What is AAVE? Overview of the project and its token

AAVE: What is it?

Aave is a decentralized financial protocol allowing you to lend and borrow cryptocurrencies using no KYC or credit assessment, whilst keeping such transactions secure.

Formerly known as Ethland, the project was founded in 2017 by Stany Kuleshov, CEO of a London-based IT company. Then in 2018, “AAVE” appeared.

During the ICO, more than $16.5 million was raised, with a further $32.5 million coming in three funding rounds. Various venture capital funds including Blockchain Capital, Standard Crypto, and Pantera Capital invested in the project. However, some of them have declared bankruptcy, such as Three Arrows Capital and Alameda Research.

A large number of networks have already been supported by the third version of the current protocol, which was launched in early 2020.

With the current protocol being launched in early 2020, the third version of it already exists supporting a large number of networks. Among those are Ethereum, Avalanche, Polygon, Optimism, Arbitrum, Fantom, and Harmony. No wonder then that Aave appears to be one of the largest DeFi protocols in terms of total value locked (TVL).

TVL in DeFi protocols Source: DefiLlama

Wondering how it works?

The Aave protocol operates on an excess collateral economy, which allows it to always remain solvent.

To borrow cryptocurrency, you need to deposit another cryptocurrency, the total value of which must be greater in dollar equivalent. In addition, you pay an interest rate that is determined by the supply and demand ratio for the borrowed asset.

Borrowers must constantly monitor to ensure that their collateral is not liquidated. This can happen if its value, together with accrued interest, is less than the value of the borrowed cryptocurrency.

Aave platform Source: app.aave.com

How is AAVE Token Used?

Unlike many cryptocurrency projects, the Aave protocol is community-governed, which explains the existence of the eponymous governance token. This is an ERC-20 standard token that allows its holders to have a voice in the project's operation and development.

AAVE can also be staked, earning interest on it. However, there is a risk of losing a certain portion of the tokens, as they may go towards covering the deficit of borrowed funds on the platform. This is the second safety measure in the protocol's economy, in addition to surplus collateral.

The AAVE emission is limited and 88% of the total issued tokens are already in circulation, which is a positive factor for long-term investors.

Aave Ecosystem Diagram Source: docs.aave.com

Project Prospects and Risks

The decentralized finance industry is promising, and the Aave crypto lending platform has demand. However, due to the acute issue of cryptocurrency industry regulation on the international arena, such platforms have the risk of being suppressed or subjected to rules that will deter many users.

There are also other risks associated with the fact that the project team is working on creating the GHO decentralized stablecoin. So far, such stablecoins have not shown themselves in the most favorable light, and this may negatively affect both the Aave protocol and its token.

The team is also working on other promising developments, but most of them do not concern the platform itself. Therefore, they are unlikely to contribute significantly to the growth of the AAVE price.