Borrowing and lending your assets is an old tradition in the financial ecosystem. Money borrowing can leverage the capital to accomplish certain tasks that require money flow. It creates a safe and regular return on the otherwise idle money.
Cryptocurrency developers understand the need for money lending. Aave Crypto was introduced for the money market and became successful in no time.
What is Aave Crypto?
Aave is an Ethereum based money market for users to lend and borrow a variety of digital assets. It ranges from stablecoin to altcoin. Before jumping into Aave crypto, first, we have to understand the Aave protocol.
Aave was introduced back in 2017. In November the same year, Stani Kulechov and his team of developers released ETHLend in an Initial Coin Offering. The main motive behind this ideology was to promote the borrowing and lending culture in the digital fiscal.
However, ETHLand was a novel idea. But in 2018 the platform, as well as the token Lend, lost its traction heading into the bear market. The platform suffered from fallout due to a lack of liquidity and unable to meet the number of loan requests.
The team went under evaluation in the year 2018 and 2019. After making some dynamic changes it came back in 2020.
How Aave function?
The new and reformed Aave is similar yet different from ETHLand. Aave works as a money pool, where all the lenders can make money and obtain a return by adding their holdings. Aave is an algorithm money market which means that loans are provided from a pool. There is no direct exchange of cryptocurrency between users.
The interest rate charged depends on the “utilization rate” of the total assets in the pool. If all the assets in the pool are used, then the interest rate would be high. This will attract users to provide more liquidity in the pool. And if no one uses the assets in the pool, the interest rate will be low to attract browsing.
Aave just like ETHLand works on an overcollateralized method. This means if a user wants to borrow money of $100, he would need to deposit an amount more than that. Due to the volatility of cryptocurrencies, Aave crypto has a liquidation process. If the collateral you provide falls under the collateralization ratio specified by the protocol, your collateral may be liquidated. Note that a fee is charged in case of liquidations. Make sure you understand the risks of depositing funds into Aave before posting collateral.
Features of Aave crypto
Aave is expanding itself not only in the money market. The platform has gained popularity for the DeFi users who can apply for flash loans. Anyway, there is much more liquidity in the Aave pool than the market. The remaining unused liquidity can be used for flash loans. This extra amount is from the uncollateralized loans which have a validity of only one Ethereum Block. However, a flash loan allows a user to borrow a good amount of cryptocurrency without posting collateral. Later return the loan within the same transaction (as long as they are paying the ethereum block transaction fee).
This gives users a large amount of capital to buy and sell assets to enact opportunities. Meanwhile, other than flash loans and other features, Aave crypto is also working on a non-fungible token called Aavegotchi.