Aave (AAVE): The Open Source DeFi Protocol

As of early November 2021 Aave is the largest Decentralized Finance (DeFi) project by total locked value (TVL), with over $15.3 billion worth of cryptocurrency deposited on the Aave protocol as collateral. The TVL is a gauge to assess the total value of cryptocurrencies staked or locked as collateral on a given protocol. Basically, the TVL figure reflects the demand for a particular protocol and thus shows how much the crypto community trusts it.

In the following article, we’re trying to figure out why Aave is so popular and whether it’ll be able to stay at the top in the coming years.

As you may already know, DeFi has been one of the fastest-growing trends within the crypto industry. DeFi promotes open finance applications built on blockchain infrastructures that cut out all layers of intermediaries. The end goal of this emerging trend is to move all kinds of financial services on decentralized, community-managed, borderless ecosystems.

One of the most popular use cases of DeFi in 2021 is lending, and Aave taps into this market by providing a decentralized lending system where users can lend, borrow and generate yield by depositing cryptocurrencies. In fact, to understand the importance of this use case, know that four out of the five largest DeFi projects by TVL are lending protocols, and Aave, as we mentioned, is currently the largest one.

How Is Aave Different?

Aave competes with other lending protocols, such as Compound and Maker, and it manages to stay at the top thanks to a great focus on user experience, a wide range of features, and a high degree of security. Aave started by leveraging the Ethereum blockchain, and it eventually landed on Polygon as well. These two blockchains are the backbone of Aave as of today, allowing it to have a global presence while having no middlemen involved in the interactions between users.

As for the ecosystem, you can think of it as a system of lending pools. Users can deposit crypto funds to lend and earn interest. The deposited funds are collected into a pool, from which borrowers can draw the funds by depositing collateral.

The Aave ecosystem can be a win-win for both parties: lenders can earn interest while borrowers make use of the funds to trade on other platforms and benefit from the price volatility. Thanks to blockchain, borrowers and lenders don’t have to go to banks anymore but instead can interact directly through a secure platform.

The lending system is fueled by two types of tokens: The aTokens (Aave interest bearing tokens), which are issued to lenders so that they can collect interest on their deposits, and AAVE, which is the native token on the platform.

AAVE provides several incentives for holders. For example, AAVE borrowers don’t have to pay any fee if they borrow AAVE. If they use AAVE as collateral, they get a considerable fee reduction.

Other than that, Aave supports about 30 tokens, including Ethereum, USDC, USDT, Chainlink, Maker, Uniswap, and BAT, among others.

Recently, Aave also launched Aave Pro, a DeFi platform aimed at institutional investors. This is hoped to drive much greater adoption and token usage. Furthermore, that additional adoption and usage could be expected to support the token price.

AAVE Token Performance

AAVE currently ranks 47th among cryptocurrencies, with a market capitalization of $4,233,859,419 as of November 3, 2021. The token had its All Time High (ATH) in May 2021 with a market value of $666.86 and currently stands at around $320. It is likely that the price will benefit from increasing activity on the platform.

AAVE to USD Chart. Image via coinmarketcap.com

As the DeFi sector and the overall crypto industry is expected to continue to expand in the coming months and years, this too could be positive for AAVE's price performance.