What Is Aave?

On Aave, lenders deposit their assets into shared pools and receive aTokens representing the deposited asset; the balance of these tokens grows as interest accrues. Those who want to borrow first deposit collateral and can borrow up to a certain percentage of the collateral's value. Interest rates change algorithmically depending on how much of the asset in the pool is being used. The project started in 2017 under the name ETHLend and was later renamed Aave.

Aave is one of the projects that popularized flash loans, which are uncollateralized loans that must be borrowed and repaid within the same transaction. When the value of collateral falls and a position drops below the set threshold, part of the collateral is sold through liquidation to repay the debt. For example, a user who deposits ETH and borrows USDC may face liquidation if the ETH price falls sharply. In addition to Ethereum, the protocol runs on various Layer 2 networks and other blockchains, and it has also issued its own stablecoin called GHO.

AAVE token holders vote on decisions such as parameter changes and the addition of new assets, and can stake their tokens in the protocol's safety module. Smart contract bugs, oracle issues and sudden price movements are the main risks for users.