Decentralized Finance and why it is imperative today
Decentralized Finance or DeFi is a breakthrough that has completely revolutionized the traditional and conventional methods of financial services. While the majority of users relied on traditional financial systems like banks, DeFi brought in a completely different setup that plucked the power away from such centralized authorities. The reason? Centralized Finances incurred a lot of commission and transaction fees, provided an online platform that was not secure or protected, reliance on third-parties were tremendous and other factors such as privacy, inflation or depression, and other factors made them very unreliable and quite erroneous. With the entry of DeFi and blockchain technology, a myriad of financial services such as lending and borrowing, asset management, cryptocurrency exchanges, staking, Decentralized Applications, and more functions promptly on blockchain networks like Ethereum and TRON. These DeFi protocols offer advantages that centralized bodies cannot even attempt – immutability, interoperability, transparency, programmable smart contracts, self-custody of funds, and a permissionless platform.
One of the DeFi protocols functioning on the Ethereum blockchain is Aave – a lending and borrowing protocol that has gained quite a lot of momentum in the DeFi space. As of now, over $2.33 billion worth of assets is locked in the protocol. Entrepreneurs and business owners who are looking for a profitable business venture in the DeFi space can brazenly enter by availing of our DeFi protocol development like Aave solutions.
Aave and the buzz around it – Decoded
The term Aave comes from the Finnish word which means ‘Ghost’ – referring to the transparent nature of the protocol. It is an open-source, non-custodial protocol that allows users two predominant functions, lending, and borrowing for which they can earn both stable and fixed interests in the form of aTokens. Apart from this, users can also have access to flash loans through the protocol. Aave also has a governance token – LEND and supports over 20 cryptocurrencies. Now, the developers of the Aave protocol have released a second version of the protocol with added advantages such as trading of deposited assets, an upgraded version of flash loans, and flash liquidity to name a few. Blockchain App Factory’s Aave like protocol will uphold all the inner workings of the P2P platform and offer your users a robust platform for permissionless lending and borrowing experience.
How does Lending and Borrowing work in the DeFi protocol like Aave?
Users who wish to deposit or lend to the protocol may do so by depositing assets in the liquidity pools for which they can earn interest. This interest is not stable since it depends on the current market conditions. The borrowing rate and utilization rate are also factors that determine the amount of interest earned. For the number of assets lent, the users will be provided with the respective amount of aTokens with which they will receive continuous earning passively. There is no limit to the amount that can be deposited, meaning users can deposit as high or as low as they see fit. The lenders can also withdraw the amount they’ve deposited anytime they wish and walk away with the interest earned.
Borrowing on the other hand will first require the borrower to deposit collateral. This collateral amount must be higher than the number of assets being borrowed. Only then can the borrower make use of the liquidity pools and borrow in an overcollateralized or undercollateralized manner. The amount that can be borrowed depends on certain factors – the amount of liquidity available and the value deposited. The repayment of the loan will have to be with the same asset that was borrowed. Say a user borrows 1 ETH, he’ll have to pay back 1 ETH + interest. This interest rate depends on the supply and demand ratio of the borrowed asset. With the updated version of Aave, users can pay back loans using deposited collaterals. In the event of failure to pay back the loan or when the collateral value drops below the value of the borrowed assets, liquidation is initiated whereby the liquidators are rewarded.
Flash Loans – Aave’s renowned functionality
A popular feature of the Aave protocol, it allows users to take out any amount of assets as emergency loans without handing in any collateral. A smart contract will be built which will request the flash loan. Once the borrower receives it, they will have to pay back the loaned out amount with interest and fees within the same Ethereum transaction. If this condition is not met, the loan and all transactions made within are considered void.
Aave Token – LEND
Formerly known as ETHLend, the LEND token is now set to be swapped for AAVE – an ERC-20 token native to the Aave protocol. AAVE gives its holders a slew of benefits –
- They do not get charged for taking out loans.
- AAVE borrowers get a discount fee on collateral.
- Borrowers who deposit AAVE as collateral can borrow an extra amount if need be.
- Token holders also possess voting rights on governance issues.
- Ability to take out flash loans
- Interest rate switching
- A wide range of DeFi collateral types – DAI, ETH, BAT, LINK, MANA, MKR, SNX, USDT, USDC, TUSD, USDT, sUSD, BUSD, KNC, LINK,wBTC, ZRX, and LEND.
- Use of deposited collaterals to pay back loans
- Highly secure platform for lending and borrowing
- Immediate settlement of transactions
- A very reasonable source of investment for lenders
The DeFi market has never been in the prime of its popularity as it is now. And protocols like Aave and Compound are drawing in users and investors. This is the time to launch a proficient protocol like Aave using our DeFi protocol development solutions. At BAF, we have gathered a team of adept and expert blockchain techs and developers who strive to produce services that meet international standards. Our white-label and scalable solutions, followed by our round the clock support system will ensure your project sees success.
