Aave (AAVE) is a decentralized finance (DeFi) non-custodial protocol that enables the lending and borrowing of cryptocurrencies through a liquidity pool model. Launched in 2020 as a more flexible evolution of its predecessor, ETHLend, Aave introduces several new mechanisms to the DeFi space, including uncollateralized loans, "flash loans," and interest rate swapping.
The native governance token of the Aave protocol is AAVE. Aave operates on a decentralized autonomous organization (DAO) model, allowing AAVE token holders to participate directly in the governance of the protocol. Staking AAVE helps to secure the platform by acting as a form of insurance against deficits in the liquidity pools. Stakers earn rewards, while contributing to the protocol's security.
The protocol employs a liquidity pool model where lenders provide liquidity by depositing digital assets into pools from which borrowers can take loans. Aave can offer instant loans without the need for traditional credit checks, relying instead on cryptographic verification and smart contracts for loan issuance and management. Interest rates in Aave are algorithmically determined based on the dynamic supply and demand for each asset within the pools.
Aave offers flash loans, a type of uncollateralized loan that allows users to borrow liquidity from the protocol instantaneously, provided that the liquidity is returned within the same transaction block. This opens up new possibilities for arbitrage, collateral swapping, and other financial operations in the DeFi space.
Aave incorporates features such as a decentralized price feed through Chainlink oracles, ensuring accurate and tamper-proof pricing information for assets within the protocol. Aave includes a reserve factor for each asset pool, setting aside a portion of the interest earned to act as a buffer against potential liquidity shortfalls.
