Aave V3 Launched, Leading the DeFi Sector Powerfully

2022-04-15, 07:52

1. Aave, the well-known DeFi lending protocol, is officially upgraded to AAVE V3 on March 16, presenting prominent progress in many aspects such as decentralization, security, risk management, blockchain interoperability, and transaction fees.

2. Aave adopts a floating interest rate and a fixed interest rate as its borrowing rate. Users can freely choose between the two different interest rate models and select an optimal interest rate based on the loan period and other related factors.

3. Aave also introduced the Flash Loans function that allows for unsecured loans. It offers excellent security and a handling fee of only 0.09%.

4. Aave V3 has enabled seamless cross-chain lending services, which is expected to mitigate the problem of each blockchain in DeFi being a "liquidity island".

Since it took off in the summer of 2020 – known as DeFi Summer, DeFi has created a growth miracle in the cryptocurrency field and became the first sector to implement crypto applications. However, DeFi was losing momentum in 2021 when various emerging narratives such as NFT, GameFi, and Metaverse were created one after another. Whereas, in recent days, an old-fashioned project has dispelled the haze that lasted for many months and carried the banner of "DeFi revival".

Aave, the well-known DeFi lending protocol, is officially upgraded to Aave V3 on March 16, presenting prominent progress in many aspects such as decentralization, security, risk management, blockchain interoperability, and transaction fees. The market responded enthusiastically to Aave V3, with the price of $AAVE rallying from $122.31 to a high of $260 in three weeks, a doubled rise. And even now, it remains relatively high around $180.

Aave: the DeFi Lending Ghost

Aave grew out of ETH Lend, a peer-to-peer lending platform founded in November 2017, which was renamed Aave in 2018 – meaning “ghost” in Finnish. ETH Lend is relatively inefficient in operation, requiring both borrowers and lenders to release their needs on the platform and match them with smart contracts, during which users could hardly loan successfully. The upgraded Aave is a decentralized cryptocurrency lending market with a series of liquidity pools for different currencies, which greatly improves capital efficiency. Aave is a set of smart contracts deployed on Ethereum, and the contract address is 0x7Fc66500c84A76Ad7e9c93437bFc5Ac33E2DDaE9.

With a circulation of 1.3 billion pieces, Lend is a token native to the Aave chain. Later, in July 2020, LEND was exchanged for the new native token AAVE at a ratio of 100:1, and an additional 3 million AAVE was issued, which means that the total theoretical amount of AAVE is 16 million. At present, the total circulation of AAVE is about 14 million pieces. AAVE is given by the system to lenders and lenders as rewards. Users who hold AAVE can participate in community governance by voting. In addition, AAVE also plays an important role in the project security system. Once bad debts and other risks took place on Aave. AAVE in the security pool will guarantee the bad debts, thereby maintaining the overall security of the project.

Lending and Dex are the two most basic applications in the DeFi sector. In the lending sector, Compound took the lead in pioneering liquidity mining in the summer of 2020. Moreover, it started the DeFi summer and led the industry trend, while Aave, as a late comer, overtook the former and became a well-deserved industry leader with its better product design. Currently, Compound’s TVL is $6.65 billion, while Aave’s TVL is $11.3 billion, second only to Maker among all DeFi projects, according to Defipulse data.

Compared to other DeFi lending platforms, Aave has several unique features. First of all, Aave adopts a floating interest rate and a fixed interest rate as its borrowing rate. Floating rates tend to be lower and suitable for short-term borrowers, while fixed rates are more predictable and suitable for long-term ones. Users can freely choose between two different interest rate models and select the optimal interest rate based on factors such as their loan period. Second, Aave has introduced the Flash Loans function that allows for unsecured loans. It offers extremely low risk and a handling fee of only 0.09%. The lender of the flash loan must be a smart contract. Since the borrowing and lending operations need to be recorded on a block, the lending and return of funds must be completed within a block time (14 seconds for Ethereum), otherwise, the transaction will not be filed.

Please refer to our previous blog post: How did the flash loan, which were originally a DeFi innovation, become an arbitrage tool for hackers? for more details on flash loans.

Finally, Aave supports a large number of currencies and has many merits in compliance and other issues. Aave completed the V2 version upgrade in October 2020; in March 2022, the V3 version was launched. Each AAVE upgrade has truly improved its functionality and usability.

Several updates to Aave V3

1.Blockchain Interoperability ("Portal" Feature)
Compared to MakerDAO and Compound, which specializes in cultivating the Ethereum ecosystem, Aave developers have greater ambitions to develop toward cross chains. In addition to Ethereum, Aave DAO has deployed Aave V3 on other six blockchains, including Polygon, Arbitrum, Optimism, Avalanche, Fantom, and Harmony. At the same time, Aave V3 has enabled seamless cross-chain lending services. For example, users can stake on the Ethereum mainnet, lend assets on Avalanche, and repay the loan on the Polygon network.
This feature is expected to mitigate the problem of individual blockchains being “liquidity silos” in DeFi.

2.High-Efficiency Mode (eMode)
The eMode can improve the efficiency of borrowing and lending when collateralizing the same type of assets. For instance, when both the collateral and the loan are stablecoins, users can enjoy higher loan-to-value (LTV) and better margin rates, thus improving the user's capital efficiency.

Moreover, Aave V3 provides an isolation mode–a better risk-management system, and an upgraded clearing mechanism. The launch of Aave V3 is remarkable when the general DeFi sector and even the overall crypto market are under downward pressure. Will Aave grow further to continuously improve cross-chain interoperability and become an indispensable infrastructure in the entire DeFi field? It’s magical to see.

Besides, Gate.io now has AAVE spot, leverage, contract, and other trading modes available, as well as provides various financial products such as mortgage loans, liquidity mining, etc. You’re welcome to join them.

Author: Gate.io Researcher: Ashley H.; Translator: Cedar W.
* This article represents only the views of the researcher and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.

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