What is Aave?
Aave is a decentralized lending protocol operating across multiple blockchains. Users deposit crypto assets into liquidity pools and earn interest, while borrowers draw funds from these pools with overcollateralization. AAVE is the protocol's governance token.
How it works
Deposit and loan rates are determined algorithmically based on pool utilization: the higher the demand for loans, the higher the rates. Loans are always secured by collateral exceeding the debt amount; if collateral value drops, the position is automatically liquidated. AAVE holders vote on protocol parameters and can insure it through staking in the reserve module.
Pros and cons
- Pros: battle-tested protocol with multibillion-dollar liquidity, transparent rules, passive income for depositors.
- Cons: smart contract vulnerability risks, liquidations during collateral volatility, regulatory uncertainty around DeFi lending.