Blockchain technology is advancing at an impressive pace, drawing widespread attention. Recognizing its vast potential, people began exploring decentralized solutions to unlock new opportunities. In 2017, Ethereum’s blockchain popularized the concept of decentralized finance (DeFi) with smart contracts, sparking interest from other blockchains to implement similar technologies. These smart contracts aim to provide access to financial services more transparently and democratically. The rise of DeFi represents a significant shift in financial paradigms. Lending, a core aspect of traditional finance, has become an essential component of the crypto ecosystem. Now, lending products are evolving in a decentralized way, enabling parties to transact directly using smart contracts without intermediaries or banks. Aave has emerged as a leader in this field.

Stani Kulechov founded Aave in 2017 while studying law in Helsinki. Although his educational background differs from many blockchain founders, Kulechov brought extensive experience in web development and financial applications. Through his research into Ethereum and smart contracts, he sought a way to execute legal agreements automatically, bypassing third parties like lawyers. This led him to envision a decentralized lending platform that would connect lenders and borrowers peer-to-peer. Initially named ETHLend, the platform was later rebranded to Aave.

During the early stages, progress was slow. Matching lenders and borrowers in a peer-to-peer system took time, resulting in limited liquidity. The situation worsened during the bear market, and the project soon lost traction. However, the introduction of automated peer-to-peer contracts and liquidity pools solved the liquidity issue, allowing borrowers and lenders to interact with smart contracts. This revitalized Aave, and in 2020, the platform launched on the Ethereum mainnet, migrating the LEND token to AAVE, followed by the successful release of version 2 of the protocol.

AAVE is now one of the most innovative and widely used decentralized lending protocols, managing up to $23 billion in assets. The platform supports various cryptocurrencies, boasts robust security, and recently integrated Layer 2 solutions for enhanced performance.

How does Aave work? Collateralized Loans and Flash Loans

Aave connects lenders and borrowers through a robust system of security-audited smart contracts.

Lenders, also known as liquidity providers, deposit funds into liquidity pools on the platform, earning interest based on how long their funds are loaned. Interest rates fluctuate with market conditions, and users can withdraw their funds anytime. Once funds are deposited, lenders can also apply for loans as borrowers.

Borrowers must deposit collateral worth at least as much as the assets they wish to borrow. The borrowed asset does not have to match the cryptocurrency deposited as collateral. After depositing, borrowers receive an equivalent amount of aTokens (e.g., borrowing ETH would result in aETH). The longer the loan duration, the more interest is accrued. Given the volatility of the crypto market, Aave uses a liquidation process—if the collateral’s value falls below the required ratio, liquidation is triggered.

Aave also offers unsecured flash loans, which are particularly attractive to traders. This feature allows users to borrow and repay within a single transaction, using excess liquidity and charging a 0.09% fee. If the loan isn’t repaid, the transaction is cancelled, eliminating risk for both the borrower and the protocol. Flash loans are popular among arbitrage traders who capitalize on price differences across exchanges.

The collateralized loan mechanism is the foundation of Aave’s existence. To protect the entire mechanism, Aave has set up a security device called the “Safety Module.” The Safety Module is a deposit pool based on smart contracts, containing AAVE tokens, where all token holders can participate by depositing funds and earning rewards. The main role of the Safety Module is to protect the protocol from unexpected financial losses (also known as deficit events), where liquidity providers are in a deficit state in the Aave protocol. If a financial loss event occurs, the AAVE in the Safety Module will be sold to cover the deficit.

Source：aavenomics

Aave V4

Aave V4, scheduled for release in mid-2025, represents a major upgrade to the protocol, building on the improvements of V3. It aims to enhance user experience and further the development of DeFi by introducing several key features:

1.Unified Liquidity Layer: This new architecture streamlines liquidity management, allowing Aave to adjust lending modules, interest rates, and incentives without migrating liquidity, addressing the issue of fragmented liquidity.

2.Fuzzy-controlled Interest Rates: Designed to adjust dynamically based on market conditions, this feature optimizes interest rates for both lenders and borrowers by responding to market demand shifts.

3.Liquidity Premiums: The new version will fine-tune borrowing costs based on the collateral risk profile, incentivizing riskier assets.

4.Smart Accounts: This feature allows users to manage multiple lending positions under one wallet interface, simplifying the process and improving the user experience over V3, which requires multiple wallets for management.

