What is AAVE?
AAVE is a landing Defi protocol that allows you to lend and occupy crypto assets using variables and stable interest rates.
Who and when created AAVE?
The creator of AAVE is a Finnish programmer and master of law of the Stani Kulechov.
While studying at the University of Helsinki, Kulechov became interested in Blockchain and Ethereum technology and wanted to create a decentralized cryptocredit platform.
May 1, 2017 Kulechov founded Ethled. In November 2017, Ethled launched a landing P2P platform Ethled.Io and conducted ICO for $ 16.2 million. The project sold 1 billion Native Lend tokens. 300 million coins (23%) were received by the founder and team.
Against the background of the bear market, the protocol was faced with a lack of liquidity. In September 2018, EthLEND was rebranded.Io in AAVE. Translated from Finnish AAVE (pronounced as “ave”) means “ghost”. The project team explains this name by the fact that “the brand continues to intrigue users with innovative technologies and is aimed at creating transparent and open infrastructure for decentralized finance”. Ethlend has become a subsidiary AAVE.
In October 2019, the public test network AAVE V1 earned.
January 8, 2020 on the Ethereum blockchain, the main network of the first version of AAVE launched.
In October 2020, AAVE was released and LEND → AAVE was migrated in a ratio of 100 to 1.
In December 2020, the main AAVE V2 network earned.
How does the lending/borrowing mechanism work in AAVE?
Initially, the platform used a one-rat model (P2P), where users interact by means of smart contracts. The disadvantage of the scheme is that there are not always counterparties and liquidity for the effective implementation of operations. Therefore, the creators decided to go to the PEER-to-CONTRACT (P2C) model, which is used by most Defi protocols.
On the P2C platform, the funds are deposited through a special contract, which allows you to instantly borrow crypto assets with interest payments for the use of credit funds.
Participants of two categories interact on the platform: borrowers and creditors.
Users deposit assets used as a collateral in AAVE. In exchange for this, they can borrow a smaller amount of the asset determined coefficient “Credit/Cost of the pledge” (Loan to Value, LTV). The indicator is the maximum right of borrowing for a certain collateral.
Obtaining funds of loan implies “excess support”, which allows AAVE to always remain solvent. The cost of security should exceed the value of the borrowed asset in accordance with the Loan To Value parameter, which depends on the volatility and other risk parameters of the collateral asset.
If, for example, the coefficient is 80%, then for each collateral asset for an amount of 1 ETH the user can take the main currency for the maximum amount equivalent to 0.8 ETH. The coefficient “Credit/cost of pledge” is calculated for each collateral individually and is expressed as a percentage.
As security, users can provide any of the tokens available on the platform:
AAVE became the first landing platform to give users the opportunity to occupy and borrow USDT. This stablecoin, along with Busd from Binance, SUSD from Synthetix and GUSD from Gemini, cannot be used as providing loans, since the mechanism for managing these coins potentially creates a risk of a single refusal point.
AMM Liquidity Pool Pool allows uniswap liquidity suppliers to use their LP tokens as a collateral in AAVE Protocol. ADAI Uniswap pool is the largest AVE AVE liquidity source.
In total, AAVE supports 22 assets in the first version, 26 – in the second, 21 – in AMM Market. For comparison, the main competitor – compound – only 11 available assets.
Users make assets in AAVE and receive ATOKEN in a ratio of 1: 1 to deposited coins. Atokens is a kind of deposit certificates that accumulate interest.
While liquidity is available in the protocol, Atokens can be redeemed based on the ratio of 1: 1 to the basic asset. The balance of such coins grows in accordance with the current interest rate of the protocol.
- LEADERS/liquidity suppliers deposit assets in AAVE and receive ERC20-tokens-tokens in the ratio of 1: 1 (100 DAI ⇒ 100 ADAI).
- Borrowers deposit collateral assets, receiving creditworthiness for borrowing. To avoid liquidation, lenders must maintain a “healthy” position, given the LTV parameter.
- LEADERS/liquidity suppliers can redeem Atokens in a ratio of 1: 1 to a deposited asset. The user’s Atokens balance is growing, reflecting the percentage paid by borrowers of assets. Also, liquidity suppliers receive commissions from instant loans.
- Users who want to pay off the debt must return the borrowed asset, as well as pay the percentage. Until the debt has been repaid, the pledge is blocked in the protocol.
How the liquidation mechanism works?
The so -called AAVE eliminated liquidation mechanism Health factor.
The health factor (Federal Law) expresses the safety of the user asset in relation to the borrowed asset and its basic value. The higher the indicator of the pledge factor, the safer the asset.
