Aave Lending Protocol has an awesome diet, don’t you think?

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Undoubtedly, blockchain technology has brought many benefits to existing systems and even revolutionized traditional financial systems. Once the financial systems which remained centralized during all this time since its emergence, it was under the control of the authorities, and where the customers had no control even over their assets. Now consider the decentralized financial system based on smart contracts that has led to drastic changes in financial behavior.

Aave Protocol (AAVE) Bringing Evolution in Finance

The Ethereum-based Aave lending protocol is one of the emerging DeFi projects that have gained so much adoption and wide acceptance. It is a decentralized lending system that follows the traditional system of lending, borrowing and earning interest, but has a slight modification of decentralized features that do not require any middlemen. What? If that’s too much for you, don’t worry; let’s simplify it.

Take, for example, borrowing scenarios in general from any bank, where you would need to show your credit history or secure an asset already under authority. The bank takes your assets as collateral, gives you at least 80% of the value of your assets and charges you specific interest rates which it returns to its customers, account holders, after having withdrawn its share. In this process, the banking institution has all the control over your assets, loan amounts and powers related to terms and conditions.

How does the Aave loan protocol work?

The similar procedure Aave Lending Protocol follows while having no drawbacks like banks, reducing the tedious process and making the process smooth and frictionless. Since it is based on smart contracts, it makes the process easily accessible and reliable. Aave users do not need to depend on specific institutions or intermediary individuals to manage funds on their behalf; everything is open since it is written code and can be executed on its own after fulfilling particular conditions. Fun fact, Aave in Finnish means “ghost”, where it means that transactions, lenders and borrowers remain anonymous and private.

The Aave Lending protocol allows users to stake their specific digital assets and earn quite a high interest on their stake as an annual percentage yield (APY) of up to 6%. The Aave software allows the creation of crypto asset lending pools that allow users to lend or borrow from 17 different available cryptocurrencies on the platform, five of which are stablecoins, and the other 12 include ethereum (ETH), Basic Attention Token (BAT), and decentralized (MANA).

Perhaps the best-known loan pool system, Aave allows participants to deposit funds they wish to loan raised into a liquidity pool. The pool is accessible to borrowers, who can then withdraw the amount as a loan as much as they want from the pool after fulfilling the required conditions. Such conditions are equivalent to putting around 120% of assets as collateral in order to take out loans of digital assets.

Here Aave has a cool feature called Liquidating Threshold which automatically liquidates the collateral to recover the value of the loaned amount whenever the collateral asset amount drops by around 82.5%. In such a case, the amount from the lender always remains safe. The number of AAVE tokens supposed to be the governance token of the platform, where there are approximately 110,571 token holders, makes it quite decentralized.

Steve Anderson
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