Aave

Aave is a decentralized money market protocol that lets users lend and borrow cryptocurrency without a bank or broker in the middle. Depositors supply assets into shared liquidity pools and earn interest from borrowers, while borrowers post crypto collateral to take out loans against it. The protocol supports a wide range of assets and runs on Ethereum alongside deployments across several other networks.

The project began life in 2017 as ETHLend, a peer-to-peer lending experiment, and was rebuilt in 2020 as Aave with a pooled liquidity model. That redesign replaced individual loan matching with algorithmic interest rates set by pool utilization, which made borrowing and lending far more liquid.

How the protocol works

Loans on Aave are overcollateralized: a borrower must deposit more value than they draw out. Each asset carries a loan-to-value ratio and a liquidation threshold, and if collateral falls below that threshold, liquidators can repay part of the debt and claim a share of the collateral. Interest rates float with supply and demand in each pool. Aave also popularized flash loans, uncollateralized loans that must be borrowed and repaid inside a single transaction, which are used mainly for arbitrage and collateral swaps.

Role of the AAVE token

AAVE is the governance token of the protocol. Holders can propose and vote on changes such as adding new collateral assets, adjusting risk parameters, or directing treasury funds. AAVE can also be staked into a Safety Module, a pool that acts as a backstop against shortfall events in exchange for staking rewards. The token has a fixed maximum supply of 16 million.

Aave sits among the largest lending venues in decentralized finance and is widely used as base infrastructure by other protocols. The Aave DAO has also launched GHO, a stablecoin minted against collateral supplied to the protocol, extending Aave from a lending market toward a broader credit system.