What is AAVE? (Animated) Crypto Borrowing and Lending Explained
Summary
TLDRThis video from the Whiteboard Crypto series simplifies the concept of Aave, a decentralized finance platform for lending and borrowing cryptocurrencies. It explains how Aave operates using smart contracts, enabling users to earn interest on deposits and borrow against their crypto assets. The video covers the importance of over-collateralization in crypto loans, the potential for leveraged positions, and the innovative flash loan feature, which allows borrowing without collateral, provided it's repaid within the same blockchain transaction block.
Takeaways
- 🚗 Aave is a decentralized finance (DeFi) application that enables lending and borrowing of cryptocurrencies, similar to how banks operate but with digital assets.
- 🏦 Users can lend their cryptocurrencies to Aave and receive interest, or they can borrow against their deposited assets, paying fees in return.
- 📈 Aave uses algorithms to determine lending rates and match lenders with borrowers, automating the process through smart contracts.
- 💡 The Aave token (AAVE) is an Ethereum-based token that grants governance rights to its holders, allowing them to vote on platform changes.
- 🛠️ Aave was developed as an evolution of the EthLend platform, which faced challenges with liquidity and matching borrowers to lenders.
- 🏡 The concept of over-collateralized loans in Aave ensures that borrowers provide more collateral than the amount they wish to borrow, mitigating risk.
- 🔄 Leveraged positions can be created on Aave by depositing and borrowing within the platform, allowing users to amplify their potential gains or losses.
- 💸 Flash loans are a unique feature of Aave, allowing users to borrow large sums without collateral, provided they are repaid within the same blockchain transaction block.
- 🌐 Aave operates on a global scale, providing an anonymous and permissionless platform for crypto lending and borrowing.
- 🔑 The platform's use of smart contracts eliminates the need for intermediaries, making the process more efficient and transparent.
Q & A
What is Aave and how does it relate to traditional banking?
-Aave is a decentralized finance application that allows people to lend and borrow cryptocurrencies, similar to how traditional banks operate but using cryptocurrencies as the asset. It uses smart contracts to automate the lending and borrowing process and determines lending rates algorithmically.
What is the role of the Aave token in the platform?
-The Aave token is an Ethereum token that powers the governance on the Aave platform. Token holders get to vote on changes to the application, making it a key component in the platform's decision-making process.
Why did the developers overhaul Ethlend to create Aave?
-The developers overhauled Ethlend to create Aave due to two main problems faced by Ethlend: liquidity issues and the manual process of matching borrowers to lenders. Aave automates this process using smart contracts, improving efficiency and user experience.
How does Aave utilize smart contracts in its operations?
-Aave uses smart contracts to automate the lending and borrowing process. Lenders can deposit money into a smart contract to earn interest, and borrowers can deposit collateral into another smart contract to borrow funds. The platform uses algorithms within these contracts to determine loan rates based on liquidity.
What is the significance of being over-collateralized in Aave loans?
-In Aave, to borrow a certain amount of cryptocurrency, users must provide more collateral than the amount they wish to borrow. This is to mitigate risk in case the value of the collateral decreases, ensuring that lenders are protected even if the borrower defaults.
Can you explain the liquidation threshold in Aave?
-The liquidation threshold in Aave is the point at which the platform automatically sells the borrower's collateral to cover the loan if the value of the collateral falls below a certain percentage of the loan value. This protects lenders from losing money due to default.
How does leveraging work with Aave?
-Leveraging in Aave involves borrowing against deposited crypto to increase one's position in the market. For example, by depositing and borrowing against Ethereum, a user can increase their holdings and potentially amplify gains if the price of Ethereum rises.
What are flash loans on Aave and how do they work?
-Flash loans on Aave are a feature that allows users to borrow large amounts of cryptocurrency without providing collateral. However, these loans must be repaid within the same blockchain transaction block they were borrowed in, making them suitable for quick, high-volume trading strategies.
What happens if a borrower defaults on a loan in Aave?
-If a borrower defaults on a loan in Aave, the platform's smart contracts automatically liquidate the borrower's collateral to repay the lender, ensuring that the lender does not suffer a loss.
How does the repayment process work for loans on Aave?
-Aave loans do not have a fixed repayment schedule. Borrowers can repay their loans over an undefined period as long as their position remains safe. However, accrued interest will grow over time, which could lead to the borrower's collateral being liquidated if the health factor decreases significantly.
Outlines
🏦 Introduction to Aave: Decentralized Finance Lending
The paragraph introduces Aave, a decentralized finance (DeFi) platform that facilitates peer-to-peer lending and borrowing of cryptocurrencies. It draws an analogy between traditional loans for cars and houses with Aave's crypto loan system, explaining how banks lend money and charge interest. Aave operates similarly but uses smart contracts to automate the process, matching lenders with borrowers and determining interest rates algorithmically. The platform has its own governance token, the Aave token, which allows holders to vote on platform changes. The paragraph also touches on the history of Aave, starting as EthLend and evolving into Aave to address issues like liquidity and matching borrowers with lenders.
