Overview of the Aave open-source liquidity protocol.
As a decentralized non-custodial liquidity protocol, Aave enables users to participate as depositors or borrowers by interacting with smart contracts. In other words, Aave is a peer-to-smart-contract lending ecosystem.
As depositors, users provide liquidity by lending their assets (tokens) to the market. And borrowers can borrow assets as long as they are over-collateralized on their loan.
Key features of Aave include
- Over-collateralized borrowing of assets
- Debt represented by Aave-specific versions of assets i.e. "aTokens", these tokens are also interest bearing
- A variable and stable interest rate
- Under-collateralized flash loans, which allows borrowing large amounts of assets, but the loans must be repaid in a single block
What is over-collateralized borrowing?
In Aave, users are expected to deposit assets into the protocol to use as collateral when they plan on borrowing assets. For a borrower, the value of the collateral provided must be higher than the value of the assets borrowed, otherwise the borrower risks liquidation of their collateral. Liquidation ensures that the depositors of the loaned (borrowed) assets are safely repaid.
Aave Token and Governance
Holders of the Aave token can participate in the governance of the protocol by voting on new proposals, new assets and upgrades to the protocol.
Separately, the Aave token can also be staked within the protocol itself to keep the protocol and depositors solvent. For providing this insurance by staking, Aave stakers earn rewards and fees from the protocol.