Aave is a DeFi lending platform based on the concept of Lending Pool. Users can deposit into the pool Assets, or lending assets from the pool, without one-to-one correspondence between borrowers and lenders. In addition to basic lending products, the platform also supports flash loans (unsecured loans) and fixed and floating interest rate conversions and other types of transactions. Users can provide liquidity, pledge, borrow, and participate in governance on the Aave platform.

When Aave launched in November 2017, it was originally called ETHLend. It was renamed Aave in September 2018. The original ETHLend became a subsidiary of Aave, and the lending model of the Aave platform also changed from peer-to-peer to pool-to-peer. .

What is a lending pool? How is the lending rate determined?

The core of the lending service on the Aave platform is the lending pool. Users who want to earn income by lending liquidity by depositing do not need to find a counterparty for the transaction. They only need to deposit the crypto assets used for lending into the corresponding fund pool on the Aave platform. There can be different types of tokens in each pool, and the total value of all assets in the pool is the total liquidity of the lending pool.

The user who deposits is the liquidity provider (LP, liquidity provider) of the lending pool. When depositing, the user obtains the corresponding interest-bearing token aToken as a deposit certificate. aToken can also be used as collateral for loans.

aToken is minted when deposited and burned when redeemed. It is linked 1:1 to the value of the deposited asset. aToken provides holders with discounted fees on the platform, and it also serves as a governance token, giving owners a say in the future development of the protocol.

Asset lending can choose fixed interest rate or floating interest rate. The floating interest rate depends on the utilization rate (Utilization Rate) of the funds in the corresponding pool. If the assets in the pool are almost completely put into use, the interest rate will be raised to attract liquidity providers to inject more funds and at the same time promote repayment, thus easing the balance of supply and demand; conversely, if the assets in the pool experience a serious oversupply At this time, the interest rate of loans will also be maintained at a low level, which in turn will attract users to make loans to improve the efficiency of assets. Every time the assets in the lending pool change, the smart contract will update the floating interest rate of the lending pool.

All loans in the lending pool are over-collateralized (except flash loans). This means that users need to pre-deposit assets worth more than the target loan amount as collateral. Insolvent users will face liquidation.

What is Health factor? How does Aave liquidate?

On the Aave platform, an important indicator that usually determines whether a user is facing liquidation is the health factor, which is the ratio of the value of the loaned assets to the value of the mortgaged assets. Its formula It is: Hf = (∑Collateral × liquidation threshold) ÷ total lent assets. The value in the formula is uniformly calculated in the form of ETH.

It can be seen that the health factor is directly proportional to the total value of mortgage assets and inversely proportional to the total loan amount. The greater the mortgage value, the greater the health factor, the stronger the borrower's solvency, and the healthier the loan. When the health factor is less than 1, it means that the value of the mortgage assets cannot fully cover the total loan amount, the platform will face the risk of bad debts, and the user will enter the liquidation process.

In actual execution, since the smart contract of the Aave protocol itself cannot automatically complete the liquidation operation, Therefore, the liquidation process on the platform needs to be completed with the help of a third party. The third party needs to call Aave's liquidation smart contract to obtain information about the account that should be liquidated and perform liquidation operations.

The account being liquidated will need to pay an additional fee to the third party, also called a liquidation penalty. This reward mechanism is to encourage more people to participate in platform liquidation and improve the platform's capital efficiency.

In the V2 version launched by Aave in December 2020, the platform has added some new lending services, including collateral swap through flash loans and batch flash loans. -loan), debt tokenization (Debt tokenization), etc. In March 2022, Aave was updated to the V3 version, which highlights providing multi-chain liquidity, allowing users to conduct cross-chain lending.

Although Aave is a decentralized lending market with many bright spots, the number of lending assets it supports is still limited - because usually only low-risk and highly liquid assets can pass the listing vote of the governance mechanism.

What should users do if they have borrowing needs for other high-risk assets? Please refer to the entry: What is Euler Finance?