Our take on Aave
The bottom line:
Aave, a DeFi lending protocol, is focused on a community-driven approach to DeFi borrowing and lending of crypto assets. This platform enables users to lend and borrow a diverse range of cryptocurrencies using both stable and variable interest rates. In addition to the typical features seen on protocols like Compound, Aave includes notable distinguishing features such as uncollateralized loans, “rate switching,” and unique collateral types.
Best for DeFi borrowing/lending
On Aave's website
Total Value Locked
Token Market Cap
According to industry experts, the worldwide blockchain technology market is expected to grow to $70 billion by 2026. That’s right around the corner, which means it’s clear that crypto is absolutely here to stay.
Speaking of blockchain technology, the way users are connecting with the technology is also changing. The rise of decentralized finance (DeFi) is simply a desire to make transactions without all of the barriers of traditional finance. Crypto is powering that future, and exchanges like Aave are striving to bring full transparency to the DeFi space.
Aave, a DeFi lending protocol that enables users to lend and borrow a diverse variety of cryptocurrencies, offers all of the typical features users want in order to maximize the returns on the tokens they lend to borrowers. In addition, Aave offers other notable features, such as uncollateralized loans, “rate switching,” Flash Loan and unique collateral types. Before you take the leap into using the Aave platform, though, here’s what you should know.
Aave pros and cons
- Unique collateral
- Flexible rates
- Many popular cryptocurrencies represented
- Runs on ETH blockchain primarily (limited)
- Can only deposit cryptocurrency
- Smart contracts add complexity
Aave has a very narrow mission, but for a good reason: it allows it to focus, give the community a set environment, and be open to changes in the greater crypto ecosystem. This is not a decentralized platform for everyone, but there are few advantages found in the Aave exchange. These include:
As a decentralized platform, Aave users retain complete custody and control over their crypto. This keeps the risks lower than it would with other types of platforms, which typically require you to give custody of your tokens to the exchange. Plus, the decentralized nature of this platform also removes the laborious Know Your Customer requirements that come with using centralized, or CeFi platforms to lend and borrow crypto.
Other lending platforms tend to lock users into fixed or variable interest rates, but Aave offers a rate-switching function that allows users to switch between two different types of rates. This allows users to get the best interest rate on their loans, by choosing between “stable” and “variable” interest rates.
Flash loans are an option
Flash loans are one of the main selling points for Aave – namely due to the fact that they require zero collateral to use. Rather than guaranteeing repayment with collateral, Flash loans rely on the timing of the loan’s repayment. As long as the loan is used and paid back in full within the same block it was issued, it is approved. On the other hand, if the loan is not paid back within the same block, the entire transaction fails.
In addition, Aave charges a low fee on flash loans – giving the platform a steady revenue stream at virtually no cost to the user.
Outside of common DeFi tokens like ETH, DAI and USDC, Aave offers the ability for users to take out borrowed positions on fee-collecting tokens. This means users can take out a loan against a position that is earning them revenue. Plus, they can do so without having to sacrifice the opportunity cost that comes with taking advantage of crypto lending and borrowing.
Fully transparent governance
Aave has taken the time to fully explain the ecosystem, tokenomics, and governance related to the platform. This open-source approach is designed to instill a higher sense of trust within the community, and it’s a solid precedent to set for other decentralized platforms. It’s also proof that Aave is focused on not just liquidity, but ensuring strong reserves.
Every exchange has its drawbacks, and Aave is certainly no exception. Here are a few disadvantages of Aave:
Dependent on the Ethereum blockchain
While the Ethereum blockchain is growing in popularity, it isn’t without its drawbacks. Ask just about anyone with moderate experience in crypto about Ethereum’s blockchain, and you’ll hear one complaint above the rest: the gas fees can be quite high. Gas is what powers the transactions on the blockchain, but in times of high demand, the gas fees can become quite high — and the Ethereum blockchain is one of the most congested. That means gas fees are generally high all day long.
Smart contracts aren’t for everyone
The Flash loan feature is awesome, but it requires working with smart contracts. While there are solutions that allow non-developers to use the Flash loan feature (essentially carrying no collateral as long as the funds are repaid within the block transaction), no solution is bug-free or guaranteed. The nature of smart contracts is such that it is wise to understand them fully before exploring these features.
Loans require overcollaterization
Simply put, overcollaterization is when you have to put up more collateral to cover the potential for the underlying asset to decrease in value — and Aave requires it. That said, Aave isn’t the only exchange that requires overcollaterization for loans. However, this is a disadvantage to take note of.
