Aave, also known as AAVE which means “ghost” in Finnish, is a decentralized system in which users can lend their crypto assets, borrow them, or earn interest over them. In essence, AAVE is a system of lending pools.

Aave users must provide collateral for whatever they borrow, and they are only limited to borrowing the exact same amount they posted as collateral. By doing so, they receive something called an aToken, a token which is both encoded so that lenders receive their due interest and also pegged to the value of another asset.

Aave Explained

In this non-custodial liquidity market protocol, users can participate as both the depositors or borrowers and while the depositors can earn a passive income, the borrowers can borrow in either an undercolleaterilsed or overcolletaralised manner, all of which without an intermediary.

Aave runs on the Ethereum blockchain and operates under a system composed of smart contracts and lending pools for whichever cryptocurrency one wants to either deposit or borrow.

AAVE features two types of tokens:

1. aTokens: which are issued for lenders and grants them the ability to collect interest on their deposits

2. AAVE tokens: which are Aave’s native tokens and allows users to have discounted fees.

AAVE also features “flash loans”, a type of load which is to be instantly issued and settled with no upfront collateral. Since Ethereum’s block interval is roughly 13 seconds and Aave is built on it, flash loans take place during that 13 second period.

To do so, a borrower can request funding from AAVE but has the responsibility of paying them back with a 0.09% fee within the very same block or the entire transaction is aborted, leaving no room for risk on either side of the transaction.

The History Behind AAVE

Aave was founded in 2017 and is the vision of Stani Kulechov. The for-profit Swiss-based company was formerly known as ETHLend and its 2017 initial coin offering (ICO) raised an estimated $16 million US Dollars.