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What is Aave Protocol in DeFi?

BitForex Editor
Aug 31, 2020

The bliss and beauty of the cryptocurrency industry don’t only reside in the fact that it is a digital currency system that helps to reduce the stress of dealing with fiat currencies for every transaction.

Although, going digital with your transaction seems to be the best thing that can happen to the financial industry, but there are other reasons why the cryptocurrency industry is not only making waves and doing better than the fiat currency industry.

Some of these reasons include the peer-to-peer network structure, classified transactions, zero transaction fees, zero international exchange rates, and levies, and of course, its DeFi feature which is the main focus of this article.

What is the DeFi Feature of the Cryptocurrency Industry?

Known as the Decentralized Finance feature, the DeFi feature is a blockchain feature that allows bitcoin users to take loans, borrow funds, deposit funds in an account, and access other financial products without unnecessary paperwork and human middlemen.

What this means is that the DeFi feature gives everyone in the cryptocurrency world access to an unlimited number of financial products and services, just as can be found in the traditional banking system.

But what makes the difference between the financial products that are offered by DeFi and what the traditional banking system offer is that DeFi is a frictionless and non-rigid system of carrying out these financial transactions.

For instance, getting loans, transferring funds, or depositing funds with DeFi doesn’t warrant that you own a traditional bank account to get all of these done successfully.

How Does DeFi Work?

The DeFi feature is successfully carried out through the aid of decentralized apps which are famously known as Dapps. What these Dapps do is that they utilize different smart contracts to carry out the different DeFi financial transactions using an automation process.

These Dapps are the apps that the different cryptocurrency platforms use to dispense the different DeFi products such as borrowing and lending, tokenization, fund savings, yield farming, insurance, and DEXs (decent exchanges) to mention but a few.

Which Platform Does the DeFi system better?

Knowing that the cryptocurrency industry is a fast-growing industry with lots of endless possibilities for its users, it is no surprise to find that there are a lot of DeFi-themed financial brands and platforms all over the world.

While a lot of these platforms are doing well in their way, there is a financial platform that stands out in the cryptocurrency industry, that platform is known as Aave.

What is the Aave DeFi Protocol?

Launched in November 2017 by Stani Kulechov and later rebranded one year after, in August 2018, the Aave (name is gotten from the Finnish language which means “ghost”) DeFi protocol is an integral project of the Aave company.

This Aave DeFi Protocol is a non-custodial and open-source system that is designed to help users earn interest on fund deposits and also enable them to borrow assets via a transparent and open DeFi system.

What this means is that the Aave Protocol allows you to borrow and also lend out different types of cryptocurrencies via a variable and stable interest rates through their LEND token system.

Asides LEND, there are other assets available for borrowing and lending on the Aave protocol, these assets include, Ox Coin (ZRK), DAI, USDT Coin (USDT), Decentraland (MANA), USD Coin (USDC), Maker (MKR), and TrueUSD (TUSD).

The Aave protocol is designed to help both the lenders and borrowers alike. For the lenders, the Aave protocol rewards them in the sense that when they put their funds into the lending pool, they automatically get aTokens.

These aTokens guarantee lenders an interest-earning asset which gives them a pro-rata claim on the primary capital pool, and an opportunity to be able to monitor the growth rate of their interest.

For the borrowers, the Aave portfolio makes borrowing simple and easy, in the sense that it gives room for borrowers to switch between two types of loan rates (stable and variable), and select the one that suits them just fine.

This is an attribute that is not common with other lending platforms, as the latter doesn’t give their borrowers such incentive on interest rates.

Also to make borrowing convenient and easy for users, the Aave protocol has introduced the Flash Loans products (which is designed mainly for developers). Flash Loans is a loan product that enables users to borrow easily, conveniently, and swiftly without any form of collateral and with just a charge fee of 0.09%.

The absence of collateral has made the Aave Flash Loan product one of the highly sought-after loan plans by a lot of users.

Instead of providing collateral for any loan gotten via Flash Loans, the user only has to make sure that he or she pays back the loan within the same transaction block.

Once the borrower uses and repays the loan within the same transaction block, the loan transaction will be approved. But peradventure the borrower couldn’t pay back the loan within the same transaction block, that equals to a termination of the entire transaction block.

Borrowing and lending are not all there is to the Aave Protocol as they offer other services which include the Aave Pay. The Aave Pay which is currently exclusive to Europe-based users grants them access to purchase and pay for everyday items in fiat currency with cryptocurrency.

That is, they can purchase any everyday item that is priced in traditional currency straight from their cryptocurrency balance without going through the stress of exchanging cryptocurrency for fiat currency.

Another perk of the Aave Pay is that you can borrow funds via Aave, and send it through fiat currency to your traditional bank account without you having to go through the traditional fund withdrawal and depositing.

This service is also only applicable to users living in Euro currency spending countries.

Conclusion

In summary, the Aave protocol is the best thing to happen to cryptocurrency users who want to borrow money seamlessly without stress and high-interest rates attached.

In the same vein, lenders are not left behind as they also can make use of their idle funds to earn money when they are not transacting major businesses.

This and so much more are the reason why Aave is now the leading DeFi protocol (as listed by DeFi Pulse rankings in the cryptocurrency industry with over 1.4 billion dollars in cryptocurrency assets.

About BitForex:

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BitForex is programmed in a way that it can quickly adapt to the changes of the Crypto market while introducing new features like margin trading, enhanced trading charts,  derivatives, and a host of others. The headquarter of BitForex is located in Hong Kong, while there are branch offices in countries like the United States, South Korea, and Singapore.

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