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- What is Aave?
What is Aave?

Aave is a DeFi (decentralized finance) protocol, which allows users to lend and borrow cryptocurrencies and real-world assets without a need for a centralized intermediary. When people lend, using Aave, they earn interest, and when they borrow, they pay interest. Originally built on the Ethereum network, Aave has since expanded to other chains.
Lending with Aave
Because of the DeFi protocol, you don’t need to visit a bank (or any other centralized finance establishment), to get a loan. With Aave, the middlemen are removed, as it operates based on smart contracts - computer codes that automate transactions, so the cryptocurrency loan is conducted among users, not institutions - like it is with banks. You do, however, still have to put up collateral, which, in this system, are cryptocurrency tokens.
Although Aave also offers pools for real-world assets (e.g. real estate) through their partner company Centrifuge, which tokenizes those assets. Investors can then purchase the resulting tokens or keep them as collateral. The asset tokens behave similarly to bonds and can also be used as collateral for real-world businesses to borrow money.
About liquidity pools
In Avee’s case, users deposit their digital assets into liquidity pools, which becomes a source of funds that the protocol can lend to users. Whoever deposits their tokens (be it a cryptocurrency or a real-world asset) into Aave’s liquidity pool receives new aTokens (Aave tokens). For example, depositing 1,000 DAI to the pool will result in receiving 1,000 aDAI, which enables you to earn interest on your aTokens and partake in the platform’s flash loans. Note that interest rates may vary based on what is being lent/borrowed.
Aave tokens
An important function of aTokens is also to govern the Aave protocol - holders of these tokens can vote on the direction of Aave and on managing the funds. Each token equals one vote.
Another use for the tokens is posting them up as collateral - which in turn raises the borrowing limits of users who have done so. If you borrow and post aTokens as collateral, you can get a discount or even bypass the borrowing fees.
Setbacks
In order to start using the platform, you must first deposit cryptocurrency into Aave, as you can’t just purchase tokens with a credit or debit card. Some people are a bit hesitant to do so with small amounts when Ethereum transaction costs are high. In addition, there’s also a hint of risk involved because of liquidity. Liquidations are an essential part of Aave - it manages debt and ensures the continued ability to give loans to users. If the liquidity is still too low, Aave has a Safety Module. This failsafe exists as a pool of aTokens, which have been deposited by users. In case of a calm market, holders of said tokens receive more AAVE as compensation. When the system needs more capital, however, it will liquidate the Aave tokens inside the Safety Module pool.
Nevertheless, Aave is an excellent form of innovative finance systems, providing opportunities from borrowing to lending and earning interest. If you decide in favor of using Aave, we offer it as a payment option at Fairspin!