary cryptocurrencies so that others can borrow them.

Investors, of course, lend these coins with the intention of earning a return.

On the other hand, capital seekers go to the market with the intention of obtaining new cryptocurrencies to invest or perform any operation. For these borrowers to participate, they must post collateral.

What guarantee is used in AAVE?

Well, other cryptocurrencies that borrowers have, and in this case, that collateral has to be oversized, which means you have to put in more than you take. This is so because of the enormous risk these markets present, with insane volatility.

In the event of significant market fluctuations, it is possible for AAVE to liquidate the guarantee and for this a penalty is paid.

It's actually a pretty simple system, in the sense that it brings together two groups that are looking for different things and get what the other wants.

What is not so simple is to design the algorithm that makes all this work perfectly and, moreover, to maintain it.

When we deposit a cryptocurrency, for example DAI, we receive an aDAI, and so on for the rest. In this way, the tokens that the lenders receive are called aTokens and are proof of the investment in the system. These ATokens can also be traded as they are fully recognized in the AAVE system, i.e. they are the same contracts.

How is it deposited?

deposit in aave

This is done using one of the cryptocurrency market wallets, these are the following:

  • Browser Wallet
  • doors
  • register
  • MEW Wallet
  • Coinbase
  • Authentic
  • Wallet Connect
  • Torus
  • Fortmatic

In this market, there is no minimum or maximum deposit. Any amount is allowed. On a personal note, I would always recommend depositing a little in the beginning to test out the platform, and only making larger deposits when we see things are going well.

The operation is thus summarized as suit :

  1. The lender deposits cryptos into the liquidity pool and therefore receives a token, which represents its investment in the pool. Then you receive interest over time.
  2. The borrower must put crypto as collateral and chooses a fixed or variable interest rate loan type. Once you do, you receive the loan.

Let's look at an example:

Let's imagine that we want to borrow Ethereum and for this we put DAI as collateral.

guaranteed in aave

If we look at the DAI file, which we can access by clicking on the respective currency on the screen, we see that we have a series of data such as:

  • Usage Rate: How in-demand is crypto.
  • available liquidity
  • Deposit interest(APY): the interest on the loan
  • Can be used as collateral: Yes or No
  • asset price
  • Maximum LTV: loan to collateral ratio
  • Liquidation threshold: In this case, 80% say that if Ethereum goes up 20% or more, our position would be liquidated since the collateral would not reach the minimum.
  • Liquidation penalty: the stipulated % (in the event of a shot, 5%)

In this case, I put a stable guarantee such as DAI, but volatility could also be put, so the possibilities are many. obviously, when we use collateral and lending in volatile cryptos, we are going to have much more dynamic lending.

Interest rate in AAVE

As we have just seen, the borrower can choose between two interest rates for his loan:

  • Variable
  • Permanent

The fixed rate is higher than the variable, but this is because it remains fixed, while the variable can increase significantly over the period.

The interest rate of the variable rate will depend on various factors such as the liquidity available in the pool and the demand for loans and deposits.

If you want more security, the landline is surely better for you.

If you want more risk and more chances to win, then the better the variable.

How much does it cost? What commissions do you have?

The use of the platform is not entirely free. You must undertake a series of expenses, even if they are very small. Let's look at these commissions:

  • For the borrowers, they will have to pay 0,00001%, of which 80% goes to the protocol fund and 20% is for the integrators (but they don't specify what it is because the link on the avee page is broken)
  • On Flash Loans, 0,09%, of which 70% goes to depositors, and the rest to the previous distribution (80/20%)
  • Fees for using the Ethereum Blockchain. To consult.

What cryptocurrencies are available in AAVE?

The number of cryptocurrencies is increasing remarkably over time. In 2020 there were 16, but within a few months they have grown to 24, and the number will surely continue to rise.

The cryptos it allows to work with are:

Dai USD coin TrueUSD
USDT coin sUSD BinanceUSD
Gemini Dollar Wrapped ETH Aave
unitedwap aspire.finance Basic attention token
REN EnjinCoin Kyber Network
chain link Decentralized Manufacturer
SNX WBTC-Coin Curve DAO Token
pendulum xSUSH 0x piece

The major part of the volume of loans is made in: Dai, USD Coin, True USD and USDT Coin, i.e. essentially in Stablecoins.

Currency of the platform, the Aave has a number of advantages, such as:

  • No fees charged to lenders
  • If used as collateral, discounts are obtained
  • Lenders who use Aave can get a higher loan amount.
The logic here is: people want to borrow in stablecoins and stake that capital against the major cryptos, so that after getting the good return, they want to get back into that other stablecoin and take a profit.

Flash loans

This was AAVE's original standard loan (when it was ETHLend).