- FZ ≤ 1: can be eliminated up to 50% of the debt;
- HF > 1: The cost of the collateral regarding the value of the loan may vary by formula (1-ФЗ)/FZ.
For example, at fz = 2, debt is eliminated when the cost of a collateral regarding the value of the loan is -50%.
Formula for calculation of the Federal Law:
Fz = σ (the cost of collateral × liquidation threshold)/loan (in ETH)
Thus, with an increase in the Federal Law due to an increase in the cost of a guarantee below the risk of liquidation. With a sharp drop in the indicator, the user can fully or partially repay the loan, or make additional support. The decrease in the Federal Law can be caused not only by the fall in the cost of security, but also to the increase in the prices of borrowed assets.
The price data comes from ChainLink oracles.
Liquidation bonus – This is a bonus to the prices of collateral assets that liquidators acquire in the process of eliminating a loan that has reached the corresponding threshold (Liquidation Threshold).
Liquidation threshold – This is an indicator for a loan that is considered insufficiently secured and subject to elimination. If Liquidation Threshold reaches 80%, the loan is eliminated. This means that the amount of debt is 80% of the cost of support. The liquidation threshold is calculated individually for each collateral and is expressed as a percentage.
Liquidators can pay up to 50% of the debt of the borrower. In exchange, the liquidator receives the corresponding volume of security for a loan with an additional percentage.
This liquidation percentage depends on the type of asset and the corresponding bonus. For example, if the liquidator wants to get ETH, it will receive 5% if YFI is 15% and t. D.
Example 1: Asset with one type of collateral
- The user a deposit 10 ETH as a collateral and borrows DAI with a value equivalent to 5 ETH.
- The Federal Law falls below 1 – the loan is subject to elimination.
- Liquidators can pay up to 50% of borrowed funds – DAI in the amount of 2.5 ETH.
- The liquidator may receive a deposit in the form of ETH (with a bonus of 5%).
- Finally, the liquidator receives 2.5 + 0.125 ETH for the payment of DAI in the amount of 2.5 ETH.
Example 2: Multizalum assets
AAVE: Liquidation mechanism with multi -posed assets. Data: Coin 98 Insights.
- The user a deposit 5 ETH and YFI worth the equivalent 4 ETH, and borrows DAI in the amount of 5 ETH.
- The Federal Law falls below 1 – the loan is subject to elimination.
- Liquidators can pay up to 50% of borrowed funds – DAI in the amount of 2.5 ETH.
- However, this time the liquidator understands that the choice of YFI will bring a larger bonus (15% versus 5%), so instead of ETH chooses YFI.
- Finally, the liquidator receives YFI worth 2.5 + 0.375 ETH for paying DAI worth 2.5 ETH.
It is possible to eliminate not more than 50% of the user’s assets, which has its advantages and cons of.
- Plus: users can support part of the loan. They do not lose all their assets, they can wait for the increase in the price of the pledge, pay the debt and withdraw the rest.
- Minus: if the price of a collateral asset continues to fall, or the cost of a borrowed asset continues to grow, the risk of loss of the remaining 50% increases.
How the risk reduction mechanism works?
If the liquidation process is not finished, loans become insufficiently secured and hopeless debt is formed.
The mechanism for reducing the risk of insolvency includes Safety module (Safety Module). This is a risk reduction protocol on AAVE Protocol.
It contains an insurance fund in case when the assets reserves arise shortage of collateral (Shortfall Event). An example is Black Thursday in March 2020, when MakerDao investors lost $ 8.325 million. With a shortage of funds, AAVE holders vote for refinancing a credit pool.
Users steak AAVE tokens in the security module and receive Stake Aave (stkaave) tokens in return for tokens. When users remove tokens from the steak, they return AAVE and the platform burns stkaave. Up to 30% Stkaave can be used to cover a shortage of funds in a credit bullet. In exchange for the risk of losing their share of their stkaave, users receive reward (Safety Incentives). Every day among all Stake Aave holders in the security module are distributed 550 stkaave.
There is a so -called one Cooling period (CoolDown Period) ten days long, during which users can display Stkaave, as well as an incentive reward that are received in the same assets. Thanks to this, the risk of panic removal of funds can be avoided before the AAVE protocol launches the regime of coating deficit by voting of the participants. The decision to launch the deficiency coating mode is made by AAVE and/or StKAAVE tokens holders with joint voting. The “weight” of the voice is proportional to the number of tokens, which is owned by the participant in the vote.
During periods of deficiency, the necessary funds for its coating in the protocol are sold at the auction, and the revenue enters Support module (One Backstop Module). Users deposit stablecoins or ETH into it before selling them in open markets.
If it is not possible to cover the shortage of funds, users can vote for the so -called Recovery production (Recovery Issuance) AAVE tokens. The latter are sold at the auction to replenish the support module, after which they are put up for sale in open markets.
