The Aave protocol is a system of smart contracts designed to facilitate over-collateralized lending and borrowing of digital assets. The protocol is deployed on multiple networks such as Ethereum, Polygon, Avalanche, BNB Chain, Fantom and Harmony, and also includes second-layer chains such as Base, Arbitrum, Optimism, Gnosis, Scroll and Metis. Aave allows users to supply and lend cryptocurrencies without the need for a central authority or intermediary. The protocol consists of publicly accessible self-executing smart contracts and runs on various permissionless public blockchains. Users interact with the Aave protocol by submitting transactions to the blockchain using self-custody wallets.
supply assets
By supplying tokens to Aave, users can earn interest while providing liquidity to the protocol. These supplied assets are “pooled” and can be used as collateral for borrowing and lending while continuing to earn interest.
Suppliers, also known as liquidity providers, supply their cryptocurrencies to Aave’s liquidity pool. Here's how it works:
Users select a supported cryptocurrency (e.g. ETH, USDC) and supply it to the Aave protocol.
After supply, the address will receive a corresponding number of aTokens (e.g. aETH, aUSDC) in return. These tokens represent that address's share of the pool and automatically start accruing interest.
The interest earned by liquidity providers is not fixed and changes based on the usage of the asset in the pool. Usage is the percentage of the total pool of assets currently being lent.
High Utilization: If most of the assets in the pool are loaned out, interest rates will rise. This creates an incentive for suppliers to fund and repay borrowed money, while discouraging further borrowing.
Low Utilization: If most of the asset is idle, interest rates will fall, reflecting lower demand for borrowing on the asset.
Interest will accumulate and be automatically added to the provider’s aTokens. In other words, over time, the balance of aTokens increases, allowing providers to redeem them at an increasing supply position. Providers can withdraw their tokens and accrued interest at any time, as long as there is available (not lent) liquidity in the token pool. This is done by destroying aTokens, which triggers the corresponding amount of the underlying asset to be returned from the pool.
loan assets
Supplied tokens can be used as collateral for borrowing and lending. The value of the collateral must be greater than the amount borrowed, a concept known as overcollateralization. If the value of the assets used as collateral falls below the minimum collateral threshold, the location may be at risk of liquidation.
Requirements for collateral: To borrow assets from Aave, users must first supply collateral. These collaterals can be any cryptocurrency supported in the protocol. The value of the collateral must always exceed the value of the amount borrowed. Over-collateralization is a safeguard measure designed to protect the interests of both borrowers and lenders and ensure the safety of assets during the lending process.
Advantages of Aave: One of the main advantages of the Aave protocol is its decentralized nature. Users do not need to rely on traditional financial institutions and can control their own assets independently. Additionally, Aave offers a variety of features such as:
Liquidity pool: Users can choose different liquidity pools according to their own needs and enjoy different interest rates and risks.
Interest rate selection: Users can choose fixed or floating interest rate loans, which can be flexibly adjusted according to market conditions.
Trustless environment: All transactions are executed automatically through smart contracts, reducing the risk of human error and fraud.
How to get started with Aave?
For newbies, using Aave is very simple. Here are the basic steps for using Aave:
Create a wallet: Choose a self-custody wallet that supports Ethereum and ERC-20 tokens, such as MetaMask.
Buy Cryptocurrency: Buy supported cryptocurrencies like ETH or USDC on the exchange.
Connect to Aave: Visit Aave’s official website and connect your wallet to the Aave protocol.
Supply or lend: Choose to supply assets to earn interest based on your needs, or use supplied assets as collateral to borrow.
Summarize
As a decentralized lending protocol, Aave provides users with a flexible asset management method. Through supply and lending, users can make profits while ensuring the safety of their assets. As the DeFi ecosystem develops, the use of Aave will become more and more popular, becoming the preferred platform for more people to manage digital assets.