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DeFi is all the rage in the digital asset market. There is seemingly something for everyone among the crypto-savvy folk, from incredibly high-yielding (and unsustainable) new protocols to established blockchain-powered savings apps.
In our new “DeFi Unlocked” series, we will introduce you to the different ways you can make money in the booming decentralized finance market.
This time, we will look at the Aave protocol and explain how you can earn interest by lending cryptoassets using the popular DeFi lending app.
The aim of Aave - which means ghost in Finnish - is to provide an open and transparent marketplace for decentralized financial products and services.
Aave supports a wide range of Ethereum-based assets, including BAT, ETH, DAI, USDC, TUSD, USDT, BUSD, and more. Deposit APYs (annual percentage yields) ranged from 0.18% to 25.01% across all available assets, at the time of writing.
Interest is paid in aTokens, which are minted upon deposit and burned upon withdrawal. Each aToken is pegged 1:1 to the underlying asset. So, if you deposit ETH, for example, you will receive aETH as interest. Interest payments accrue on a minute-to-minute basis.
To start earning interest on your digital assets using the Aave protocol, you need to take the following steps:
Aave also has a platform-native token, called LEND, which was originally used to raise funds during the platform’s ICO in late 2017, which secured over USD 16m for the company.
Today, the primary role of LEND is to act as a governance token. LEND tokenholders can take part in the protocol’s governance process; for example, to vote on Aave Improvement Proposals (AIPs).
What’s more, 80% of borrowing fees collected by the platform are used to burn LEND tokens, which should - in theory - push up the price of the token, which is up by a staggering 11,193% in a year.
All DeFi protocols have some degree of “code risk,” which means there could be vulnerabilities or bugs that could be exploited. We have seen this many times before in the crypto markets.
The bigger risk for Aave, however, is if depositors start to withdraw their funds in one go, creating a de facto bank run on the protocol. To combat this issue, Aave has an interest rate strategy aimed at managing liquidity and optimizing utilization. Essentially, the interest rates move in line with the utilization ratio to encourage more deposits with high interest rates when more funds are needed.
Finally, tokens locked up in Aave cannot be quickly traded to capitalize on new investment opportunities. While investors who lock up tokens in DeFi protocols tend to look for yield, more than price appreciation, for active traders the time-lag to withdraw assets from Aave is a disadvantage.
With APYs that might surpass 25%, Aave offers an alternative for investors who want to earn investment income on their long-term crypto holdings.
In our new “DeFi Unlocked” series, we will introduce you to the different ways you can make money in the booming decentralized finance market.
This time, we will look at the Aave protocol and explain how you can earn interest by lending cryptoassets using the popular DeFi lending app.
What is Aave?
Aave Protocol is an open-source, non-custodial money market protocol that enables cryptoasset users to borrow and lend Ethereum-based cryptoassets.The aim of Aave - which means ghost in Finnish - is to provide an open and transparent marketplace for decentralized financial products and services.
Aave supports a wide range of Ethereum-based assets, including BAT, ETH, DAI, USDC, TUSD, USDT, BUSD, and more. Deposit APYs (annual percentage yields) ranged from 0.18% to 25.01% across all available assets, at the time of writing.
Interest is paid in aTokens, which are minted upon deposit and burned upon withdrawal. Each aToken is pegged 1:1 to the underlying asset. So, if you deposit ETH, for example, you will receive aETH as interest. Interest payments accrue on a minute-to-minute basis.
How to lend crypto on Aave
The team behind Aave has developed a seemingly intuitive, user-friendly platform.To start earning interest on your digital assets using the Aave protocol, you need to take the following steps:
- Access www.aave.com.
- Click “Enter” to access the application.
- Before you can access the Aave marketplace, you will need to connect your Ethereum wallet. You can choose between a wide range of wallets, including MetaMask, Coinbase Wallet, MyEtherWallet, Ledger, and more.
Once you have connected your wallet, you can access the Aave app dashboard. There, you will find all available assets and their prevailing borrowing and lending rates.
- Next, click on “Deposit” in the menu on the left to find all available lending opportunities or click directly on the asset you want to deposit into the protocol on your dashboard.
- Once you have chosen the asset you want to deposit, make sure you have the asset and amount ready in your Ethereum wallet. Then, hit the “Deposit” button to access the individual asset’s market.
- The next step is to choose the amount of the asset you want to deposit.
- Then, you click continue and confirm that the asset and the amount you want to deposit are correct.
- If you are happy with the conditions of the deposit, click “Submit” to approve the transaction using your Ethereum wallet.
- Finally, you click “Submit” to deposit your asset.
What about LEND?
Aave also has a platform-native token, called LEND, which was originally used to raise funds during the platform’s ICO in late 2017, which secured over USD 16m for the company.
Today, the primary role of LEND is to act as a governance token. LEND tokenholders can take part in the protocol’s governance process; for example, to vote on Aave Improvement Proposals (AIPs).
What’s more, 80% of borrowing fees collected by the platform are used to burn LEND tokens, which should - in theory - push up the price of the token, which is up by a staggering 11,193% in a year.
Disadvantages & risks
Aave is one of the most established DeFi protocols in the market and actually ranks the highest among DeFi apps by USD value locked up at the time of writing. However, that does not mean that interacting with the protocol is a risk-free affair.All DeFi protocols have some degree of “code risk,” which means there could be vulnerabilities or bugs that could be exploited. We have seen this many times before in the crypto markets.
The bigger risk for Aave, however, is if depositors start to withdraw their funds in one go, creating a de facto bank run on the protocol. To combat this issue, Aave has an interest rate strategy aimed at managing liquidity and optimizing utilization. Essentially, the interest rates move in line with the utilization ratio to encourage more deposits with high interest rates when more funds are needed.
Finally, tokens locked up in Aave cannot be quickly traded to capitalize on new investment opportunities. While investors who lock up tokens in DeFi protocols tend to look for yield, more than price appreciation, for active traders the time-lag to withdraw assets from Aave is a disadvantage.
The bottom line
Aave has emerged as one of the most popular decentralized borrowing and lending platforms in the market. Moreover, its wide range of supported assets has made it a DeFi favorite for yield-hungry crypto investors.With APYs that might surpass 25%, Aave offers an alternative for investors who want to earn investment income on their long-term crypto holdings.