Aave is a unique and revolutionary decentralized finance protocol. It uses the power of the blockchain to allow users to borrow and lend cryptocurrency. It has many applications and can be used in a variety of scenarios.
- What is Aave?
- Brief History of Aave
- How Aave Staking Works
- See All 7 Items
What is Aave?
Aave is a dApp (decentralized application) that runs on the Ethereum network. It relies on users across the network to allow for the borrowing and lending of cryptocurrency. Aave offers a wide variety of cryptocurrencies that can be borrowed or lent. The platform presents a unique opportunity to integrate borrowing and lending into the crypto sphere.
Brief History of Aave
Originally named Ethlend, Aave was launched in November 2017 by Stani Kulechov. Kulechov created the protocol to allow for peer-to-peer lending on the blockchain. In 2020, it rebranded to Aave when they switched to a liquidity model. Instead of lending directly to others, funds are placed into a pool that users can borrow from.
How Aave Staking Works
Similar to a loan from a bank, there is interest involved when crypto is borrowed or lent. For instance, a bank lends someone money and expects all of the money back and a little more. They also require collateral in exchange for the loan. For instance, a loan for a house holds the house as collateral. This is very similar to how Aave staking works. Users place their investments into a liquidity pool, which is just a collection of funds used for lending and borrowing. The money in the pool can be used by others, but there are fees involved. These fees are determined by the supply and demand of the underlying asset.
There are 2 types of fees: stable and variable. As the name suggests, stable interest rates do not move much and are for short-term loans. Variable is for the long-term and moves with the supply and demand of the underlying asset. The borrowing rates of most assets can be found on Aave’s website.
Aave on Polygon
Polygon is an Etheruem smart contract that connects Ethereum-compatible blockchain networks. This is very useful for staking Aave, as it can connect Aave to many other coins and protocols on the Ethereum network. Aave uses Polygon to send funds from its liquidity pool to other wallets across the blockchain. It is also very good for users with small amounts of capital, as virtually any amount of money can be staked. Polygon is also more efficient than the Ethereum network. It has much cheaper gas fees, allowing for lower barrier of entry.
How to Use Aave
Aave is a wonderful tool that allows your digital assets to earn passive income for you. Though it seems daunting, anyone can use it, and it is fairly simple.
- Buy Ethereum from a crypto exchange.
The first step in using Polygon to stake Aave is buying Etereum from a crypto exchange. Since Polygon is based around the Ethereum network, buying Ethereum is the easiest way to send funds using Polygon. While there are many exchanges to buy Ethereum, there are a few that stand out due to low fees, simple interface and speed of transactions.
Coinbase.com provides a very simple and easy approach to investing in cryptocurrency. It is also very easy to send cryptocurrency across the blockchain, which will be important later on. Some other options for exchanges are Gemini.com and Crypto.com. After you create an account on an exchange, you can link your bank account and send funds to your account. Then, you use the funds to purchase the Ethereum.
- Send ETH to your Ethereum wallet.
The next step in staking Aave is to send your Ethereum to a wallet. A wallet differs from an exchange in that it is a place to store cryptocurrency, while an exchange allows for the buying and selling of cryptocurrencies.
A great choice for an Ethereum wallet is MetaMask. MetaMask is a wallet that allows you to store, send and buy cryptocurrencies. You can also use hardware wallets, like Ledger. When you open a MetaMask account, you will be assigned a wallet address (usually a long string of numbers and letters.) This will be the address you will send your Ethereum to. On your exchange, navigate to your Ethereum position. From there, you should see an option to send your ETH. Click on this and enter the address from your wallet. Hit Send, and your ETH should be in your wallet.
- Connect your wallet to Aave.
After the funds are in your MetaMask or other wallet, you must connect your wallet to the Aave protocol. To do this, you can simply visit Aave’s website. In the top right, there is an option to connect a wallet. Click this and select the wallet from the list Aave supports. You will then have to enter the address of the wallet into the Aave app. After you’re connected, you are almost ready to begin staking your Aave and earning interest!
- Start earning interest.
Once your wallet is connected to the Aave protocol, you can place your funds into the Aave liquidity pool. To do this, click the “Staking” option on the left side of the screen. You can then select the amount you would like to stake. From there, you can begin earning interest. As of September 2021, 400 Aave tokens are given as rewards per day. These are given to stakers based on the number of investors and individual contributions to the liquidity pool. If you wish to unstake your Aave, you can simply select the option from the same screen used to stake.
Current Cryptocurrency Market Prices
September 2021 has shown a great deal of volatility in the cryptocurrency world. Currencies such as Ethereum and Cardano have approached all-time highs but also saw drops of over 30%. Aave is down 20% on the month at the time of writing but is still up 54,000% on the year. Prices are changing every day, and nobody knows where prices will go.
Is Using Aave Worth It?
While U.S. bond interest rates hover between 1% to 2%, Aave interest rates can easily surpass 15%. This provides a much higher return on investment than more conventional lending techniques. It is also easy to use and readily available, as well as a great option to receive steady returns from an otherwise volatile market.
After a cryptocurrency is staked, it cannot be traded until it is unstaked — you cannot sell your Aave when it is staked. This could be problematic if a dramatic drop in price occurs. Also, the safety module — a protocol to protect from a short fall event — can use up to 30% of funds in the liquidity pool to cover deficits, meaning your investment isn’t completely risk free. While Aave has both pros and cons, it could be a great way to earn interest.
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About Caden Pok
Caden has been involved with crypto since 2018, when he began investing, trading, and mining tokens. He took part in undergraduate research studying cryptoeconomics at the University of Michigan, where he will graduate Phi Beta Kappa with a bachelor’s in economics in 2025. He is experienced with DeFi technology and multiple blockchains, currently investing in Ethereum and Bitcoin.