Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.
Decentralized finance is a wondrous yet complicated thing. The crypto community’s ambition is not just to dethrone the titans of regular finance and hang them by the neckties they wear to the office each day, but also to do it with excitement, passion and… memes.
Aave is one such project. The company, which until the pandemic operated out of East London’s start-up hub, is a loans company that lets you lend and borrow cryptocurrencies with hefty interest. The project, still in its infancy and thus highly risky, offers annual yields of, in many cases, well over 10%, giving long-term crypto investors a way to put their money to work while they wait for their virtual piles of money to change in value.
And Aave has a token, also called AAVE, that powers the whole thing. You can earn AAVE by locking it up within the protocol and you can trade AAVE on exchanges—just like you can trade Bitcoin or Ethereum. On exchanges, its price changes each day. Since AAVE’s market cap is comparatively small, it often fluctuates wildly.Buy and sell Bitcoin and Ethereum instantly with Wealthsimple. Sign up to trade here.
What is the Aave protocol?
Aave is a decentralized lending protocol based on the Ethereum blockchain. It lets you lend and borrow cryptocurrencies on its platform. As of this writing, there’s $3.2 billion worth of cryptocurrencies locked up in the platform.
In the spirit of the hacker ethic, although Aave is created by a team of coders that mostly operate out of London, Aave is decentralized and open-source. Through what it delightfully calls “Aavenomics,” anyone with enough AAVE can vote on how the platform is run.
Aave is one of several lending markets that blew up in the summer of 2020. It rivals lending protocols such as Compound and Maker. These are the three largest protocols in a market that is now worth $25 billion. Note: At the start of 2020, this market was barely worth $1 billion. As of January 2021, Maker has $4.64 billion locked up in its chests and Compound has $3 billion.
There are several advantages that Aave claims to have over a large retail bank.
The first is obvious: It lets you take out loans for cryptocurrencies.
The second is that Aave requires no personal identification. It doesn’t care about your credit history, will not deny you a loan because you are bankrupt, and carries no racial or class-related prejudices—accusations directed against loan managers.
The third is that loans on Aave are instant. So long as you can prove you can repay the loan, you can take out a loan at the click of a button, and the loans require no further approval from a third party.
This third advantage is what makes Aave so interesting. The protocol lets you take out massive loans, provided you can prove to the protocol that you can pay it back. To do this, you either need to stake another cryptocurrency as collateral, or you can take out a so-called “flash loan,“ which lets you take out a loan with zero collateral, provided you can prove to the protocol that you can pay it back.
Since this proof generally relies on some other trading position, you can’t use these loans to, say, buy a house (although the protocol’s founder, Stani Kulechov, says that he hopes one day you could). But you can use these flash loans to place a highly complex trade on another protocol. Since these protocols can talk to each other on the blockchain, and data held on blockchains is nigh-impossible to fake, it’s fairly easy to provide sufficient proof that you can pay back the money.
The biggest lending markets on Aave are all for stablecoins. A stablecoin is a cryptocurrency with a value pegged to a specific asset.
The largest market, worth $155 million, is for a stablecoin pegged to the price of Ethereum. The second, also worth $155 million, is for WBTC, a stablecoin pegged to the price of Bitcoin. These markets offer slim returns to lenders, of 0.8% and 0.02% respectively, but are relatively cheap to borrow (in Aave terms), at 3.34% and 0.35% respectively.
But stablecoins pegged to the US dollar offer the highest returns. The coin that offers the highest annual return is TrueUSD, which currently offers 19.3%. Next up is sUSD, which offers 17.68%, and then USDT, which offers 15.92%.
The largest stablecoin lending markets are USDC, a stablecoin maintained by Coinbase and Circle that has a lending market of $76 million and offers returns of 6%; DAI, a decentralized stablecoin that maintains its peg to the US dollar through a complex algorithm that has a market of $50 million and offers 5.63% APY, and the aforementioned USDT, a stablecoin pegged to the US dollar that has a lending market worth $35 million.
