What is Aave (AAVE)

What is Aave (AAVE)

Aave is a decentralized, non-custodial liquidity protocol that allows users to lend and borrow cryptocurrencies without relying on banks or intermediaries. It functions like a global money market on the blockchain: users deposit crypto into liquidity pools to earn interest, while borrowers can access those funds by providing more collateral than the loan amount—a system known as over-collateralization. This mechanism helps protect the protocol; if a borrower’s collateral loses value or they fail to repay, it can be automatically liquidated to cover the debt.

Aave is permissionless, meaning anyone with a crypto wallet can access it without registration or approval​. The platform runs on Ethereum and has expanded to multiple other networks (like Avalanche, Polygon, Sonic, and more), making it a multi-chain protocol​. Users interact with Aave through smart contracts – self-executing code on the blockchain – which automatically handle deposits, interest calculations, and collateral management in a transparent and secure way.

Who Created Aave

Aave was founded in 2017 by Finnish developer and entrepreneur Stani Kulechov while he was studying law in Helsinki. At the time, he saw a gap in the Ethereum ecosystem—there were very few lending applications available. To address this, he launched ETHLend, a peer-to-peer lending platform designed to match lenders and borrowers directly on the blockchain.

In November 2017, ETHLend raised around $16 million in an initial coin offering (ICO), selling 1 billion LEND tokens. This funding helped build one of the earliest decentralized finance (DeFi) lending platforms. However, the peer-to-peer model had its challenges, such as slower matching and limited scalability.

By 2018, the team rebranded ETHLend to Aave, which means "ghost" in Finnish—symbolizing the project’s aim to deliver a seamless, transparent user experience. Aave moved away from the direct matching system and introduced a pooled liquidity model. In this system, users deposit funds into liquidity pools, and borrowers draw loans from those pools, making the process more efficient and scalable.

Aave officially launched its first version, Aave v1, on Ethereum in January 2020. It introduced several DeFi innovations, including flash loans—instant, unsecured loans that must be repaid within the same transaction. This feature gained widespread attention and helped solidify Aave's reputation as a pioneer in the DeFi space. 

How Does Aave Work

Lending and Borrowing

At the heart of Aave is a system of liquidity pools. When users deposit their crypto assets (like ETH, DAI, or USDC) into the platform, they’re added to a shared pool of funds. In return, lenders receive aTokens, interest-bearing tokens representing their deposits (e.g., depositing DAI earns you aDAI). These aTokens are pegged 1:1 to the original asset and automatically earn interest in real-time.

Borrowers can access funds from these pools by depositing collateral that exceeds the loan amount. This over-collateralization ensures that loans are secure—even if a borrower fails to repay, the collateral can be sold off (liquidated) to cover the loan. Aave monitors market prices and automatically liquidates collateral if it drops below the required threshold, protecting the protocol from losses.

Interest Rates

Aave uses a dynamic interest rate model based on supply and demand. If most of a pool’s assets are being borrowed (high utilization), borrowing becomes more expensive, and lenders earn more interest. If a lot of funds are sitting idle, interest rates drop to encourage more borrowing.

Borrowers can choose between two types of rates:

• Variable Rate: Adjusts with market conditions.

• Stable Rate: Offers more predictable repayments, similar to a fixed-rate loan, but can change under extreme market shifts.

This flexibility allows users to pick a rate that best suits their needs.

Flash Loans 

One of Aave’s most unique features is the flash loan. This allows users to borrow funds without any collateral—as long as the borrowed amount is returned within the same transaction. If the loan isn’t repaid instantly, the transaction fails, and the funds remain safe. Flash loans are mostly used by developers and advanced users for things like:

• Arbitrage (buying low on one exchange and selling high on another)

• Refinancing loans

• Swapping collateral types

Although invisible to everyday users, flash loans demonstrate how programmable finance works in DeFi.

Multi-Chain Expansion and Aave v3

Aave started on Ethereum but has expanded to multiple networks, including Polygon, Avalanche, Optimism, Arbitrum, and others. With Aave v3, the platform introduced Portal, a cross-chain liquidity feature. Portal allows users to deposit funds on one blockchain and borrow on another, thanks to trusted bridge protocols that manage the minting and burning of aTokens across chains.

This makes Aave’s liquidity more flexible and efficient, supporting more complex DeFi strategies and increasing accessibility for users across various blockchains.

Risk Management Features in Aave v3

Aave v3 introduced several features to improve safety and capital efficiency:

High Efficiency Mode (E-Mode)

This mode increases borrowing limits for assets that are closely correlated—like USD-pegged stablecoins. For example, if you deposit USDC and borrow DAI, E-Mode allows you to borrow more than under standard rules, because both assets are relatively stable and interchangeable.

Isolation Mode

This feature helps protect the platform when listing riskier assets. If a new token is volatile, it can only be used to borrow stable assets, and only up to a debt ceiling. This limits the damage that could occur if a risky token fails, without exposing the rest of the platform.

Supply and Borrow Caps

Governance can set limits on how much of a specific asset can be deposited or borrowed. This helps prevent abuse, such as price manipulation or overexposure to a single asset, reducing the risk of exploits and instability.

Aave Tokenomics

The AAVE token serves multiple functions within the Aave ecosystem:​

• Governance: AAVE holders can participate in the decision-making process, voting on proposals that affect the protocol's development, such as adding new features or adjusting parameters. ​

• Staking: Users can stake AAVE tokens in the Safety Module, a reserve fund designed to protect the protocol against shortfalls. In return, stakers earn rewards from protocol fees. ​

• Fee Discounts: Borrowers who use AAVE tokens as collateral receive discounts on fees, incentivizing the use of the native token within the platform. ​

The total supply of AAVE tokens is capped at 16 million. The initial distribution included a token migration from the original LEND tokens to AAVE at a rate of 100 LEND to 1 AAVE. This migration reduced the total supply and introduced new tokenomics to align incentives within the ecosystem.

How To Trade Aave (AAVE) on Flipster

1. Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).

2. Click the [Trade] tab.

3. Search for AAVE and click on it.

4. Select the leverage (up to 25x).

5. Select either a Trigger Order or Market Order.

6. Input the amount of crypto you wish to trade, or select a percentage of your available funds to use.

7. Once you have confirmed the details, click the [Long] or [Short] button to open a position.

AAVE Perpetual Swap Contract Specifications

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with a significant risk of loss due to its high price volatility, and is not suitable for all investors. Please refer to our Terms.