Aave

Learn about the history, products, and governance mechanisms behind one of DeFi's first lending protocols!

Overview

Aave is one of the first and most well-known lending and borrowing platforms, a key building block of Decentralized Finance (DeFi). Protocols like Aave allow users to deposit assets into a “pool” of liquidity and earn interest, while enabling other users to borrow from that pool if they can supply collateral to back up the loan. 

Aave’s was one of the first DeFi protocols to figure out how to do this in a permissionless way, meaning that smart contracts, instead of human developers, facilitated the borrowing and lending process for the protocol. Aave has pioneered a high standard for secure borrowing and lending platforms in the DeFi ecosystem.

History

Aave was founded by Stani Kulechov in 2017 and launched originally as "ETHLend," with a native token called LEND. ETHLend matched lenders with borrowers at a peer-to-peer level. This approach was altered as the popularity of ETHLend grew, and the company began to pioneer a permissionless method for borrowing and lending liquidity. The protocol's parent company was renamed Aave in 2018, and LEND was eventually migrated to the AAVE token in 2020.

Initially launched on Ethereum Mainnet, Aave now supports multiple chains such as Avalanche, Fantom, Polygon, Arbitrum, and Harmony. Aave allows users to take out over-collateralized loans against deposited crypto tokens. Lenders who provide liquidity to facilitate loans receive aTokens in exchange: a method of earning passive income on deposits made to the protocol.

Products

Aave V1

In January 2020, Aave V1 was launched. The first major product launched after ETHLend rebranded as Aave, Aave V1 was a permissionless liquidity market protocol where users could lend and borrow liquidity and earn passive income (yield) on any amount of liquidity that was provided to the protocol.

The key shift in this product launch was the move from a direct peer-to-peer relationship between borrowers and lenders, to a pool-based strategy that allowed users and borrowers to deposit and withdraw from a growing pool of liquidity as needed. This enabled borrowers to receive instantaneous loans, and lenders to immediately start collecting yield on liquidity they provided. The protocol's smart contract automatically adjusted the terms of each transaction, depending on the status of the pool, like how much liquidity was available, or how many unique lenders and borrowers were participating in the protocol. The terms that shifted depending on the state of the pool were things like how much yield a lender would earn on their deposit, or how much collateral a borrower must put up to secure a loan.

The fact that all of this was facilitated automatically by a coded smart contract, rather than human intermediaries, was a huge breakthrough in DeFi's ability to offer transparent, open-source, and decentralized financial services.

Aave V2

Launched in December 2020, Aave V2 improved upon features in V1 and added several new features that gave users more flexibility to customize the terms of their deposits & loans, earn yield, and repay debt. Around the same time as the V2 launch, Aave migrated governance of the protocol from a centralized structure to a decentralized framework that allowed token holders to vote on governance proposals and serve as stewards of the protocol. 

Debt Tokenization, Variable & Stable Debt

The V2 update tokenization debt positions, meaning that any debt that users held in the Aave protocol was represented in native tokens. By representing debt in tokens, Aave was able to give users the ability to delegate their credit on the protocol to different wallet addresses, increasing flexibility of how users could manage their debt.

Debt tokenization also enabled more flexibility in the amount and types of loans users could hold. In V1, users could hold either a variable OR a stable rate loan, and the terms of any previous loans were updated to align with the most recent loan type a user took out. V2 made it so that users could hold multiple loans with a combination of variable and stable rates, offering more options for loan terms and flexibility for how users could manage their portfolios.

Flash Loans

In between the launches of V1 and V2, Aave pioneered a tool called "Flash Loans," which is a way users can borrow uncollateralized funds to make a quick swap or investment with the loan, as long as the principal amount of the loan is repaid within the same transaction block. Though developed by Aave, the original Flash Loan technology was not compatible with the Aave protocol itself. Aave V2 finessed the feature, making it so that Flash Loans could be used in combination with any other functionality of the Aave protocol.

Aave V3

In March 2022, Aave launched V3 of the protocol. This new product included several new features that improved the efficiency and flexibility of the protocol. V3 also responded in many ways to the rapid growth of DeFi and web3 to include multiple blockchains. It included new platform designs that aimed to improve UX and reliability on Layer 2 networks, gas costs for all functions were optimized and reduced by 20-25%, and risk caps were adjusted to provide additional security.

Portals

Portals facilitate cross-chain transactions, acting as a specialized in-app bridge integrated with the entire Aave ecosystem. This feature enables users to move assets between Aave V3 markets over different networks. The bridge protocols that are used to fuel Portals are voted upon by Aave governance, adding a community-vetting layer to the integration process.

High Efficiency Mode

High Efficiency Mode, or “eMode,”  gives users the option to access even more borrowing power within the same asset category, maximizing the amount users can extract from their collateral. Normal mode is still available, and is the default. The trade-off for eMode is that lower collateral requirements may make it a bit more risky for an inexperienced user.

Isolation Mode

Assets that have been newly-listed as "isolated" by Aave governance now have a debt ceiling when used as collateral. This feature is meant to limit risk exposure that sometimes comes with interacting with newly listed assets. In isolation mode, users can only borrow assets of a particular type (e.g., stablecoins, ETH/wETH) to interact with newly listed assets.

Governance

Around the same time as the launch of Aave V2, the governance of Aave was decentralized to follow a standard DAO structure. Today, Aave is governed by a community of over 106,816 token holders. To make a suggestion for a new or improved feature, governance process, or integration on Aave, token holders can submit an Aave Request for Comment (ARC) to receive initial feedback and generate discussion on the idea. The next step is to create a Snapshot vote to get a sense of how the community feels about the ARC. The Snapshot votes are gated to token holders. Finally, users submit a proposal via a GitHub pull request and the community votes on whether or not to approve it. To get started with Aave governance check out this guide.

Zapper Learn aims to provide factual, unbiased information about apps featured on our app page. However, you should always get curious and do your own research before interacting with any app. Ask yourself things like: Do I understand how the protocol works? How reliable has this protocol been historically? What is my tolerance for risk?
Networks
Governance Token
AAVE
Audits
Sigma Prime, Trail of Bits, Open Zeppelin, ABDK, and PeckShield
Official Links
Website

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