Aave Network

Aave Labs has proposed the creation of the Aave Network, which would operate as an application chain capable of performing a range of functions. In this proposal, Aave Labs also includes considerations for on-chain governance:

• Using GHO for payments: By leveraging Validium on the Aave Network, efficient micropayments can be enabled, enhancing the user experience
• Network-level integration of Aave V4: Aave V4 will serve as the network’s central liquidity hub, simplifying integration and access for developers
• AAVE is the main staking asset for decentralized validators/orderers
• Governance control over the interface between the Aave Network and Ethereum through Aave Governance V3
• Widespread adoption of account abstraction
• Inheriting Ethereum’s network security

Three-Year Roadmap

To manage and implement the Aave 2030 vision effectively, Aave Labs has outlined clear goals and a timeline:

First-Year Objectives:

• Launch Aave’s new visual identity (redesign the logo)
• Release the Aave V4 framework (Q4 2024)
• Complete Aave V code development (Q2 2025)

Additional Goals:

• Onboard at least one innovative GHO promoter
• Support at least one non-EVM blockchain

Second-Year Objectives:

• Launch the Aave Network
• Establish a cross-chain liquidity layer
• Research and launch Real World Asset (RWA) products
• Integrate with at least one non-EVM blockchain
• Launch at least one Aave Labs product to drive Aave/GHO growth

Proposals and Security Module

TEMP CHECK

In the crypto space, Aave is well-known for its innovative lending platform. The Aave community has proposed a “TEMP CHECK” proposal to revamp the AAVE token’s economic model, potentially enabling a fee switch mechanism to facilitate token buybacks. After this announcement, the price of AAVE tokens jumped from $85 to over $100.

The core idea of the proposal is a “buy and distribute” plan that would use protocol revenues to buy AAVE tokens from the secondary market and distribute them to key ecosystem participants. The proposal also suggests the introduction of a new security module, activation of a safety mechanism for Atokens, removal of the GHO lending rate discount, and the addition of an anti-GHO minting and burning mechanism to align better the interests of AAVE stakers and GHO borrowers (GHO is Aave’s stablecoin).

Aave’s security module allows staking of AAVE, GHO, or ABPT V2. In case of financial losses, up to 30% of locked assets can be used for compensation. If these funds cannot cover all liabilities, a “Recovery Issuance” mechanism will be triggered, temporarily issuing AAVE tokens for auction.

Umbrella

Bgd Labs has proposed a new version of Aave’s security module, named Umbrella, to address inefficiencies such as slow bad debt resolution, low capital efficiency, lack of transparency and flexibility in slashing mechanisms, and staking/slashing being exclusively based on Ethereum. The Umbrella module introduces new staking assets (stk aTokens), offering full network and pool coverage, an automated rapid slashing mechanism, and a new incentive structure. The proposal also includes upgrading the current AAVE security module into a new staking model and using protocol revenues to purchase AAVE tokens, bolstering ecosystem reserves. This approach would not only create consistent demand for AAVE tokens in the secondary market but also enhance the long-term sustainability of the protocol.

As Aave continues to explore and innovate its tokenomics, it could inspire other projects to rethink their token models, encouraging a shift from tokens serving purely as governance tools to assets with real utility or revenue-sharing capabilities. Aave’s initiative represents more than just an exploration of current economic models. Still, it sends a strong message to the broader market — token value should not be limited to governance rights but should be more closely tied to project revenues and user benefits. This could prompt market participants to reevaluate the potential value of tokens and foster deeper thinking about tokenomics innovation.

What is the AAVE Token?

AAVE is an ERC-20 token that powers the Aave network. Its maximum supply is 16 million tokens. As of September 2022, 14.1 million tokens were circulated, representing 88% of the total supply. The Aave network was previously known as ETHLend, and its token was LEND. In 2020, when ETHLend rebranded to Aave, LEND tokens were converted to AAVE at a 100:1 ratio.

The AAVE token serves two key purposes: utility and governance.

AAVE holders can stake their tokens to improve the protocol’s security and earn AAVE rewards. Borrowers who use AAVE as collateral also benefit from lower fees than other assets.

Additionally, every AAVE holder can participate in governance by voting on decisions that impact the protocol. As Aave is a DAO (Decentralized Autonomous Organization), certain decisions regarding protocol updates, system parameters, and the security module are delegated to token holders. Each AAVE token equals one vote.

The Aave Ecosystem

The Aave project has excited many in the DeFi industry. As one of the earliest DeFi projects, Aave stands out for its uniqueness. While Aave has no direct competitors, it has recently improved its interoperability by deploying on other networks.

