DeFi 101: What Is Aave?

Aave is a decentralised finance (DeFi) lending and borrowing protocol. The application lets people lend and borrow digital assets without using a central intermediary, enabling anyone to secure a loan or earn interest with little more than an internet connection.

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Stani Kulechov is an unlikely blockchain hero. In late 2017, he was still studying for his Master’s in Law from the University of Helsinki.

But it was in the midst of his degree that he discovered Ethereum. The more research he did, the more interested he got. And before finishing his studies, he launched a product called ETHLend, one of the first-ever DeFi applications.

ETHLend was a peer-to-peer lending and borrowing network for digital assets. But in 2018, Stani decided to rebrand his platform and broaden its scope. He set his sights on building a fully-fledged decentralised money market.

And today, lenders use it to earn interest while borrowers loan cryptocurrency, with the application now one of the biggest DeFi apps around.

The app’s name is Aave, and this is why it’s so popular.

Aave: Background

Stani Kulechov didn’t officially launch Aave until 2020, and it was in 2021 that the decentralised application had its watershed moment. 

The Aave team implemented a novel liquidity mining program, which attracted thousands of new users and catapulted Aave above Compound Finance. The platform has since cemented its position as one of the dominant DeFi platforms.

And it maintains its dominance using an innovative pool-to-peer lending model, where lenders deposit digital assets into decentralised liquidity pools, with the pools acting as a fund from which borrowers can secure loans.

In March 2022, Aave v3 hit the market, offering a feature called Portal. Portal allows the protocol to operate seamlessly across blockchains, meaning you can use Aave to lend or borrow on chains like Solana, Avalanche, and Arbitrum.

Aave’s total value locked (TVL) now sits well above $6 billion, showing just how popular the lending and borrowing protocol has become.

How does Aave generate interest?

Aave works in much the same way as a bank. 

The application takes money from depositors and lends it to borrowers. Borrowers pay interest, and Aave redistributes that interest to depositors.

The big difference between Aave and a bank is that the entire infrastructure sits on the blockchain, so there’s no central party governing the process. Everything runs off computer code, from interest rates to debt liquidations.

While this makes the process very efficient, it’s not always user-friendly:

1. You first need a crypto wallet to deposit on Aave
2. You then need to convert funds into digital assets to deposit
3. You also need to buy cryptocurrency to cover the blockchain fees

For some people, this is all simple enough. For others, it can make more sense to use a digital asset management platform like Elitium.

Elitium harnesses DeFi protocols like Aave to generate interest, but we streamline the experience. You can fund your Elitium account with a bank transfer or credit card. And you can get security guarantees that decentralised protocols simply can’t offer.

That said, there are certain things that you can do on Aave that Elitium doesn’t offer — at least, not yet.

Tokenised lending of real-world assets is one.

Tokenised lending on Aave

Aave offers lending and borrowing on over thirty digital assets, including the stablecoins Tether and USD Coin.

However, it’s Aave’s ability to provide lending pools for real-world assets that makes it unique. Aave’s partner, Centrifuge, enables brick-and-mortar businesses like real estate, cargo, and freight companies to tokenize aspects of their operations. 

Investors can then purchase these tokens, which act like bonds, with the tokens paying a yield. In essence, businesses use the blockchain to turn real-world assets into collateral against which they can borrow.

This demonstrates the power of the blockchain and the level of innovation that protocols like Aave bring to the table.

Aave is a leading light in DeFi

Much like Compound, Aave has existed since 2018. And Aave founder Stani Kulechev is one of the most respected names in the blockchain space.

His platform offers a reliable source of interest from some of the most established digital assets, including USDT and USD Coin (USDC). And the Aave team never stops innovating, unlocking new possibilities for lenders and borrowers alike.

This is why Elitium trusts Aave to power our platform. And when you combine the app with other leading DeFi protocols, the possibilities to generate yield only grow.

Interested to learn more? Schedule a chat with our team today.