One of the most established protocols in today’s DeFi market is Aave, pronounced ah-veh. You may recognize this platform from its previous name, ETHland, which launched in 2017. Since its rebranding in 2019, Aave has become a popular DeFi protocol.
In this guide, you will learn about Aave and how you can earn investment income on this market-leading DeFi platform.
What is Aave?
Aave is a decentralized finance lending platform. It was one of the first DeFi projects to market when it launched its ETHlend solution in 2017, long before DeFi started making a lot of noise.
ETHlend, for those that don’t know, was a marketplace that allowed lenders and borrowers a place to come to terms without including a third-party using smart contracts.
In January 2019, Ethlend became Aave, introducing a fresh protocol to its platform, plus a few other unique and creative features.
How Does Aave Work?
Aave provides its users with a way to borrow and lend digital assets through a trustless and decentralized process.
Part of the beauty of decentralized finance is that no middlemen are involved and users don’t need to go through AML (Anti-Money Laundering) or KYC (Know Your Customer) to use it.
There are plenty of digital assets for borrowing and lending the Aave platform. Some of the more popular options include Tether, DAI, Ethereum, BAT, ZRX, and Augur. However, before you run off and buy a bunch of your favorite digital currency, remember that Aave uses overcollateralized loans.
These loans require the amount locked into place to be larger than what is being withdrawn. As a result, if the value of the collateral drops below a certain threshold, then the funds are marked for liquidation. At that time, the funds are available for purchase within the system at a discounted price.
Aave Platform Tokens
Anytime funds are deposited on the Aave platform, users receive the equivalent in the site’s aTokens. These tokens allow users to earn interest on the platform.
Each second your tokens reside on the Aave platform, you’re earning a small amount, which is deposited into your Ethereum wallet.
The amount you received is determined by the interest rate of the asset you chose. You can exchange or withdraw the equivalent amount on the platform any time you want. As a result, you’re not waiting for funds to clear or wading through red tape when you want to liquidate your assets.
Aave’s recently revamped its LEND token to become a governance token, called AAVE, which allows for liquidity mining on the protocol.
Liquidity Mining on Aave
Before we get too far down the rabbit hole, let’s take a moment to understand how liquidity mining works and how to liquidity mine using the AAVE token.
First, liquidity providers deposit an asset that goes toward the liquidity pool. This serves as a baseline through which others on the platform can borrow, exchange, or lend tokens.
Each operation on the platform is paid for through user fees. These fees are then distributed to the liquidity providers (LPs) based on their overall pool share. Additionally, liquidity providers are also rewarded with the platform’s governance token as an added incentive to boost the LP’s APY.
The main point behind liquidity mining that you should remember is that you earn rewards based on how much liquidity you are offering to the market.
When it comes to liquidity mining, you’ll discover that the most popular digital currencies are typically stablecoins. However, you’re not required to use them if you prefer a different asset.
So, when you deposit your coins onto the AAVE marketplace, you earn aTokens. At this point, you can deposit your aTokens onto the platform, which allows you to mine a different token. Or you can deposit the token into the liquidity pool and earn from the marketplace. The benefit here is that the entire process can go on forever.
Of course, there wouldn’t be interest in liquidity mining if the payout wasn’t worth it, right? With most banks nowadays barely hitting the 1% mark in interest rates, it might make more sense to choose a protocol that’s returning somewhere between 2% and 6%.
It can be a challenge to calculate short term profits since the DeFi market is still maturing. As a result, you may experience volatile returns. Also, keep in mind that the market is very competitive right now. Just because a specific strategy works right now doesn’t mean it’s going to work for the long-term.
If you’re familiar with the digital currency market, then you know that DeFi can be much more complicated than typical banking. Risks exist in the world of digital tokens and currencies, so if you’re not entirely confident when you begin, try starting out with just a small amount before moving on to anything bigger.
Aave is a promising platform that boasts a wide range of features for investors looking to earn yield on their digital assets. If you’re looking to get started in the world of decentralized finance, AAVE is a great place to begin.
- What is DeFi?
- What is Yield Farming?
- What is Wrapped Bitcoin (WBTC) and How Can DeFi Investors Use It?
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