Defi is a popular space in the crypto universe and a major player is Aave. Aave has a lot going for it but does have some challenges like every project.
If you feel the DEFI industry will grow then Aave can be a good investment! Aave does face the challenge of relying on Ethereum and has more people wanting to loan crypto than borrow it.
Keep reading and I’ll share what makes Aave different than other DEFI projects. I’ll share the number 1 thing going for it, why crypto lending is better than traditional banking, and how to earn money with this project.
What is Aave?
Aave is a decentralized lending project. I currently use this program HERE. that pays some good interest for loaning crypto, but it’s is centralized.
One of the great things about Aave is there are NO annoying KYC requirements. KYC means (Know your customer) and means taking pictures of your ID (It’s a pain in the ass).
Oh, and if you want to go to a bank to borrow money there is a big application and it’s a (HUGE pain the ass).
Aave is different due to it being on a blockchain and it’s also built on Ethereum. The challenge with Ethereum is gas fees and this means it can cost “a lot” to move things on the blockchain.
A second challenge with Ethereum is it’s Turing complete and this is a fancy way of saying MORE things can go wrong.
Aave was launched in 2017 and used to be called Eth Lend. In case you’re wondering what the hell Aave means (It’s a ghost from the language of Finland).
Aave does 3 things…
- You can borrow crypto
- You can lend crypto
- You can exchange tokens
If you wanted to borrow money from a traditional bank there would be a big application and you would need to have some collateral. If you wanted to borrow money for a car the bank would use the car title as collateral. If you didn’t pay back the loan the bank would take the car.
With Aave, you would put crypto as collateral.
To ensure someone doesn’t borrow money and NEVER repay it (who would do that?) someone needs to put up more money in crypto than what they are borrowing. Also, the prices of crypto can be crazy!
Someone can only take out 75% of crypto that they put up for collateral. If someone puts up $100 worth of collateral they can only borrow $75 dollars.
Aave also has LOTS of liquidity and at the time of this blog post is number 1 with DEFI (Decentralized Finance).
The interest getting paid comes from the borrowers who are paying to borrow crypto. The interest rate depends on the demand for that token.
If “many” people want to borrow a coin then the interest on that coin will increase!
The interest rate someone can pay if they borrow is either Variable or Stable. Oh, and the stable rate can change if the market moves “a lot” it’s just WAY more stable than the variable rate.
Aave has 29 ERC20 tokens (that I counted) at the time of this blog post. ERC20 stands for (Ethereum Request for Comment) and the 20 is just a random number.
Think of ERC20 as WordPress for Ethereum tokens and it makes it easier for wallets and exchanges to accept the coin. Many websites are built using WordPress just like many Ethereum tokens are built with ERC20.
Aave Tokens?
The maximum supply of Aave is 16 million tokens compared to Bitcoin’s maximum supply of 21 million “this isn’t a lot.” The total supply of Aave in circulation is 12.5 million compared to Bitcoin’s 18 million.
A low supply is a good thing and does help the price.
Still, a low supply doesn’t mean anything if there is NO demand. What does the Aave token do?
One of the uses is for staking. If you’re not sure what staking is you can check out this post HERE where I do my best to simplify it.
If you do stake the Aave token you can get 5% returns, also if something goes wrong with Aave you can lose 30% of your investment.
The 30% penalty is both good and bad! Good because investors have more skin in the game and bad because you can lose money.
Another way the token is used is for governance and this means you can vote on where the project is headed.
Lastly, Aave tokens are used for discounts on borrowing fees and someone can get their borrowing limit raised with the token.
Flash Loans
Flash loans are an interesting feature that charges 0.09% interest. Someone can take out a loan without any collateral. If someone doesn’t pay back the loan then the transaction either gets reversed or canceled.
The catch is it has to be in the same transaction.
The point of flash loans is so someone can borrow money to buy a token and resell it somewhere else, make money and repay the loan in 1 transaction. (My head is exploding thinking about this)
It sounds crazy, but different exchanges usually have different prices for a token.
Another use for flash loans would be refinancing. You could borrow money with Aave to pay off debt and then transfer the money to get a “better” rate. You could do all this is in 1 transaction.
Now, I do think burrowing money isn’t a good idea in general, but it’s an option!
It reminds me of the “Blue Light Special” that Kmart had a long time ago. Basically when the blue light special came on and you were in the store then you could save money buying an item. The sale usually lasted for around 15 minutes.
Liquidity Mining
Yes, Aave does have liquidity mining. When it comes to a DEX (Decentralized Exchange) you can exchange 1 token for another. The only way for this DEX to work is with a pool of money.
Nearly everyone is not going to deposit (money/crypto) into a pool without getting paid.
This is a WONDERFUL income-making opportunity!
What is cool about Aave is they have a market to loan out the tokens you could get paid for this liquidity mining. When it comes to stable coins the yield would be between 4.78% to 13.49% + 3.5%. These rates while good I found this project HERE to pay a higher rate!
You can use the code 939517 for $30 in free coins if you make a deposit of over $50. Also, I like the DEFI project because it’s based on Bitcoin and is “very” secure, plus I know the founders and they have lots of nifty plans for the future.
(Truthfully, I’m a little biased)
Still, liquidity mining is a wonderful opportunity, with whatever project you go with.
Conclusion
I’m extremely bullish on DEFI because it can do everything a bank can do faster, easier with fewer fees. Aave does have a lot going for it.
Still, nothing is perfect and one of the weakest links in Aave is hopefully Ethereum will be able to handle it.
Ethereum is going through MANY changes at the time of this blog post and you can read some of them from the link HERE.
Another challenge with Aave is the amount of people wanting to earn interest from their crypto has increased a lot, while people wanting to borrow crypto has stayed low.
Whether you’re into Aave, Defichain, or any other DEFI project there is space for everyone. One thing I’m almost certain of is change is coming to the banking industry!
I hope this blog post on is Aave a bad investment was helpful. Bye for now.