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Aave (AAVE) token review

AAVE is a utility token for the Aave protocol.

Aave is the first decentralized finance protocol on Ethereum, which allows users to lend and borrow various ERC-20 tokens (such as ETH, wBTC, SHIB, Avalanche, and many others) and stable ERC-20 tokens (such as DAI, USDC, and USDT ). Stani Kulechov launched it in November 2017 as ETHLend and later in September 2018 rebranded it as Aave, a Finnish word meaning ‘GHOST’.

The rebranding was done to emphasize the protocol’s goal of becoming an open and transparent protocol on Ethereum. The protocol introduced AAVE native coins to become more self-governed and upgraded its protocols with Aave (Launched in October 2020) and Aave V2 (Launched in December 2020) with extra added features. 

About Ethereum

Stani Kulechov created Aave to solve many inefficiencies in the financial world and give people financial autonomy, which was possible with smart contracts only. As it happens, Ethereum is the first blockchain that introduced smart contracts, allowing developers to build and deploy various dApps on its mainnet. 

Kulechov saw the potential of Ethereum’s smart contracts, well-established infrastructure, compatibility, and widely diverse and decentralized community which led to the deployment of the Aave protocol on Ethereum.

AAVE token use cases 

AAVE is the native cryptocurrency of the Aave DeFi running on the Ethereum blockchain, the token is utilized for the following usages.

1. Governance: AAVE token holders get the power to manage the funds of Aave by voting through the process, known as Aave Governance. One token equals one vote, meaning holding more tokens will give its holders more voting power.
2. Stake: AAVE token can be staked in the Aave protocol’s Safety Module to provide more security to the protocol in the Ethereum Network and earn Safety Incentives as a reward.
3. Collateral: To raise the borrowing limits on Aave, one can deposit AAVE tokens as collateral, this can even get users a discount on fees if they deposit AAVE as collateral instead of other supported tokens.
4. Flash Loan Fees: AAVE tokens are used for paying 0.09% flash loan fees for the transactions, by the borrower. 
5. Borrowing: To borrow digital assets from Aave, a collateral crypto deposit is required. Aave supports various cryptocurrencies, but borrowers of AAVE cryptocurrency don’t require any fees if they take out loans in Aave’s native token, and borrowers who use AAVE as collateral get a discount on fees. Aave also provides higher borrowing limits to those borrowers who used AAVE as collateral. 

Economic value

AAVE tokens have a total supply of 16 Million with a circulating supply of 13,885,020 AAVE. AAVE’s market value depends on its buying and selling. The protocol earns revenue through various fees it charges for the services it offers such as Flash Loans, around 80% of it is utilized in buying back AAVE and burning it to regulate and control its supply. 

To keep the lender's and liquid provider's assets safe in case of emergency, the protocol has its Safety Module. This module can be used to cover the deficit by selling deposited AAVE and preventing losses. 

Challenges

The Aave protocol runs on Ethereum, inheriting Ethereum’s transaction speed and scalability. During the high demands, the gas fees make headlines and the processing speed goes further down. Aave claims to dynamically calculate the value of assets for lending and borrowing, but digital assets are at stake here, and they are notoriously volatile, which could lead to either its value drop or skyrocket without giving any notice in advance.

Currently, Aave is using 80% of its earnings for buying AAVE back and burning it, and 20% into providing rewards for lenders and liquidity providers, leaving it essentially no capital for upgrades and research.