Aave (AAVE) is 2 things - a decentralized non-custodial liquidity market protocol and a crypto token.
Aave (AAVE) is 2 things - a decentralized non-custodial liquidity market protocol as well as a crypto token.
As a protocol, Aave enables the lending and borrowing of crypto.
Lenders deposit funds in a smart contract. These funds can be withdrawn on-demand. These funds can also be exported as aTokens which can be moved and traded as an Ethereum token.
Borrowers can borrow in 2 ways:
- in an overcollateralized manner, or
- in an undercollateralized manner using "flash loans".
Flash loans allow anyone to borrow any amount of assets without the need to provide any collateral. But the loan and interest must be repaid within one "block transaction". The Aave Protocol is very popular since it is open source and enables anyone to interact with it using:
- a user interface client,
- Application Programming Interface (API), and
- directly with Ethereum smart contracts.
One challenge is that interacting with Aave requires Ethereum transaction fees to be paid.
As a token, AAVE gives holders discounted fees and also serves as a governance token by giving holders a vote in the protocol's development. AAVE can also be staked.