In particular, Aave’s deployment on the Polygon network, launched in 2021, has attracted attention. Polygon is a Layer 2 solution and Ethereum sidechain, designed to enhance Ethereum’s performance and scalability. Polygon operates independently but interacts with Ethereum via checkpoints, allowing Ethereum to maintain control over its operations. In essence, Polygon and Ethereum work in tandem, with Polygon not affecting Ethereum’s core functions.

Polygon’s Layer 2 network improves Aave’s scalability and transaction throughput (TPS), while significantly reducing gas fees, helping the platform attract more capital. Through Polygon, users can trade assets like MATIC, WBTC, WETH, and stablecoins on the Aave market. Aave’s interactions with other blockchains act as a “bridge,” enabling assets to be moved onto Polygon’s sidechain.

Is AAVE a Good Investment?

Aave is one of the most user-friendly and high-performing DeFi platforms today. Powered by the Ethereum blockchain and protected by its safety module (a large security fund), Aave is highly secure. With its easy-to-use interface, transaction volume on Aave is likely to continue growing. Moreover, Aave’s security is backed by numerous audits. Seventeen IT security companies have audited Aave’s smart contracts to further bolster its safety.

Aave’s expansion to other blockchains has also boosted its user base. The significant rise in transaction volume, thanks to its interaction with Polygon and other networks, is a prime example.

Tokenomics

Aave’s tokenomics are integral to its decentralized finance (DeFi) platform, which is designed to offer users an enhanced borrowing experience and governance rights. AAVE was initially issued in 2017 with a total supply of one billion tokens, of which 77% was allocated to investors and 23% to the project and its founders. In 2020, Aave underwent a token swap, converting LEND tokens to AAVE at a 1:100 ratio, improving its functionality and giving users more control over the protocol.

Initial Token Distribution

AAVE tokens play a vital role in the DeFi ecosystem, offering several features and uses, including:

1. Governance: AAVE holders can vote on important decisions regarding the protocol’s development and changes. This decentralized governance ensures that token holders have a say in the project’s operations.
2. Fee Discounts: Users who use AAVE as collateral for loans benefit from lower fees. Additionally, AAVE holders receive fees discounts, reducing the cost of using the platform.
3. Flash Loans: AAVE supports flash loans, which allow users to borrow without collateral, provided the loan is repaid within the same transaction block. This feature is particularly useful for arbitrage traders, who can quickly capitalize on market opportunities.
4. aTokens: When users deposit funds, they receive a corresponding amount of aTokens, which earn interest over time. Borrowers must provide collateral to take out loans, and all loans are over-collateralized to minimize risk.
5. Dynamic Interest Rates: AAVE automatically adjusts borrowing rates based on liquidity pool usage, balancing supply and demand. This system incentivizes users to provide liquidity while offering borrowers flexible loan terms.

To further enhance the token’s value, Aave recently proposed “AAVEnomics,” a revenue-sharing mechanism that would distribute a portion of the protocol’s income to AAVE holders, increasing the token’s utility and appeal. Aave continues to refine its safety model to mitigate the risks posed by market volatility, ensuring the protocol’s long-term stability.

You can purchase Aave (AAVE) on cryptocurrency exchanges like Gate.io. Here’s how:

1. Log into Your Account: Access your Gate.io account. Navigate to Trading: Hover over the “Trade” option in the navigation bar and select “Spot Trading.”
2. Search for AAVE: In the search box, type “AAVE” to view available trading pairs.
3. Place an Order: Choose your desired trading pair (e.g., AAVE/USDT). For a limit order, enter your preferred purchase price and quantity, then click “Buy AAVE.” Once the order is filled, your AAVE tokens will be credited to your spot wallet.

In addition to acquiring AAVE through trading with other tokens, Gate.io also supports purchasing AAVE via credit/debit cards or bank transfers.

After obtaining AAVE tokens, you may choose to transfer them to a non-custodial wallet or keep them in your Gate.io account. If you opt for the latter, you can earn passive income through services like staking and lending. Currently, AAVE tokens support both of these income-generating methods.

Additional Resources

For the most up-to-date information on Aave, consider visiting:

• Official Website
• Twitter
• Discord
• GitHub
• Telegram

Start Trading

To view AAVE prices and select your preferred trading pair, visit:

• AAVE/USDT
• AAVE/ETH