What Aave is best for
The advantages and disadvantages of Aave work together to create a decentralized exchange that isn’t for everyone. However, there are some cases where Aave really shines:
- Community-based decentralized crypto: If you’re looking for a truly decentralized platform that has a working plan for autonomy, Aave is where it’s at.
- Vote for new projects within the ecosystem: As long as you hold the AAVE token, you can vote for projects that matter.
- A desire for less verification: DeFi doesn’t rely on proving identity in terms of government-issued credentials. In other words, there are no Know Your Customer requirements to deal with like there are with centralized exchanges. The transactions are based on real-time verification of the underlying assets, making it great for people that aren’t looking to add to their online footprint.
Key features of Aave
Aave has multiple features within the exchange that make it worth exploring. Below are just a few key features to check out:
- aTokens: These are special tokens that are generated when crypto users on the exchange choose to lend out crypto. This is primarily done with AAVE, the native token of Aave, but ETH can be used as well.
- Full community governance: If you hold AAVE tokens, you can vote on the future of the exchange.
- Fully open source: The source code for Aave is on Github, where anyone can not only see the code but also offer contributions.
Cryptos lending rates on Aave
There are over 30 cryptos listed on Aave, and the APYs are widely varied for both borrowers and lenders. You can find the full list on the Aave website. Below are a few of important note:
Fees for using Aave
Every exchange has its own set of fees, and most list them clearly in the name of transparency. Aave is the same way: You know what fees are involved even before you begin trading. Thankfully, the fees associated with Aave are minimal; conducting transactions on the Ethereum blockchain means being tied to gas fees, but Aave does not apply fees on top of that.
|Minimum deposit||No minimum|
|Transfers||Gas fees only; depends on ETH network|
Alternatives to consider
Aave is a great option for people looking for a true DeFi space that allows them to borrow and lend crypto assets as they see fit, without many of the hurdles and risks well known to the CeFi platforms.
However, Aave is just one player in the greater exchange space. Here are some alternatives to think about that could be a better fit for your goals:
YouHodler: Good for fiat holders
If you’re looking for more flexibility, YouHodler has it in spades. This platform offers 90% loan to value crypto loans, over 50 different crypto coins, and easy deposit and withdrawals, which make it worth adding to your list of exchanges.
Aqru: Good for stablecoin hunters
Got a lot of stablecoins? Looking to get a good return on them? Aqru isn’t the oldest platform, but it has risen in popularity due to the high APY for lending out your stablecoins.
Coinbase: Good for absolute beginners
DeFi has its own learning curve, and it isn’t for everyone. If you’re looking for a centralized exchange instead, Coinbase is one of the most recognized and used exchanges around. It is extremely easy to use, and even comes with its own educational series to really give users a crash course in basic crypto concepts.
Is Aave right for you?
The DeFi space is growing, and exchanges like Aave represent a clear picture of why so many are embracing this way of borrowing and lending crypto assets. If you’re looking for a clear way to borrow and lend crypto without some of the hassles you may face with centralized exchanges, Aave is definitely a great option to consider.
Final thoughts on Aave
Aave is a decentralized exchange with a narrow focus for a good reason: open source, community-driven liquidity is pretty important. By making the methods transparent, Aave hopes to encourage not only discussion but a high level of developer involvement for a long time to come.
MilkRoad.com reviews cryptocurrency and Web3 products, services, and companies based on five quantifiable metrics to help crypto users understand how they compare based on similar metrics. For the best decentralized exchanges, our editorial team compared layer 2 access, the platform’s native token market cap, cryptocurrencies available to trade, and total value locked from each operator to rate the top competitors in the space.
Frequently asked questions
Is my crypto safe when using Aave?Expand to learn more
Yes, your crypto is generally safe when using Aave. While nothing is guaranteed in the world of crypto, the Aave platform is decentralized, which lets you keep custody of your tokens. Having control of your crypto through your wallet means that your coins are safer using Aave compared to having a centralized entity taking custody of your tokens.
Can you use Metamask with Aave?Expand to learn more
Yes, you can use Metamask with Aave. Because Metamask can connect to the Ethereum blockchain, you can use it to access Aave. In fact, Metamask has a browser plugin that makes it easy to use Aave (and other exchanges as well).
Does Aave require verification?Expand to learn more
Because it is completely decentralized, Aave does not require verification. You just need to connect a compatible wallet that holds ETH or another compatible cryptocurrency to get started.
Does Aave report to the IRS?Expand to learn more
No, as Aave is a decentralized exchange that doesn’t collect personal information on users. However, any profits you make trading on Aave constitute taxable income, and you must self-report to the IRS.