Aave is one of the most popular decentralized finance (DeFi) protocols that lets people lend and borrow cryptocurrency without the need for a centralized intermediary like a bank or exchange. It has been developed on top of the Ethereum blockchain. Users earn interest when they lend and pay interest when they borrow. Lenders earn interest by depositing funds into the Aave’s pools. Aave has pools for more than 20 Ethereum-based assets, including the stablecoins such as Tether, DAI and USD Coin.
How liquidity pools work
In the past if you wanted to borrow an asset, you’d have to find someone on the platform to lend it to you at the agreed price and terms. Aave changed the whole process of peer-to-peer lending to pool-to-peer lending. Users can deposit their digital assets into liquidity pools and that funds can then lend out. Borrowers also pay interest rates which vary depending on what they’re borrowing. Users who deposit, will start earning interest. The interest rate is variable and will fluctuate based on borrowers’ demand for the crypto assets. If there is low demand, the rate declines, and if there is a high demand, then it increases.
Aave Security
Aave stores funds on a non-custodial smart contract on the Ethereum blockchain. As a result, users keep full control of their wallets. As the safety module acts as a kind of decentralized insurance fund to ensure the protocol against any shortfall events, Aave governance token holders can stake their tokens in these modules.