🔄 Leveraged Positions and Flash Loans with Aave
This paragraph delves into the concept of leveraged positions on Aave, where users can borrow more than their initial deposit to potentially increase their gains, but also their risks. It explains the process of creating a leveraged position by depositing, borrowing, and trading to accumulate more assets. The paragraph also introduces Aave's flash loans, a feature allowing users to borrow large sums without collateral, provided they repay within the same blockchain transaction block. The example given is an arbitrage opportunity between different cryptocurrency exchanges. The summary concludes with a reminder of Aave's flexible repayment terms and the importance of maintaining a safe 'health factor' to avoid liquidation.
Mindmap
Keywords
💡Decentralized Finance (DeFi)
💡Aave
💡Smart Contracts
💡Lending Rates
💡Over-Collateralized Loans
💡Liquidation Threshold
💡Flash Loans
💡Liquidity
💡Stablecoins
💡Leverage
💡Governance Token
Highlights
Aave is a decentralized finance application that enables lending and borrowing of cryptocurrencies.
Users can earn interest by lending their cryptocurrencies to Aave.
Aave operates on a peer-to-peer lending model using smart contracts.
The Aave platform uses algorithms to determine lending rates and match lenders with borrowers.
Aave token holders have governance rights and can vote on platform changes.
Aave was created by the team behind EthLend, rebranding and overhauling the platform in 2020.
Smart contracts on Aave automate the lending process, allowing for liquidity and matching efficiency.
Aave allows for over-collateralized loans, reducing default risk.
Borrowers on Aave must maintain a collateral value above a certain threshold to avoid liquidation.
Flash loans on Aave enable borrowing without collateral, but must be repaid within the same blockchain block.
Flash loans can be used for arbitrage opportunities across different cryptocurrency exchanges.
Aave offers flexibility in loan repayment, with no fixed time period required.
The health factor on Aave indicates the safety of a loan, considering the value of collateral and borrowed amount.
Aave's platform is designed to be anonymous, providing privacy for lenders and borrowers.
The term 'Aave' is Finnish for 'ghost', reflecting the anonymous nature of transactions on the platform.
Aave's interest rates are influenced by market volatility and liquidity, affecting both lenders and borrowers.
Users can leverage their positions on Aave by borrowing and reinvesting to increase their holdings.
Aave's platform is accessible through app.ave.com, where users can view current lending and borrowing rates.
Transcripts
you know how when you buy a car that's
just a little too expensive but it's
really nice so you do it anyways
well to do it you have to get a loan
from the bank you tell them they can
have the title to the car
until you pay off that loan that way if
you don't pay the loan
they can come and take your car or what
about if you're getting ready to buy
your first house
well for most people you definitely need
a mortgage you put up a down payment of
twenty percent so that way you can
borrow the other eighty percent and then
make payments on it well
the money for the car and the money for
that house come from a
bank they lend money knowing that you
will pay high
interest on it and they give that
interest to their lenders
well of course the bank takes their cut
well ave is the cryptocurrency version
of that bank hello and welcome to
whiteboard crypto where we break down
difficult crypto topics into easy
stories and examples so that way you can
better understand them in this video we
are going to explain what ave is
so simple that your grandpa could
understand it with that being said
what is ave ave is a decentralized
finance application that allows people
to lend
and borrow cryptocurrencies in turn for
getting and paying fees
ave is basically peer-to-peer lending
using cryptocurrencies as the asset that
is traded
however ave uses an algorithm to
determine lending rates and a match the
lenders to borrowers
ave also has an associated ave token
which is an ethereum token that powers
the governance on their platform
in short the idea of this token is that
token holders get to vote
on changes to the application as time
goes on around 2017 there was a team of
developers who were creating something
called
ethlend they essentially created an mvp
platform
that matched lenders to different
borrowers and it wasn't automatic
the borrowers had to wait around for a
lender to meet them two big problems
that they faced were liquidity
which is the amount of money in the
system and actually matching borrowers
to lenders so during the start of 2020
they overhauled eath lind creating ave
the creator said the cryptocurrency bear
market was the best thing to help them
pivot their product
ave utilizes smart contracts which are
just pieces of code that get ran
automatically based on certain
conditions to run the platform
now if you're new to smart contracts you
should definitely go watch our video on
it where we break it down
really simply using stories and
analogies back to ave
this time instead of using peer-to-peer
lending where a borrower had to match
with a lender ave used a peer to a smart
contract method so lenders could deposit
money into a smart contract and earn
interest
and also borrowers could deposit their
collateral into another smart contract
and borrow from any smart contract they
wanted to borrow from
they used new algorithms in the smart
contracts to determine the loan rates
based on how much liquidity was in each
smart contract that was really confusing
but by the way
ave is a finnish word that means ghost
they stuck with this for the branding
because when you lend your money or
borrow your money
it's all anonymous no banks regulate it
nobody else can see what you're doing
and specifically
you don't know who is on the other side
of that smart contract so that's how ave
was formed but let's get into what they
do
if you go to app.ave.com markets
you can see the current rates for
