What is Aave (AAVE): Interoperability is key for DeFi protocol

With a recent V3 upgrade under its belt, can Aave stand its ground in a busy market?

Aave ghost logo in gold, city lights backdrop – Photo: Shutterstock                                 
Ghost in the multichain: “Aave” is Finnish for “ghost” – Photo: Shutterstock
                                

Contents

In an increasingly saturated DeFi (decentralised finance) market, it takes a lot to stand out. Aave, having recently undertaken a suite of changes in its V3 upgrade, continues to sustain a leading presence, thanks to high user support and a thriving governance community.

With that in mind, Currency.com decided to take a peek under the hood of the multibillion-dollar DeFi platform. What is Aave coin used for and how does Aave work

The Aave protocol: An overview

Aave is a decentralised finance (DeFi) protocol founded by the UK-based developer Stani Kulechov. As a decentralised market, liquidity is user-generated, with depositors incentivised through the distribution of passive staking rewards. Rewards are generated from transaction fees and interest rate payments, and are contingent on the size and duration of your stake.

Borrowers on the platform can open overcollateralised positions in order to increase their liquidity, while earning APY on their locked collateral. APY is displayed in Aave’s user-friendly portal (below), though users should be aware that liquidation will occur should you reach a certain threshold.

Screenshot of Aave staking portal – Source: aave.com
Variable APY is always subject to volatility – Source: aave.com

It was first deployed on Ethereum in January 2020, and today Aave provides liquidity across seven networks, including Avalanche, Fantom and Polygon. In total, more than $9.78bn in liquidity is locked across all networks. 

Ethereum is by far the most-liquid market, with a total value locked (TVL) of $15.21bn, followed by Avalanche’s $5.03bn TVL and Polygon’s $1.5bn TVL.

In March 2022, Aave launched the V3 update. New features in V3 include stable APY rates, instant liquidity, exposure limits on newly listed assets, reduced gas fees and perhaps most importantly, multichain operability for certain assets.

The Aave token: An overview

The ERC20 AAVE cryptocurrency is the gateway to interacting with the Aave DAO (decentralised autonomous organisation). As a DAO, holders of the AAVE coin can collectively discuss, propose, and vote on upgrades to the protocol. Typical proposals pertain to risk-parameter changes and asset listings (the most recent of which was Terra USD on 12 March).

Screenshot of an example of an Aave DAO vote – Source: aave.com
Majority rules in the Aave DAO – Source: aave.com

Users can also stake AAVE on the Safety Module. In the event of a shortfall (a deficit on any of the supported markets), funds are drawn from the Safety Module. Stakers receive incentives in return for taking on this risk.

The AAVE cryptocurrency has a maximum supply of 16 million tokens, of which just under 13.7 million are currently in circulation. As of 8 April 2022, AAVE was trading at $189.66, with a market capitalisation of $2.59bn. AAVE is a top-50 cryptocurrency by market cap, ranking number 48 on the charts.

A recent 24-hour trading volume of $341.4m was a healthy 13% of market capitalisation. AAVE coin is supported by many major exchanges, including Currency, Coinbase, Binance, FTX and Kraken.

The token was initially distributed via a token swap of the erstwhile LEND token, which performed an initial coin offering (ICO) in 2017. Be sure to check out our Aave price prediction for the latest forecasts and price movements.

AAVE token: Distribution

The Aave Community Treasury retains 11.3% of the total supply of AAVE tokens, valued at just under $345.29m. According to Aave, the treasury “focuses on ecosystem growth and earns fees from transactions, staking, and liquidations.”

The largest AAVE coin account holder, going by EtherScan’s data, is the staking account, which consists of 17.7% of the supply.

The ten largest token holders, the majority of which are various smart contracts and exchange holdings, collectively own just under 62% of total supply.

What is Aave (AAVE) doing differently?

As a DeFi protocol, Aave is not exactly lacking in competition. Data from the market tracker DeFi Llama shows a DeFi industry with a TVL greater than $222bn, featuring big hitters such as Curve Finance (a multichain platform with a market share of 9.27%), MakerDAO and Convex Finance.

The number of DeFi protocols available to users is in the hundreds, with no fewer than 30 having a $1bn-plus TVL. Aave sits at number five in this list, above Uniswap and below Lido.

There is one metric where Aave stands out. With a market cap/TVL ratio of 0.27, Aave is one of the most actively utilised among the top protocols, significantly above any other in the top five, although a fair way below Uniswap.

Screenshot of various market activity metrics among top DeFi protocols – Source: defillama.com
Lido saw the highest rate of growth among the top protocols, with Aave coming in second – Source: defillama.com

Aave has also enjoyed strong growth where others have lagged, including a recent weekly growth of 2.62% against Curve’s -1.16% and MakerDAO’s -1.48%. Aave’s growth was also ahead of Uniswap’s 1.37% growth in the same period.

In the end, what is Aave (AAVE) offering that others are not? Maybe not a great deal, but the platform’s success could very well lie in strong user uptake, sustained support among the development community and wise governance decisions. Furthermore, if Aave can lead the way in cross-chain interoperability, the platform will be in a leading position in the times ahead.

Aave: On the horizon

In a recent interview with Currency.com, Kulechov suggested that interoperability will be a major factor in future developments. “I think for Aave, the scalable way is to figure out cross-transacting between different networks and to the Aave pools to make it capital efficient,” he said. 

A headline feature of the Aave V3 upgrade, the Portals Protocol is a key ingredient in making this happen. Kulechov said: “Every bridge can become – that is whitelisted by Aave governance – a Portal. That way you can make cross-chain transactions more seamless, and that’s the next focus point for the Aave community.”

Speaking of governance, Kulechov said he was excited to see where the decentralised community will take the project next. “Essentially [Aave V3 is] a community-developed protocol by the DAO, meaning that the Aave team can’t change the code. What’s interesting now with the Aave community is finding ways to improve the code together,” he said.

Assessing the DeFi market as a whole, Kulechov said: “Essentially, decentralised finance is the one value network where things can move very quickly and innovation can happen at quite a high rate. When you have an open ecosystem like DeFi, it means that anyone can take the Aave code, improve it a bit and redeploy it within the community… then you have innovation there.

“When you have open culture, things are moving very fast, but they become very efficient for the end users.” 

FAQs

AAVE has a maximum supply of 16 million tokens. There are currently 13,678,908 in circulation.

Aave was created by the developer Stani Kulechov, who was born in Finland but is now based in the UK.

Aave’s smart contracts have been audited by numerous security firms, including Trail of Bits, Certora and OpenZeppelin. Certik gives Aave a live security score of 90/100. In terms of your lending position, there is always a risk of liquidation, thus it is advised to manage your funds wisely.

Further reading

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