What Is Aave Crypto and Is It a Good Investment?
Aave is a decentralized money lending protocol that has recently gained popularity after releasing a working DeFi solution. In this article, we take a look at its special features, some of its major development milestones, and share predictions on where it could go in the near future.
What is a ghost?
Aave is a decentralized smart contract system that runs on the Ethereum blockchain. It allows users to create money markets and earn interest by reliably borrowing and lending cryptocurrencies.
The Aave ecosystem consists of the Aave protocol, AAVE holders, liquidity providers, Ethereum and DeFi wallet partners, developers and projects promoting Aave. This product range features the original AAVE code.
Ghost Protocol
The main integrated part of the Aave system is the open source liquidity protocol launched on January 8, 2020. It was created with the aim of freeing up capital from smart contracts, improving capital flow into the DeFi ecosystem and enabling the community to take decisions. Key features of Aave Protocol 2.0 include flash loans, aTokens, credit delegation, fixed rate deposits, interest rate swaps, and administration. Let’s look at each of them in detail.
- Flash loans. This allows the borrower to take out a loan provided the principal is repaid within one Ethereum transaction (13 seconds). If the loan is not returned to the pool on time, the transaction will be cancelled.
- aTokens are interest-bearing tokens that are minted during deposits and burned during redemption. They collect interest directly from borrowers. To reduce transaction costs of Aave 2.0, aToken has integrated the EIP-2612 proposal, which allows payments to be made with ERC-20 tokens without gas approval.
- Credit Delegation (CD). It allows the depositor to earn extra money by delegating the credit line to someone they trust. This way the depositor can use the Aave protocol to earn interest without a loan. Recipients of lines of credit can withdraw funds from a designated credit proxy warehouse. To protect the funds, the parties sign the terms of use using the Open Law application.
- To change gears. This model was introduced to protect borrowers from interest rate volatility. This allows them to switch from fixed rates to floating rates.
- Commercial features. Deposited cryptocurrencies secured by Aaven are subject to trading even when used as collateral. Users are also offered margin trading, which allows them to take leveraged long and short positions, and liquidity providers to increase the weight of their deposits.
- Aave management has been released to allow AAVE token holders to delegate their votes to other addresses. To participate in Ghost administration, voters can sign messages from a cold wallet.
How does Spirit work?
The Aave protocol allows users to earn interest on their digital assets and borrow crypto tokens in the form of fixed rate loans, variable rate loans, and flash loans. It offers more than 15 cryptocurrencies for borrowing and lending, including DAI, ETH, LINK, USDT and AAVE.
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Lenders provide liquidity by depositing funds which are pooled into liquidity pools. Each pool sets aside funds as reserves to hedge against volatility. To avoid potential liquidity issues, Aave has set up liquidity pools in Balancer and Uniswap so that lenders can repay their funds at any time.
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Like other Ethereum-based DeFi lending systems, Aave supports the concept of overcollateralized lending. This means that in order to borrow money, users must first secure collateral that exceeds the loan amount by 50-75%. This protects the protocol’s assets in case users are unable to repay their loans. It is important for the borrower to maintain a collateral relationship. Otherwise, their collateral will automatically be sold or liquidated to repay the loan. The interest earned on the investment offsets the interest earned on the loans.
aToken
Whether the deposits are for loans or borrowing, users receive interest-earning tokens in return that are pegged 1:1 to the value of the underlying asset. For example, if you deposit ETH, you will get one ETH token. Such tokens can be stored, transferred and traded freely. This exchange mechanism allows borrowers to access various cryptocurrencies without owning them.
Lenders have the ability to earn ongoing interest on deposited funds. Interest rates depend on the currency, loan supply, loan demand and occupancy rate. Additionally, aToken holders receive a percentage of payments collected through the Aaven Flash Loans mechanism.
Flash loans
Aaven makes it unique that customers can borrow quickly without collateral, primarily through a developer quick loan. The quick loan is granted on the condition that the principal must be repaid in a single Ethereum transaction. If the loan is not returned to the pool on time, the transaction will be cancelled. This ensures the safety of the funds in the fund and nobody takes the risk. The instant loan requires a 0.09% down payment and completes in 13 seconds.
- Arbitration
- Loan refinancing
- Self-liquidation
- Generate commercial profits
- Automated cryptocurrency exchange
- Securities exchange
Regardless of the purpose, the refund mechanism is protected by a code, which contributes to the overall security of the system. This feature also allows users to borrow and lend money without depending on a third party.
Ghost vs. Compound: Similarities and Differences
Aave and Compound Finance are the two largest DeFi lending platforms (and biggest competitors) since the launch of the lending protocol. At first glance, they look very similar.
Here’s what Ghost and Compound have in common:
- Based on the same concept
- Offer an over-insured cryptocurrency loan
- Enable deposits to earn interest
- Use administrative credentials
- ERC-20 tokens represent the target asset
Despite their similarities, they differ in some important points. Among these differences are the following:
- The main distinguishing feature of Aava is fast unsecured loans.
- Aave offers a wider range of lendable and lendable tokens: 15+ compared to Compound’s 9 assets.
- Aave offers both fixed and floating rates with an interest rate swap service, while Compound offers floating rates only.
- Ghost’s guarantee rate is higher: borrowers get 75%, while Compound gives 66%.
- Compound has, on average, lower loan rates and financing costs than Aave.
- The connection is easier to use and navigate for beginners.
- To encourage participation, Compound offers lenders and borrowers fractions of a COMP token every few seconds.
Overall, Aaven’s unique features and higher payout options make it a more profitable solution than Compound.