The Flash Loan is a loan that is made and executed in the same transaction, that is to say at the same time. This is also done without any guarantees.

How is it possible? How to make such a loan?

Well, because the Ethereum system allows an instant transaction with a crypto and at the same time it is released. That is, it's something like:

  • receive the loan
  • do something with instantly
  • repay the loan

In this type of transaction, there is no risk for the lender because his contract is secured by a security protocol.

One of the examples of using this type of flash loan is in an arbitrage transaction. In it, it is assumed that if we see a different price between two different houses, we can make an instantaneous transaction by buying in one and selling in the other (more expensive), in order to obtain a profit “ free".

Of course, that in the real world isn't what it seems, and it won't be that easy. Here we are more in the domain of programmers and algorithmic experts. In fact, this type of loan is only available to programmers.

Using platforms such as DeFi Saber or Furucombo, you can perform three-way trades with other platforms and structure a trade where we close out one of these contracts.

It's a bit like targeting an asset on a certain site. Perform an algorithmic operation and execute it in Aave, such that the moment we grant the loan, we manage to buy the asset, and at the same time return the principal of the loan.

Is AA Ve safe?

This is one of the most important questions in this article, if not the most important.

At least, it seems to me that it is so.

The first thing we want to make sure in this world of 100% online operations is that they are secure.

The first thing that comes to mind is whether AAVE has been hacked in the past or not.

In its first years of use, it is not a platform that has had a reputation for being hacked or stolen. That doesn't mean it's risk free.

In February 2021 , I've found news that 2,8 million USD from yearn.finance may be stolen through Aave. Although it must be said that the theft problem seems to be more related to the other platform.

Is AAVE a scam?

In theory, we are facing a fairly safe system which has seen how the funds invested in it have increased significantly year on year, from a few tens of millions of dollars to more than 5 billion at the start of 2021. That is proof of that is a system that does not appear to be a scam.

Like any system in the blockchain world, it has its risks, but aside from the case I mentioned earlier, we are hardly going to see any reports of problems on the platform.

Could this change in the future?

Of course, but it also concerns the rest of the sector.

What I can say for now is that Aave is one of the most successful platforms in the DeFi world, and for a reason.

Another important detail of this platform is that its creator has a public profile, which differentiates successful projects from those that are not.

One market that is under quite a bit of attack on other platforms is flash loans, so be careful when using it.

Conclusion Can you make money with Aave?

This is another of the questions that really matters in this post.

I will give you my opinion.

In theory yes. This is the idea behind the program.

Otherwise, what would savers invest in it?

From the way I've seen how the project has evolved, I'm sure there's money to be made from it. In fact, right now, I'm thinking of starting to invest something.

What happens is that, as with everything, we have to take into account certain problems.

Seen above, I can clarify that it is a rather speculative system, which depends on the price of cryptocurrencies constantly increasing. In this case, the lender is content to earn good interest, while the borrower tries to earn money from the rise in price of the previous ones.

In the case of the lender, I see it more clearly, but the borrower does not know if he can derive great benefit from it. This is due to the limits of the program, with the settlement percentage, among others. The latter somewhat blocks the flexibility of the operation.

The problem arises when there are bear markets in cryptocurrencies, which also exist, although this is not the usual case. When things go wrong and prices fall, then we see big losses from borrowers, who not only don't see their collateral liquidate, but also see how the value of their crypto plummets and in the end they lose a significant sum of money; amount which is compounded by the interest on the loan, which, as we have seen, is not exactly low.

Therefore, it seems a more attractive system from an investor's point of view, at least in normal lending.

If we move to flash loans, there could be an advantage for sophisticated developers who can see system failures in other markets and apply the algorithms to execute these beneficial smart contracts. Yet I don't see it as easy.

For example, in the following tweet, they brag about a game that made them a lot of money officiating, although I think it was in another flash loan, not Aave's:

 

Will it be true or not?

Will there be a cheater?

Who knows?

But I think it is worth seeing where the hits go and the average interest that can be found in those looking to make use of this type of flash loans.

Pros and cons

✔️Possibility of obtaining high interest for the transfer of our cryptos

✔️The system manages itself automatically. It is an automated lending system

✔️Good web and platform interface. It's easy to use and find what you're looking for

✔️Lots of cryptocurrencies to choose from

✔️It offers many wallets to deposit from, although some others are missing

✔️It is one of the biggest DeFi projects in the market and also the one with the best reputation

✔️It's a pretty secure ecosystem and not known for many hacks

✔️Commissions are symbolic

✔️It offers guarantees of anonymity and great flexibility

❌As a system that depends on crypto fluctuations, it can be said to have a lot of risk

❌You have to be very careful if you are the one taking the loan. You can lose a lot fast

For more information, visit the Website.

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