AAVE is the native token of the Aave protocol.
Aave is a DeFi lending platform built on the Ethereum network. It enables the decentralised lending and borrowing of cryptocurrencies, with unique features such as Flash Loans and Rate Switching available.
|Circulating supply (approx. as of January 2021)||12.2 million|
|Maximum supply||16 million|
How does Aave work?
Aave is a DeFi lending platform built on the Ethereum blockchain.
It allows users to either lend or borrow a range of cryptocurrencies, with fees or rewards for doing so. Rewards are earned by depositing funds into currency-specific pools, which can then be accessed by borrowers who pay interest for the privilege of doing so.
Users may access several markets including Aave and Uniswap, with additional markets such as Set due to be implemented over time.
In addition to standard borrowing and lending, Aave also offers unique features such as Flash Loans and Rate Switching, which helped Aave rise to the top of DeFi projects in 2020.
Flash Loans are issued with zero collateral required; however, the borrower must repay the loan before the transaction is settled. Flash Loans are intended for advanced users or programmers who are pursuing things like arbitrage opportunities.
On the surface, this is a rather confusing concept, but essentially, it means someone can borrow money from Aave’s reserve pool, use it to rapidly turn a profit in another market and return the money to the pool all within the same transaction while pocketing the profit.
If the borrower fails to return the money before the transaction expires, then the loan is automatically cancelled, with no risk to the Aave pool. Keep in mind that a transaction in this context is an Ethereum transaction, which allows for all sorts of programs and smart contracts to do their magic at once, allowing for a near-instant turn around between withdrawal and repayment.
What does the AAVE token do?
Formerly known as LEND, the AAVE token is used to manage fees on the platform, vote on protocol changes and can be staked for rewards.
Users can hold AAVE in their wallets to get a discount on fees when using the platform. This also makes AAVE a deflationary asset, as a portion of AAVE tokens are burned each time a user pays fees on the platform.
AAVE holders may also choose to provide liquidity on the platform by staking their tokens within the Aave reserve pool. Doing so earns the user a portion of the platform’s trading fees in return for providing collateral.
Given that AAVE is a DeFi platform, it follows that token holders are able to play a part in governance. Token holders can exercise their voting rights on things like protocol upgrades, changing fees or adding new coin pools.
What to watch out for
On its surface, AAVE is a fairly straight-forward lending platform, but dig deeper and it allows for some rather complex functionality. Of note is the phenomena of “flash loan attacks” which are a type of financial exploit unique to DeFi and enabled by AAVE’s flash loan feature.
Flash loan attacks explained
While flash loans are not unique to AAVE, many of them originate from the platform. This places AAVE under scrutiny, which may affect the popularity of the service in the future.
As flash loan attacks show, the limits of AAVE are still being tested, and both users and token holders will want to be wary of what unknown risks are yet to be uncovered. Due to the massive amount of value held on the AAVE platform, it is a honey pot for hackers that are constantly looking for ways to illegitimately access user funds.
How to buy AAVE
Here’s a step-by-step guide to one way of buying AAVE. Note that there might be other options available, so you may want to compare cryptocurrency exchanges to find the one that’s right for you.