What is Aave (AAVE)?

In Crypto Spotlight

Aave is a decentralized finance (DeFi) protocol, which allows users to lend or borrow cryptocurrency assets without intermediaries.

Like other DeFi applications such as Uniswap, Aave uses smart contracts to eliminate intermediaries between lenders and borrowers, operating in a truly decentralized fashion.

In this article, Liquid has covered everything you need to know about the Aave protocol, how it works, and more.

What is Aave?

Aave is a decentralized lending protocol built on Ethereum and uses decentralized autonomous organization (DAO). Meaning, it is governed and operated by AAVE token holders who vote on changes to the protocol.

Aave determines lending rates and matches lenders to borrowers. While lenders earn interest for depositing cryptocurrency assets into liquidity pools, borrowers pay interest for borrowing amounts lent by depositors.

How does Aave work?

With Aave, you can earn passive interest on your digital assets. You can lend and borrow cryptocurrencies with a DeFi protocol.

Lenders can deposit tokens into liquidity pools and receive Aave interest-bearing tokens or aTokens. For example, you can deposit USDC and receive aUSDC or deposit DAI and receive aDAI. aTokens are minted upon deposit and burned when redeemed.

The interest earned on aTokens varies based on market conditions like demand and supply. Since deposits sit in a global liquidity market, interest rates increase when demand is high.

Depositors can withdraw their assets at any time. The entire process takes place automatically without having to manage or monitor your position actively.

Aave also facilitates flash loans. You can take out a loan by depositing collateral to borrow any supported assets. Additionally, you can repay the loan along with any incurred debt to unlock your original deposit.

Aave requires borrowers to repay the borrowed amount with an additional 0.09% of the total borrowed amount. This fee is further split between lenders and the platform facilitating the flash loan by integrating Aave’s flash loan API. A part of the fee is also swapped to Aave tokens & burned.

Since the loan is repaid within a single transaction on Ethereum, it eliminates the risk of borrowers not repaying their borrowed amount.

Aave’s AAVE token

Now that we have discussed the Aave protocol and how it deals with lending and borrowing cryptocurrency assets, let’s talk about the AAVE token and its most common use cases.

AAVE token is a native governance token of the Aave protocol. Borrowers can use AAVE tokens as collateral to raise their borrowing limit and avail a discount on fees.

How to buy AAVE on Liquid

AAVE is available for instant purchase via Liquid Buy and Swap, or trading against BTC: AAVE/BTC.


Without a doubt, Aave is an interesting DeFi project that paves the way for a more decentralized financial system, with its native governance token AAVE allowing the holders to influence change in the protocol.

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