Crypto Stories

AAVE Protocol – You Can Use DeFI to Earn More Interest Than Banks

By Parasshuram Shalgar
Published January 6, 2022 Updated February 2, 2022

AAVE is a decentralized finance (DeFi) etiquette that supports lending & borrowing of cryptocurrency. While lending, they earn interest & while borrowing, they pay interest. The entire ‘lend’ & ‘borrow’ process can be carried out without going to a centralized negociant. 

AAVE is invigorated upon the Ethereum network. All the tokens on AAVE use the Ethereum blockchain for transactions. These transactions are known as ERC20 tokens. The convention uses an independent decentralized organization known as DAO. DAOs are managed and controlled by the people associated with AAVE tokens.

AAVE is the local governance token of the AAVE protocol. Investors belonging to Ethereum cryptocurrency are eligible to review as well as vote on proposals influencing the project’s administration.

AAVE is one of the leading decentralized finance protocols. Market Cap considers the AAVE token to be the largest DeFi coin. Ethereum investors can use AAVE to borrow and lend their cryptocurrencies in a decentralized manner.

This is How AAVE Works 

The latest & enhanced AAVE is like ETHLend’s concept. AAVE and ETHLend allow Ethereum users to acquire cryptocurrency loans or earn a return by lending holdings. Yet, the two are disparate at their core.

AAVE can be considered to be an algorithmic money market. This means loans can be attained via a pool rather than an individual lender. To obtain the loan, there’s a fixed interest rate. The interest rate charged depends on the “utilization rate” of the assets in a pool. 

Supposing that single assets in a pool are used, the interest rate can persuade liquidity providers to deposit more capital. If all assets in a pool are used, the interest rate will automatically fall, persuading liquidity providers to borrow more.

AAVE has another distinctive feature. It allows users of originating loans in a cryptocurrency that’s different from the original deposit crypto. For example, users who deposit Ethereum (ETH) can withdraw stablecoins to deposit into Yearn.Finance (YFI), thereby making a profit. All types of loans are asset-based, just like ETHLend. Asset-based loans are such where a user can borrow $100 worth of cryptocurrency through AAVE. And the same user will have to deposit more than the borrowed amount.

Owing to the volatile nature of cryptocurrencies, AAVE includes a liquidation process. Suppose the collateral provided by a user falls under the collateralization ratio specified by the protocol, the user’s collateral is considered liquidated. It is important to note that the fee charged is liquidations. A user must be well aware of the risks of depositing funds into AAVE before posting collateral.

DeFi Protocol & Savings: More Flexible and Efficient

DeFi savings are somewhat similar to bank savings. Anyone using DeFi can lend a cryptocurrency (DAI or USDC) to a lending pool and collect high interest. The interest earned here is much more than bank savings which eventually grows your savings.

DeFi users can earn high yields as compared to banks. This is possible only due to the unmatchable urge for leverage. Moreover, D users can earn interest through native tokens and protocol fees. The DeFi protocol is maturing day by day & hence its adoption is also growing. Today, several users are well aware of the profusion of opportunities to earn interest on their crypto assets.

To earn interest on one’s savings is an old concept. In the system of traditional banking, people store their funds in banks. The users then are awarded a small interest rate in return for lending out their assets. From the 1980s and 1990s, traditional banks paid interest somewhere between 5% and 10%, whereas today, the rates are closer to 0.5%.

DeFi creates an alternative way to earn higher on one’s assets. The users of DeFi need not lock their fiat money away in a bank account. Instead, they can lock up your crypto assets in smart contracts in exchange for yield.