DeFi is all the excitement in the digital asset market. There is something for everyone among the crypto-savvy folk, from incredibly high-yielding (and unsuitable) new protocols to proven and tested blockchain-powered savings apps.
In this article, we will introduce you to making money in the booming decentralized finance market.
This time, we will look at the Aave protocol and explain how you can earn interest by lending cryptoassets using the popular DeFi lending app.
What is Aave?
Aave Protocol is an open-source, non-custodial money market protocol that allows cryptoasset users to borrow and lend Ethereum-based cryptoassets.
Aave’s aim – ‘Ghost’ in Finnish – provides an open and transparent marketplace for decentralized financial products and services.
Aave supports a wide range of Ethereum-based assets, including BAT, ETH, DAI, USDC, TUSD, USDT, BUSD, etc. Deposit APYs (annual percentage yields) ranged from 0.18% to 25.01% across all available assets, at the time of writing.
Interest is paid in aTokens, which are minted upon deposit and burned upon withdrawal. Each aToken is pegged 1:1 to the underlying asset. So, if you deposit ETH, for instance, you will receive aETH as interest. Interest payments accumulate on a minute-to-minute basis.
How to Lend Crypto On Aave
The organization behind Aave has created a seemingly intuitive, user-friendly platform.
To start gaining interest on your digital assets using the Aave protocol, you need to take the following steps:
- Access www.aave.com.
2. Click “Enter” to access the application.
3. Before you can access the Aave marketplace, you will need to connect your Ethereum wallet. You can choose between a wide range of wallets, including MetaMask, Coinbase Wallet, MyEtherWallet, Ledger, and more.
Once you have synced your wallet, you can access the Aave app dashboard. From there, you will find all available assets and their prevailing borrowing and lending rates.
4. Next, click on “Deposit” in the menu on the left to find all available lending opportunities or click directly on the asset you want to deposit into the protocol on your dashboard.
5. Once you have chosen the asset you want to deposit, make sure you have the asset and amount ready in your Ethereum wallet. Then, hit the “Deposit” button to access the individual asset’s market.
6. The next step is to choose the amount of the asset you want to deposit.
7. Then, you click continue and confirm that the asset and the amount you want to deposit are correct.
8. If you are happy with the deposit conditions, click “Submit” to approve the transaction using your Ethereum wallet.
9. Finally, don’t forget to click “Submit” to deposit your asset.
And that’s it. It’s a walk in the park! You are now earning interest in your digital asset using the Aave protocol.
What’s this regarding LEND?
Aave also has a platform-native token, called LEND, which was initially used to raise funds during the platform’s ICO in late 2017, which secured over USD 16m.
Today, the primary role of LEND is to act as a governance token. LEND token hodlers can participate in the protocol’s governance process; for example, to vote on Aave Improvement Proposals (AIPs).
What’s more, 80% of borrowing fees collected by the platform are used to burn LEND tokens, which should – in theory – push up the token price, which is up by a staggering 11,193% in a year.
The Catch and the Unexpected
Aave is one of the most stabilized DeFi protocols in the market and ranks the highest among DeFi apps by USD value locked up at writing. Despite that, it does not mean that interacting with the protocol is a risk-free affair.
All DeFi protocols have some degree of “code risk,” which means vulnerabilities or bugs could be exploited. We have seen this many times before in the crypto markets.
The more substantial risk for Aave, nevertheless, is if depositors start to withdraw their funds in one go, creating a de facto bank run on the protocol. To combat this issue, Aave has an interest rate strategy aimed at maintaining liquidity and optimizing utilization. Essentially, the interest rates move in line with the utilization ratio to encourage more deposits with high-interest rates when more funds are needed.
Lastly, tokens locked up in Aave cannot be quickly traded to capitalize on new investment opportunities. While investors who lock up tokens in DeFi protocols tend to look for yield, more than price appreciation, the time-lag to withdraw assets from Aave is a struggle for active investors.
To Sum It All Up
Aave has developed as one of the most popular decentralized borrowing and lending platforms in the market. Moreover, its wide range of supported assets has made it a DeFi favorite for yield-hungry crypto investors.
With APYs that might surpass 25%, Aave offers an alternative for investors who want to earn investment income on their long-term crypto holdings.