Aave was founded in 2017 and is focused on the borrowing and lending of cryptocurrencies. Developed on the Ethereum blockchain, Aave has transformed from a niche network into one of the largest Decentralised Finance (DeFi) services available.
Users can deposit Ethereum-based (ERC-20) tokens into Aave's liquidity pools, which can then be lent to borrowers in exchange for rewards. Lenders and borrowers can choose from a fixed or variable annual percentage yield (APY).
The native token of the Aave platform is AAVE. It is used as a governance token to vote on new proposals and can also be staked to provide financial security to the protocol.
This guide will explore the different ways you can earn rewards with your AAVE tokens.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific
provider, service or offering. It is not a recommendation to trade.
What is AAVE staking?
Staking a cryptocurrency is a lot like depositing funds into a treasury bond or term deposit. By allowing a blockchain or application to utilise your holdings, you can earn rewards. While staking is technically a term related to Proof-of-Stake blockchains, many DeFi applications also use the term for those that deposit liquidity into the platform.
By locking funds into a specific DeFi protocol, users help to ensure its economic security and viability. These staked tokens can operate a number of functions, including validating transactions, providing voting power, or serving as collateral. Staking cryptocurrency tokens in a DeFi application can usually be completed through a staking pool provided on an exchange, or directly through a digital wallet, like TrustWallet.
In the instance of Aave, the native AAVE tokens are deposited into a Safety Module protocol on the Aave platform. This module acts as a 'mitigation tool' to protect against smart contract risks, bugs, exploits or any other event that may cause a loss of funds.
If an event such as this did cause the loss of funds, Aave would dip into the Safety Module to cover the deficit. The maximum amount the protocol is currently allowed to use from the Safety Module is 30%.
To incentivise holders to provide liquidity to the Safety Module, Aave offers additional tokens as a reward.
How to stake AAVE?
Staking AAVE on the native Aave dApp
While other cryptocurrencies allow users to earn yield through a variety of different platforms, the only way to stake AAVE is through the Aave decentralised application (dApp). As the token is primarily staked for contingency purposes, rather than being used to validate and process blockchain transactions, the Aave platform is the one generating rewards.
Here, we will go through the steps required to purchase AAVE and to stake AAVE within the Aave platform.
Staking AAVE on its native Aave dApp:
- Cryptocurrency exchange. If you do not already have AAVE in a wallet and wish to purchase some, set up an account on a cryptocurrency exchange like Binance or Coinbase.
- Acquire AAVE. Purchase the amount of AAVE you desire to stake by exchanging either fiat or other cryptocurrencies.
- Web 3.0 digital wallet. To interact with the Aave platform you will need access to a Web 3.0 digital wallet. A Web 3.0 digital wallet acts as a bridge between your digital assets and the Aave platform. These can be browser extension wallets, like MetaMask or Trust Wallet, or a physical hardware wallet, like Ledger. Remember to back up your wallet and safely store the 12-word seed phrase.
- Transfer AAVE. Send your AAVE tokens to your unique Web 3.0 digital wallet address.
- Aave website. Head over to the Aave dApp.
- Staking. Navigate via the top menu bar to the 'STAKE' tab.
- Connect Web 3.0 wallet. Click 'Connect' and select the appropriate wallet.
- Enter the amount. Input the amount of AAVE tokens you would like to lock up. Once happy, click 'stake'. This will bring up a window from your Web 3.0 wallet requiring your approval for the potential access and movement of your tokens.
- Confirm. Once you've confirmed the window prompt, simply click through to complete the transaction and watch the value of your staked tokens appreciate.
- Cooldown period ahead of removal. Before you can unstake your AAVE tokens, you must wait for a 'cooldown period'. This is listed above the APY when staking your tokens. When you want to unstake your tokens, you must commence the cooldown period first.
