Decentralized Finance or DeFi is the next growth engine of the crypto ecosystem. We’re already witnessing most innovations in the blockchain ecosystem focusing on building the critical components required to scale DeFi operations and drive mainstream adoption.
When discussing DeFi, one coin or crypto project that cannot be overlooked is the AAVE protocol, which has established itself as a strong player in the crypto P2P lending segment. Although AAVE has underperformed in the market in the last 12 months, it’s a project worth looking at and having on the radar. Let’s explore and understand more about the AAVE protocol.
Key Coin Metrics
- Coin rank: 52nd
- Coin market capitalization (as of 11th Feb 2022): $2.8B
- Coin market dominance: 0.12%
- Coin economics: Fixed supply
- Coin total supply: 16 million AAVE
- Coin circulating supply: 13.5 million AAVE (84% of total supply)
Technical Analysis: AAVE Price Analysis
The overall trend looks weak as AAVE is witnessing a sell-off around key levels and whenever it tries to break above the 50 day EMA trendline. However, the short-term trend (20 Day EMA- red line) indicates AAVE may try to make a reversal again. In the process, if it breaks above the 50 day EMA trendline (orange), it will be a positive development.
If it breaks below the 20 day EMA line, it may go down to the $145 (₹10,935) level and recovery may take some time from there. The overall market volatility is also contributing to AAVE’s weak momentum.
A Brief About AAVE
AAVE is a decentralized finance platform that allows people to lend, borrow, and earn interest on their cryptos.
The AAVE protocol was initially launched as ETHLend in 2017 and then raised an ICO of $16.2M by offering 1 billion LEND tokens. The platform was originally designed as an order matching platform but found difficulties matching borrowers with lenders individually. Also, its token had limited use cases, resulting in a steep fall in the value of LEND tokens.
Order matching system electronically matches the borrowers and lenders. The concept was taken from the stock market.
With limited growth prospects and adverse financial conditions in 2018, the founders of ETHLend rebranded and relaunched the ETHLend platform as AAVE in 2020 and introduced many features.
It introduced an AAVE algorithmic automatic money market function feature, replacing the older order matching system. It pools liquidity from users in a smart contract from where crypto loans are issued. The interest rate is determined algorithmically depending on the type of asset pooled and the coin being borrowed. You can choose from more than ten types of crypto assets to borrow.
To borrow from the AAVE protocol, users need to deposit collateral money (in cryptos) worth more than the amount they want to borrow. Each loan issued on the AAVE platform is managed through smart contracts, eliminating the need for manual interference, thus improving efficiency and transparency.
The AAVE platform rewards those users who contribute to the liquidity pool. For this purpose, AAVE uses aTokens. These tokens are issued to lenders/depositors in a 1:1 ratio when cryptos are deposited into the liquidity pool.
It allows withdrawing the interest accrued on aTokens to any ETH public address. And, once you withdraw your cryptos from the liquidity pool, aTokens are burned permanently.
Another unique feature of the AAVE platform is the flash loan. Let’s delve deeper.
Flash loans are issued and settled within a single block time. So, adding a block to the public chain requires a certain amount of time. For instance, bitcoin has a block settlement time of 10 minutes. Similarly, AAVE has a block settlement time of 13 seconds. Therefore, the duration of flash loans on AAVE should be less than 13 seconds. And flash loans are uncollateralized.
This is how it works. The borrower requests funds through flash loans and repays the loan with 0.09% interest within 13 seconds. If the borrower doesn’t do this, the transaction is cancelled.
The purpose of flash loans is to offer short-term traders an opportunity to leverage arbitrage opportunities in the crypto market.
AAVE Coin Economics
AAVE token was launched in 2020 and was issued at a rate of 100 LEND per 1 AAVE, reducing the total supply of AAVE tokens to 16 million units. It is an ERC20 token.
Of the 16 million, 13 million AAVE tokens were redeemed by LEND holders, and the remaining 3 million AAVE tokens are held in the AAVE ecosystem as reserve tokens for protocol incentives.
AAVE token holders can participate in the platform’s governance poll and staking mechanism. The stakers on the AAVE protocol can earn in AAVE tokens as safety incentives and protocol fees.
AAVE Future Growth Potential
The AAVE platform has witnessed strong growth in recent months. The total value locked (TVL) on the AAVE platform has crossed over $25B, which is an impressive number.
With a stable platform and unique product offerings, AAVE’s P2P lending will continue to grow as the mainstream adoption in the crypto ecosystem rises.
Furthermore, AAVE has expanded its offering to a decentralized social media platform, the Lens Protocol. Built on top of the Polygon blockchain, Lens protocol provides an alternative to centralized social media platforms.
AAVE has kept NFTs at the centre of the Lens protocol, through which users can create NFT-based profiles that contain all the details and history of other content you generate.
Read here: The ultimate DeFi handbook for investors
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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