borrowing and lending for example if you
look here you can see usdt
which is tether is offering a pretty
decent deal and then you can also see
that ethereum is offering quite a low
rate this is because tether is a stable
coin and it won't move much in price
but ethereum is very volatile at the
moment so with lending comes borrowing
and so how this works is you lend
your crypto to ave and they pay you
interest on it we won't get into the
technicals of how that actually works
though however with lending comes
borrowing
so after you deposit some of your crypto
to ave to earn interest
you can also decide to borrow against it
let's move on to over collateralized
loans whenever you borrowed the 80
of your house to make payments on it the
house was collateral this means if you
couldn't pay the loan back the bank
would just kick you out
and take your house in short you gave
them collateral that they can take
if you don't pay well crypto loans don't
necessarily work like this
if you want to borrow crypto you have to
be over collateralized
this means if you want to borrow a
hundred dollars you must give the bank
120 dollars for most people you might
think this is crazy why in the world
would you give someone more money than
you want to borrow especially if you
already have that money
well imagine this if i gave you a
hundred dollars worth of ethereum
and you lent me 80 worth of tether which
is a stable coin pegged to the us dollar
you use that 80 for a few months and
then you decide to pay it back
and get your eth well by then ethereum
has doubled in price
and so you cash out your 100 of ethereum
but you actually get two hundred dollars
worth of value
because ethereum raised in price this is
a double-edged sword though because ave
has something called a liquidation
threshold where they will automatically
sell your collateral to cover the loan
that you have created
this way investors never lose money let
me use an example so you put up a
hundred dollars of ethereum and what is
called the maximum loan to value of
ethereum
is eighty percent which means you can
borrow eighty percent of that hundred
dollars
so you decide to borrow 80 dollars of
tether well if that ethereum price drops
to more than 82 and a half percent of
its value
which is the liquidation percentage ave
will automatically take your ethereum
and pay back the lender however
you get to keep that 80 that you
borrowed speaking of loans we were
actually wondering
if you wouldn't mind giving us a loan of
one like
you can have it back later but right now
we really need likes so that we can grow
this channel and that our hard work is
rewarded
sound good let's move on to the next
topic using ave you can create a very
leveraged position
which is essentially borrowing on
steroids and to understand this we're
gonna go over an example really quick so
let's say you have a hundred dollars of
ethereum you deposit your ethereum to
ave and withdraw
eighty dollars worth of usdc which is an
ethereum stable token you take that 80
dollars worth of usdc
go over to uni swap and then trade it
out for more ethereum which you then
go back to ave and deposit so now you've
deposited 180
of ethereum but you can still take out
eighty percent of that eighty dollars
that you deposited which is sixty four
dollars of usdc
so now you take that sixty four dollars
of usdc trade it for more eth and then
add it back to your account in ave
so now you have 244 dollars of ethereum
that you've borrowed against
even though you only had an original one
hundred dollars so if eth
goes up ten percent you gain twenty four
dollars and forty cents
compared to if you didn't create that
leveraged position you would have only
gained ten dollars
however if the price of ethereum goes
down all i can say is you're screwed if
you pass the liquidation threshold next
up let's talk about paying those loans
back because you might be wondering
how you pay back those loans that you
borrowed well since you technically put
up more than a hundred percent for the
loan
you just have to log into ave and repay
the loan every now and then just a
little bit ave loans aren't like
traditional loans where you have to pay
it all back by a certain date
here's what the official ave website
says now the question is when do i need
to pay back the
loan ave says there is no fixed time
period to pay back the loan
as long as your position is safe you can
borrow for an undefined period
however they say as time passes the
accrued interest will grow
making your health factor decrease which
might result in your deposited assets
becoming more likely to be liquidated
the last thing i want to talk about in
this video is something that ave offers
called flash loans
and it is a new feature that they have
that is actually one of their main
selling points
we've actually been working on an entire
video for flash loans so you should
consider subscribing if you've made it
this far in the video
in short a flash loan is a
cryptocurrency loan where you can borrow
up to millions of dollars
without putting up any collateral here's
the catch though a flash loan
must be paid back in the same
cryptocurrency block that it was
borrowed in well you might be wondering
why would you need a loan that you
have to pay back almost immediately well
let's say you could buy ethereum at
binance for one dollar
and sell it to coinbase for a dollar and
a penny each time you did that you would
make a penny
imagine if you use millions of dollars
to do that millions of times
this is one example of why you might
want to take out a flash loan even
though you'd have to pay it back in
around 13 seconds if you use the
ethereum network now
there's a lot more to flash loans but
this video is about ave
and we've covered almost everything
there is to know about it at this
current point in time so as we end this
video we want to thank you for watching
our videos and supporting our channel
and most of all
we hope that you learned something thank
you guys so much for watching
and we hope to see you in the next video
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