- 1 One of the most significant disruptions the Aave platform brought to the DeFi market was the concept of Flash Loans. It is a loan without the need for a guarantee.
One of the most significant disruptions the Aave platform brought to the DeFi market was the concept of Flash Loans. It is a loan without the need for a guarantee.
The Flash Loan payment must be made within the same block, allowing immediate liquidity in any cryptocurrency available in Aave. This type of loan seems a little strange. Why might I need a loan I must pay for simultaneously if approved? The reality is that it is a powerful tool.
To understand how it works and how practical it can be, imagine the following scenario: you owe $1000 to your friend Ada and give her your father’s watch as collateral. Over time, you meet a buyer named Bob who promises to provide you with $1200 for the clock, but your friend will not return it until you pay him the $1000, and the buyer will not pay you until you give him the watch. Then you turn to another friend (Aave) and meet with the buyer and the one with your father’s clock in the same room. Your friend Aave lends you $1000 but pays your friend Ada directly. The latter gives the clock to the buyer, who pays you the $1200 and cancels the $1000 that Aave lent you, leaving you with $200. All in the same place.
The Digital World
The example above shows how an Aave Flash Loan would work. Within the digital world, the loan process between Bob, Ada, Aave, and you occurs within the same transaction on the Ethereum blockchain. Smart Contracts make this type of multi-legged transaction possible.
Many people have created external applications around this type of Aave loan that allows ordinary users to use the tool. For example, applications such as DeFi Saver allow you to avoid settlements on other platforms in the Ethereum network, be it MarkeDAO, Compound, or the Aave itself, by running Flash Loan with funds you have on two different platforms.
One of the most striking but still in beta is Furucombo. This tool allows you to visually structure a single transaction to use Flash Loans, fulfilling the same block’s payment condition.
Credit delegation: Trust-based loans
The most recent thing you can find in Aave is the delegation of credit lines. Credit delegation is a loan where an Aave depositor delegates a credit line to someone they trust.
The interest the credit generates is added to your crypto balance within a liquidity pool in Aave. Operation is similar to the traditional Aave credits, at least in principle. For example, you deposit your funds into an Aave liquidity pool. Since you are only generating interest and are not using it to establish any collateral, you can lend it (delegate a credit line) to a third party. This third actor can use the number of funds you initially deposited, allowing you to generate extra interest.
Because we are talking about the lack of guarantee, there is a legal framework with which users can cover their backs. Thanks to OpenLaw, an Ethereum network platform made with digital contracts, the agreements and terms of the loan or line of credit are all set. These terms, in turn, are set within Aave’s Smart Contract when executing the loan.
Within this type of loan, there are already use cases, such as DeversiFi, which received the first delegated credit line from Aave.
What is an Aave aToken?
The aTokens, like UniSwap’s UniTokens, are tokens delivered to those users who deposit within Aave (give on loan). They burn the tokens when the users withdraw the funds from the liquidity pool. The token’s primary function is to accrue the interest generated by the deposit in real-time, allowing you to track how much interest you have generated directly from your portfolio. Remember that the network pays the interest for each block the miners create on the Ethereum network.
Perhaps it seems a bit unreal because, according to the logic in each block, there should be a transaction where each accumulated interest gets recorded, which brings with it a gas expense as a commission in the Ethereum network. But in the case of aTokens, this is not the case.
First, the aTokens exist within the loan’s Smart Contract and accumulate within the same Contract and in your wallet. The only gas expense occurs when you request a loan and exchange the tokens for the original token: withdrawing the money from the liquidity pool. The total interest generated within a liquidity pool in Aave is distributed among all the people holding the corresponding aToken.
Since tokens are interchangeable between users, aTokens function as a kind of temporary property title: whoever owns them can withdraw from Aave’s liquidity pool.
Governance and security on the Aave platform
At the time of ETHLend’s launch, they launched the LEND token. The launch raised just over $600,000 in its initial coin offering. In the beginning, ETHLend created 1 billion LEND tokens and delivered them to the first investors. This token did not fulfill a particular function within the platform beyond serving as collateral and generating some commission benefits. However, with the move from LEND to AAVE, the current token’s name, there is a complete change in the token’s operation within the platform. There’s an equivalence of 100 LEND = 1 AAVE.
First, the platform sought, with the AAVE token emission, to improve the platform’s governance. The move gave an extra layer to the Aave protocol’s decisions. Before, the AAVE token decision power was divided between the developers and the LEND holders. Each AAVE equals one vote on the platform, with 16 million circulating AAVEs.
With the AAVES’s improvement proposals (AIPs), the Community and AAVE holders will be the ones to propose future improvements to the platform. APIs help to offer a completely decentralized loan platform.
What’s Next: Aave as an Electric Money Institution
Aave was recently licensed to operate as an electronic money institution within the UK. Aave can legally carry out exchanges between currencies (crypto and fiat national currencies) with the license. With Aave, you can now create electronic money accounts for corporations and individuals, expand your operations to more users, and improve your product’s adoption.
The proposals and concepts with which Aave has entered the loan DeFi market have revolutionized. A pioneer in this area, Aaave was the first to integrate unsecured loans and become the cryptocurrency credit platform with the highest currently blocked capital: $1.3 billion.
The characteristics of Aave have allowed the development of external applications that take full advantage of arbitrage in trading, such as DeFi Saber and Collateral Swap, along with Furucombo, the application to manage Flash Loans manually.
In conclusion, Aave allows cryptocurrency users to use services like credits traditionally reserved for years of traditional financial systems. Besides, they go further by allowing both secured and unsecured loans. With the new license to operate as an electronic money institution, Aave is an up-and-coming platform for Finance.