The Treasury of the project stores the reserves of the AAVE ecosystem reserve (AAVE ECOSYSTEM Reserve) and the means of the so -called collectors (collection systems) of the AAVE ecosystem. As of July 2021, this is more than $ 700 million.
What are instant loans (Flash loans)?
AAVE platform offers the so -called instant loans. These are unsecured loans in which the receipt of a loan and repayment of debts are carried out within the framework of one block.
For example, the user took a loan on the landing platform of Maker, but subsequently the fall in the cost of the pledge put Vault on the line of liquidation. In this case, the user can sell part of the security for DAI to pay off the debt. This will allow him to avoid eliminating the position on Maker, without even having a stablecoin in the wallet to repay the debt.
Instant loans can be used for:
- portfolio rebalancing through many operations within the same transaction, which optimizes the commissions;
- self -indulgence;
- Swap of support.
The commission fee for such operations is 0.09% of the cost of borrowed funds. It is received by lenders.
The system of instant loans has not yet provided for the user interface, but it can be used with FURUCOMBO and similar services.
What is interest rate?
There are two categories of interest rate:
- Stable (fixed) interest rate, which does not change over time;
- Floating interest rate changing depending on the ratio of demand and supply.
Borrowers can move from a variable to a stable rate, and vice versa.
The loan mechanism with a stable rate in the short term does not differ from a loan mechanism with a fixed rate, but in the medium and long-term perspective, in case of sudden changes in the betting market, the rates can be re-bonded.
What are the functions of the AAVE protocol V2?
Support swap (Collateral Swap)
Users can carry out swaps of their columns from one token to another. For example, from ETH to DAI, if they predict a decrease in the price of ether.
Group instant loans (Batch Flash Loans)
Users can borrow several assets at a time within the same Ethereum transaction.
Debt tokenization (Debt tokenization)
In the second version of AAVE, borrowers can receive tokens representing their duty. This option, in turn, makes it possible to delegate a native loan.
Delegation of a native loan (NATIVE Credit Delegation)
This function allows the liquidity supplier to deposit funds to the protocol and delegate the right to take a loan to another borrower. Thanks to this, the borrower can take funds, without making a security deposit.
Lenders and borrowers establish the terms of lending and the procedure for fulfilling the agreement with the help of legally binding agreements or onchain using smart contracts.
The AAVE V2 protocol, compared with the first version, is more efficient use of gas. In some cases, the user can save up to 50% on the commissions.
How the AAVE Treasury works?
AAVE Treasury consists of two funds.
The first fund is replenished by funds from three sources:
- Collector (system of collection of part of the protocol revenue);
- Reserve factor (Reserv Factor) – a system for levying percent of the protocol;
Blockchain in the
- One third of the instant loans system fees.
The funds of the first fund are used to develop AAVE.
The second fund is an ecosystem reserve (3 million AAVE). Reserve funds are used to pay interest on short -term loans (SI), paying incentive remuneration for liquidity mining, distribution of grants and financing AAVE development.
Both funds are managed by the AAVE community.
How AAVE develops?
In July 2020, the company managing AAVE received from the financial supervision department (FCA) a license of an electronic money institution in the UK. Thanks to this, users will be able to buy stablecoins and other digital assets for fiat currencies, and then use these funds in the AAVE protocol.
In the summer of 2020, AAVE attracted $ 3 million as a result of the sale of LEND tokens Framework Ventures and Three Arrows Capital.
In October 2020, the project attracted $ 25 million investments from Blockchain Capital, Standard Crypto, Blockchain.COM and a number of other companies.
At the end of 2020, AAVE transferred administrative keys to Lend tokens holders. The first proposal for improving the protocol (AIP), which was taken to the vote and supported in the AAVE community, was the transition to a new AAVE control token to a new one in a ratio of 100: 1.
For the summer of 2021, it is planned to launch AAVE Arc Defi Protocol Institutions. At the first stage, he will support four assets – Bitcoin, Ethereum, Aave and USD Coin (USDC) – and offer customers the same services as in the main version of the project. Access to the platform will receive “institutions, corporations and financial companies”, which were tested by Fireblocks for compliance with KYC procedures. In the future, AAVE ARC will be transferred to decentralized management.
In July 2021, the head of AAVE Stani Kulechov announced plans to launch Twitter alternative on Ethereum blockchain. The new platform will allow users to monetize content and take a direct part in the network management. The project can be launched before the end of 2021.
Atokens are used as providing game characters in the AAVEGOTCHI game resembling Axie Infinity. AAVEGOTCHI character is the ERC-998 Standard NFT, which owns a deposit in Defi-up.