But remember that this is the cryptocurrency market: Not only are these rates highly variable, the cryptocurrencies that underlie these loans are often highly volatile and unregulated. An annual yield of 100% is worth squat if the value of the coin plummets to $0.00.
What is the AAVE token?
The protocol also has a token. Aave first sold this as LEND and used the proceeds of an initial sale in 2017, some $16 million, to fund development for the platform. In October 2020, Aave turned these LEND tokens into the platform’s current token, AAVE. As of January 2021, AAVE is worth $266, has a market cap of $3.2 billion and investors trade $1 billion of the coin each day.
AAVE is an ERC-20 token, meaning it runs on the Ethereum blockchain. Unlike Ethereum or Bitcoin, you can’t mine the token. Instead, you have to earn it. You can earn AAVE by buying it on exchanges and then staking it within the protocol’s “safety module.” This, essentially, means that should depositors lose their money, AAVE can be sold off to compensate them.
You can also use AAVE to contribute to its governance protocol. This allows you to stake (lock up) your AAVE to vote on the future of the network.
How does AAVE compare to Bitcoin?
AAVE greatly differs from Bitcoin in terms of its market size, risk profile, and purpose.
First, Aave (and its token, AAVE), runs on the Ethereum blockchain. Bitcoin runs on its own, entirely separate blockchain: the Bitcoin blockchain. If Aave is like a program that runs on your PC, Bitcoin is the Apple iMac.
That means that earning AAVE looks completely different from earning Bitcoin. On the Bitcoin blockchain, you can earn Bitcoin through Bitcoin mining, which involves setting up a very powerful computer to run special software that solves complicated math puzzles. Since the Ethereum blockchain processes AAVE transactions, you could mine Ethereum but not Aave.
Second, Bitcoin doesn’t… do anything. It’s just a coin, and all the blockchain can do is process transactions. Aave, however, is just one of the many ways developers can use the Ethereum blockchain to create new types of products and applications. Aave is, as mentioned, a lending protocol; other protocols include decentralized exchanges and derivatives.
Third, Bitcoin’s market cap is a lot bigger than Aave. As of January 2021, Bitcoin’s market cap of $572 billion dwarfs AAVE’s $3 billion. Bitcoin is by far the most dominant coin on the market. Bitcoin makes up about 62% of the market; Aave makes up about 0.3%.
Fourth, the value of AAVE and Bitcoin are dependent on different things—although the relationship is complicated.
AAVE is dependent on the strength of the lending protocol it powers. If the Aave lending protocol breaks or is prone to a hack, then this could crash the price of AAVE. Similarly, if Aave strikes a deal with JPMorgan to offer crypto loans to all of its customers, AAVE’s price could benefit. In addition, although Aave is just a few years old and lending protocols are still a novelty, Bitcoin has been around for over a decade now and is much more battle-tested.
However, it should be noted that, although AAVE is different from Bitcoin, it is far from independent from it.
Bitcoin, the coin with a larger market (by a long shot), greatly influences the price of all other cryptocurrencies. If Bitcoin crashes, there’s a good chance that AAVE will feel the burn too, just because Bitcoin is the largest token on the market. And if Ethereum, the coin that powers the blockchain that houses AAVE, crashes (it is complicated), then AAVE’s price could also get hit. However, if AAVE crashes, Bitcoin may be less likely to get hurt by virtue of its size.
How to buy AAVE
The easiest way to buy AAVE is through cryptocurrency exchanges.
As of January 2021, the biggest market for AAVE is Coinbase Pro, the advanced exchange run by San Francisco-based cryptocurrency company Coinbase. The next biggest markets are hosted on Binance, Uniswap, Kraken, KuCoin, Gate.io and Gemini.
You can use a variety of currencies to buy AAVE. On Coinbase, FTX, Kraken and Gemini, you can use US dollars to buy AAVE. On most exchanges, you can use other cryptocurrencies, such as Bitcoin, USDT (Tether) and Ethereum to buy AAVE tokens.
Another alternative is to use a crypto brokerage, such as Wealthsimple, which will handle the purchasing of these tokens on your behalf.
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