- Remove staked tokens. Once the cooldown period has passed, there will be a 2-day window where you can unstake your tokens. To do so, press 'Claim' on Aave's 'Stake' tab. If you do not claim your rewards at this time, your assets will enter into a 10 day cooldown period again.
Other methods of earning yield on AAVE
Aside from staking, there are other ways that AAVE token holders can earn rewards on their holdings.
Automated market makers (AMM)
are a key protocol used by decentralised exchanges (DEXs)
to provide users with instant trades. To support this algorithm, users can lock up their tokens on the decentralised exchange in what is called a 'liquidity pool'.
To incentivise the provision of cryptocurrencies to liquidity pools, liquidity providers are rewarded with a share of trading fees collected from every exchange.
The process of providing liquidity to a DEX is similar to staking, however, liquidity pools are composed of cryptocurrency pairs. For example AAVE-ETH. To enter a liquidity pool a user must deposit cryptocurrencies in equal proportion. This is based on the exchange rate at the time. In the example above this would require an equal share of AAVE to ETH.
Instead of locking AAVE tokens in the Aave platform, token holders can use their assets to provide liquidity to a DEX like UniSwap or even Binance. An exchange usually offers a share of transaction fees and, in some cases, additional tokens.
Adding liquiding on Uniswap
Adding liquiding on Binance
Platforms that offer staking and earning
How much can I earn by staking AAVE?
Staking AAVE is a relatively low-risk option to earn a passive income on holdings. AAVE is a particularly simple token to stake due to its native operability with its own dApp. Users can stake AAVE in just a couple of clicks.
How much a user can earn from staking AAVE in the Aave platform will depend on a number of factors. These include: how many tokens a user stakes, the length of the staking period and the cumulative total of tokens held in the 'Safety Module'.
Aave is an Ethereum-based platform, which means staking AAVE can be subject to high gas fees. Users can mitigate high gas fees by making larger transactions. This should help to avoid fees eating into rewards. This is similar to mitigating high brokerage fees on a stock exchange.
Depositing AAVE in a DEX
Contributing to liquidity pools on a decentralised exchange provides a far more variable earning rate. This can be higher or lower than staking. How much a liquidity provider can gain depends on aspects like slippage (difference between the price at entry and execution of trade), gas fees, and the demand for the liquidity pool.
Providing liquidity requires slightly more effort and time than staking AAVE.
Is staking AAVE safe?
Earning yield on any cryptocurrency token comes with inherent risks and AAVE is no different. Risks for AAVE include illiquidity, slashing, smart contract risk and exchange vulnerability.
- Illiquidity. When staking or depositing AAVE tokens for liquidity those assets could be locked for a set period. This means users will not be able to react to changing market conditions.
- Slashing. When staking AAVE in the Aave dApp the purpose is to mitigate the loss of funds from the protocol. In the event of that happening, those that have staked in the Safety Module risk losing up to a maximum of 30% of their staked total. However, 30% is the maximum and chances are this would be much less.
- Smart contract risk. As with any application based on smart contracts, those contracts are programmed by humans and human error can occur. As smart contracts are intended to be irreversible any malfunctions could lead to a loss of funds.
- Exchange vulnerability. When depositing AAVE into a liquidity pool on an exchange, as the exchange is consistently connected to the internet those funds will inherently be exposed to the risk of security breaches.
When staking AAVE, the risk of losing up to 30% from the Safety Module can seem more tangible than staking other coins. However, the reality is that it is no more, or less, dangerous than locking up the majority of other cryptocurrency tokens.
Pros and cons of staking AAVE
- Efficient. Staking AAVE is a simple process that can be done in minutes.
- Supporting the application. By staking AAVE, a user is directly contributing to the financial security of the Aave network and platform.
- Slashing. When staking AAVE in the Aave Safety Module there is a potential for up to 30% of your staked funds to be slashed.
- Illiquidity. When staking AAVE in the Aave platform a 10-day cooldown period is required prior to withdrawing funds. This means those with staked assets can't react to a fast-moving, volatile market.