What is AAVE? (Animated) Crypto Borrowing and Lending Explained

Summary

This 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

00:00

🏦 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.

05:00

🔄 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.

Keywords

💡Decentralized Finance (DeFi)

Decentralized Finance, or DeFi, refers to the financial services ecosystem built on blockchain technologies, particularly smart contracts, that aims to create trustless, permissionless, and transparent financial mechanisms without the need for intermediaries like banks. In the context of the video, DeFi is the overarching theme as it discusses Aave, a DeFi application that facilitates lending and borrowing of cryptocurrencies.

💡Aave

Aave is a decentralized finance application that allows users to lend and borrow cryptocurrencies. It operates as a peer-to-peer lending platform using smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. Aave is highlighted in the video as a modern, cryptocurrency-based alternative to traditional banking systems for loans and lending.

💡Smart Contracts

Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They automatically execute transactions when predefined conditions are met. In the video, Aave utilizes smart contracts to manage lending and borrowing processes, eliminating the need for manual matching between lenders and borrowers.

💡Lending Rates

Lending rates in the context of Aave refer to the interest rates that borrowers pay when they take out a loan and that lenders earn on the assets they provide. The video explains that Aave uses algorithms within its smart contracts to determine these rates based on the liquidity available in the platform, which directly influences the cost and availability of loans.

💡Over-Collateralized Loans

Over-collateralized loans are loans where the borrower provides more collateral than the amount they wish to borrow. This is a common practice in cryptocurrency lending to mitigate risk. The video uses the example of borrowing 80% of the value of Ethereum held as collateral to explain how Aave ensures that lenders are protected even if the value of the asset fluctuates.

💡Liquidation Threshold

The liquidation threshold is the point at which a borrower's collateral is at risk of being sold to cover the loan if the value of the collateral falls below a certain percentage of the loan amount. The video explains that Aave has a mechanism to automatically liquidate collateral if the value drops to this threshold, ensuring that lenders do not incur losses.

💡Flash Loans

Flash loans are a unique feature of Aave that allows users to borrow large sums of cryptocurrency without providing any collateral, provided the loan is repaid within the same blockchain transaction block. The video mentions flash loans as a selling point of Aave, highlighting their potential for arbitrage opportunities across different cryptocurrency exchanges.

💡Liquidity

Liquidity in the context of the video refers to the amount of funds available for lending within the Aave platform. High liquidity allows for more loans to be issued and can influence the lending rates. The video discusses how liquidity is a critical factor for the functioning of DeFi platforms like Aave.

💡Stablecoins

Stablecoins are cryptocurrencies designed to minimize price volatility by pegging their value to a stable asset, often a fiat currency like the US dollar. In the video, Tether (USDT) is mentioned as a stablecoin that offers a stable lending rate compared to more volatile cryptocurrencies like Ethereum.

💡Leverage

Leverage in finance refers to the use of borrowed funds to increase the potential return of an investment. The video explains how Aave allows users to create leveraged positions by borrowing against their deposited assets, which can amplify gains but also increase risk if the value of the asset decreases.

💡Governance Token

A governance token is a type of cryptocurrency that gives holders the right to vote on the future development and direction of a platform. The video mentions Aave's associated token, which allows token holders to participate in the governance of the Aave platform, influencing decisions such as protocol upgrades and fee structures.

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