Aave was founded by a Finnish lawyer with an interest in RegTech. It was one of the first crypto lending platforms, launched as ETHLend in 2017.
The project was funded by a successful ICO, raising about $17 million. The initial concept was to provide a decentralised platform to match borrowers and lenders peer-to-peer.
From the start, the company has been innovative and responsive to customer demand and opportunities in the market. Having experimented with various products and features, by late 2018 they have reimagined the lending platform entirely.
A new parent company was incorporated in late 2018 under the name Aave, the Finnish word for ghost. The new platform implemented a liquidity pool system, with lending rates determined by an algorithmic function. Version 1 of the new platform went live in January 2020, and Version 2 went live in December 2020.
TECHNOLOGY
With the launch of Aave V1 in January 2020, the original ETHLend platform was shut down.
The new platform operates liquidity pools where lenders can deposit tokens and earn most of the fees and interest paid by borrowers. Lending rates vary according to demand, by token, and whether the borrowing is at a partially fixed rate or a variable rate. The parameters that determine the rates are adjusted over time as market conditions for various tokens change.
The algorithm is calibrated so that it incentivises either more borrowing (lower rates) or more lending (higher rates) to drive the utilisation of the available liquidity towards the predetermined “optimal” level.
The loans are perpetual and are over-collateralised. The prescribed loan-to-value ratios and the liquidation thresholds vary according to the tokens’ risk. When the liquidation threshold is reached and the collateral has not been increased, the loan is liquidated. Safety reserves are in place to cover liquidity shortfalls due to bad debt, if any. Aave loans and deposits are represented by tradable tokens.
Originally launched on the Ethereum protocol, Aave is now also available on Polygon, and is actively targeting a multichain approach. Expansion is currently being explored to Solana, Avalanche and layer 2 scaling solutions.
KEY PEOPLE
The founder of Aave (originally ETHLend) was a young entrepreneurial Finnish lawyer Stani Kulechov, who had an interest in exploring how digital solutions can replace legal and regulatory functions, including those related to finance.
ETHLend (later Aave) was incorporated as a for-profit company, funded initially by an ICO, later by selling tokens held in treasury to VCs, including a $25 million VC round in October 2020.
Aave holds a portion of the tokens in treasury to fund future development, and it may use some of the platform revenues in future if this is approved in a token holders’ vote.
ECOSYSTEM
After the launch of the new platform in January 2020, Aave quickly gained popularity with users. The total value locked in its liquidity pools exceeded $1 billion in August 2020, and in the following spring it rivalled, and eventually surpassed, the previously largest lending platform, Maker.
Aave has managed to stay ahead of the competition by offering their service in more tokens than any of its competitors, with generally better terms (loan-to-value, liquidation threshold, and liquidation penalties), and by being extremely innovative and nimble in launching new features and new products.
Aave is looking to address the current limitations of decentralised finance (DeFi) lending versus the traditional lending markets, such as over-collaterisation and the lack of fixed-rate products. Aave has been offering loans with partially fixed interest rates, and it offered the first uncollateralised product in the form of flash loans (for loans that are settled within one block transaction, when the funds are not returned, the entire transaction is cancelled). Flash loans have been a very popular product, and are used for arbitrage, liquidations, and facilitating cross-platform transactions.
In a further step towards uncollateralised lending, Aave has also introduced credit delegation to trusted third parties via standardised legal contracts to facilitate unsecured borrowing.
Aave is releasing an institutional version of its platform, where the liquidity pools are private and all participants have to undergo KYC and AML.
Aave has been partnering with other crypto projects, such as helping decentralised exchanges improve capital efficiency, branching into NFTs and the metaverse, and working on a decentralised social media platform.
SUPPLY MODEL/TOKENOMICS
Aave’s predecessor ETHLend issued 1.3 billion LEND tokens via an ICO in late 2017. 75% of the tokens were available in the token sale. In 2020, the LEND tokens were converted to Aave tokens at a rate of 100 to 1, resulting in 13 million Aave tokens. An additional 3 million Aave tokens were created for the project’s reserve and protocol incentives.
Aave has migrated the governance of the project from the for-profit entity to the token holders.
Aave tokens accrue value through the portion of the fees and the spread collected by the protocol, as well as the discounts and improved terms Aave token holders are entitled to when participating in the platform.
The spread and fees collected by the protocol are used to buy Aave tokens in the open market, and Aave has committed to burning tokens. Ultimately the objectives of the Aave reserves are to grow the ecosystem and increase token value. Since governance is decentralised, token holders can drive decisions over the use of reserves.
Ecosystem reserves are intended to incentivise liquidity providers, liquidators, developers, and integrators with Aave tokens.
Additionally, a portion of the reserves is used as a liquidity backstop for the lending platform. Token holders can stake Aave on the platform to provide liquidity for the safety reserves that are used to cover liquidity shortfalls in the lending pools. The safety reserves earn a staking yield in Aave tokens from the treasury reserves, and up to a maximum of 30% can be slashed in case of a shortfall. Should the safety reserves be insufficient, Aave treasury reserves would be used to cover the remaining shortfall. There has not been a need for backstopping liquidity on the platform to date.
KEY VALUE DRIVERS
As the leading DeFi lending platform, Aave’s success is tied to the growth of decentralised lending, which is, in part, fuelled by the dearth of yield in traditional markets. Solutions to offering uncollateralised loans and fixed rate products would catalyse significant further growth.
Delivering on Aave’s institutional platform, executing its multichain strategy to increase scalability and transaction speed, and reducing costs, should keep them ahead of the competition.
Lending platforms compete not just on the total liquidity they attract but also on utilisation rates, liquidity management, and collateral quality.
It is important to monitor the level of liquidations and bad debt, and how the breakdown of the platform’s revenues evolve.
As long as Aave remains the nimble, dynamic, and innovative project it has been to date, it is set to be a strong beneficiary of the trend towards decentralised finance.
KEY METRICS
Market Cap
USD 2.82 billion
Price
USD 209.26
All time high price
USD 666.86
Total issued tokens
16 million
Circulating supply
13.48 million
Liquid supply
—
2050 supply
—
Updated on 10. January 2022
Price & market capitalisation
Total transaction volume
Active addresses
Volatility
Different moving averages
RSI
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