Borrowing and Lending: Aave
Banking on the blockchain continued...
Borrowing and lending is a key part of any financial system. At Scallop we are integrating Defi into regular banking accounts through protocols like Compound and Aave. We will take a look at Aave today.
- Aave is a for-profit company founded in 2017 by Stani Kulechov and based in Switzerland
- Decentralised lending/ borrowing platform
- One of the largest market-cap Defi protocols
- Built on the Ethereum network (ERC20)
- A system of lending pools known as 'liquidity pools' - 'pool-to-peer lending'
Aave is a decentralized finance (DeFi) protocol that enables the borrowing and lending of cryptocurrency. This enables users to lend and borrow cryptocurrency without a third party.
Aave is one of the largest lenders of cryptocurrency and its AAVE token has a larger market cap than rivals Maker or Compound
Users deposit digital assets into liquidity pools, and these assets are lent out by the protocol to other users. When people lend on Aave they earn interest, just like a bank would, and conversely when people borrow, they pay interest.
Aave is built on the Ethereum network, and thus uses the Ethereum blockchain for transactions. Ethereum tokens are known as ERC20 tokens.
In traditional finance, you take out a loan from a bank after posting some collateral. Once the collateral is posted, you receive the principal of the loan and pay it back with interest every month. If you miss payments, they take the collateral through a repossession. In Defi; there is no bank, just a smart contract... So individuals have to post collateral and once they do so, they get to borrow cryptocurrency from other users. Currently, in Defi, all loans are over-collateralised.. meaning that the collateral is worth more than the loan itself. This means that there is no incentive to default on your loan which protects lenders, whilst the immutability of the smart contracts protects the borrowers.
Some of the most popular assets and their rates on AAVE
Aave currently has pools for over 20 Ethereum-based assets.. these include the stablecoins: Tether, DAI, USD Coin, and Gemini dollar. Other markets include Chainlink, Basic Attention Token, and Uniswap.
To interact with the Aave protocol, you simply sign up and deposit your preferred asset and amount. After depositing, you will earn passive income based on the market borrowing demand. Additionally, depositing assets allows you to borrow by using your deposited assets as collateral. Any interest you earn by depositing funds helps offset the interest rate you accumulate by borrowing.
No platform can be considered entirely risk free. The risks related to the Aave platform are the smart contract risk (risk of a bug within the protocol code) and liquidation risk (your collateral can get liquidated if the price is too low). Aave has posted its risk framework here
Aave is just one of several DeFi lending protocols. For others, check out:
At Scallop we are very excited to be able to integrate key parts of this reputable protocol into our ecosystem. We are building an app that will include all these innovations with a regular banking account.