What is Aave? – a non-custodial lending protocol
TL;DR: Aave is a protocol for earning interest on your deposits and borrowing assets. This year Aave pivoted from a P2P lending model to a pool-based model. Liquidity is deposited in a liquidity pool — think Compound.
Anyone can borrow from the pool by depositing a collateral (token). Interest is determined algorithmically. The less funds available in the pool at a specific time → the higher the interest (attracting more liquidity due to bigger fees for LPs).
Every asset in the pool has its own Loan-to-Value (LTV) parameter, which dictates the collateral ratio. If a position is undercollateralized it is liquidated for a discount (max of 50% of the loan can be liquidated). This incentivizes liquidators to buy the collateral.
How does Aave differ from its competition?
Aave differs from other lending protocols with:
- Flexible rates. Users can switch between two different interest rates — stable and variable.
- Flash loans. Undercollateralized loans that rely on the timing of repayment (only approved if repaid within the same block)
Examples of interest rates.
How does Aave’s roadmap look like?
Currently the Aave Lending Pool is the first pool built on the Aave protocol. The upcoming “Pool Factory Update” will allow anyone to create their own pool = multiple lending pools with segregated liquidity, parameters, permissions, and type of assets.
How does Aave’s governance work?
Governance is split into two parts:
- Protocol level — token holders vote on upgrades and parameters of the protocol (similar to MakerDAO)
- Pool level — LPs vote based on their liquidity amount. Governance includes pool specific parameters (such as collateral types).
👉 This means that every pool has their own governance separate from the protocol. LEND token holders control the protocol and LPs control the pools.
What’s LEND’s token model?
0.25% of every loan is collected and swapped to LEND. 80% of the collected fee is burned. 20% allocated to “referral integrators”.
Aave is about to release a paper on their upcoming upgrades for governance and token model (Aavenomics).
We are looking forward to the Pool Factory Update and the new token model! Aave is on track to become a serious competitor to Compound, and seems far ahead with their own token with both economic and governance rights.
Similar to 👏 traditional 👏 company 👏 shares 👏.
Token Terminal provides financial and business metrics on crypto protocols — metrics we’re used to seeing applied to traditional companies, e.g the P/E ratio. Crypto protocols operate like traditional businesses, only they do it directly on the Internet.
For more, check out Token Terminal’s website and Twitter.
The authors of this content, or members, affiliates, or stakeholders of Token Terminal may be participating or are invested in protocols or tokens mentioned herein. The foregoing statement acts as a disclosure of potential conflicts of interest and is not a recommendation to purchase or invest in any token or participate in any protocol. Token Terminal does not recommend any particular course of action in relation to any token or protocol. The content herein is meant purely for educational and informational purposes only, and should not be relied upon as financial, investment, legal, tax or any other professional or other advice. None of the content and information herein is presented to induce or to attempt to induce any reader or other person to buy, sell or hold any token or participate in any protocol or enter into, or offer to enter into, any agreement for or with a view to buying or selling any token or participating in any protocol. Statements made herein (including statements of opinion, if any) are wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader or any other person. Readers are strongly urged to exercise caution and have regard to their own personal needs and circumstances before making any decision to buy or sell any token or participate in any protocol. Observations and views expressed herein may be changed by Token Terminal at any time without notice. Token Terminal accepts no liability whatsoever for any losses or liabilities arising from the use of or reliance on any of this content.
Stay in the loop
Join our mailing list to get the latest insights!
- Derivatives – Weekly fundamentals #66
Derivatives – Weekly fundamentals #66
This week’s newsletter focuses on the derivatives market sector, which has a designated dashboard on Token Terminal. Let’s dig in!
- MakerDAO's Endgame with Rune Christensen | Fundamentals ep.57
MakerDAO's Endgame with Rune Christensen | Fundamentals ep.57
In this episode of the Fundamentals podcast, I’m joined by Rune Christensen – Co-Founder of MakerDAO – a decentralized stablecoin protocol built on Ethereum, and the first-ever DAO, to discuss their recent Endgame update.
- Bridges – Weekly fundamentals #65
Bridges – Weekly fundamentals #65
This week’s newsletter focuses on the bridges market sector, which has a designated dashboard on Token Terminal. Let’s dig in!