Our Take On Aave
THE BOTTOM LINE:
Aave offers a proven platform for crypto holders to lend or borrow tokens. Version 3 brings support for additional Ethereum-compatible blockchains, allowing lower costs and faster executions. I found Aave easy to use – but not always intuitive, although answers were often found in the documentation. Overall, Aave provides a well-polished DeFi solution if you need to borrow or put your crypto to work earning a yield.
- No identity verification requirements
- Swap to another token or withdraw on demand
- Compatible with MetaMask and Coinbase Wallet
- Easy-to-use interface
- Collateral may be liquidated without warning
- Limited token choices on some networks
- Staking only profitable at scale
- Limited transaction reporting
What Is Aave?
Aave is a decentralized crypto lending platform that supports ERC-20 tokens such as ETH, MATIC, WBTC, and others. Decentralized lenders don’t require identity verification. They also don’t come with consumer protections you’d expect from traditional lenders.
Version 2 of Aave is still active and supports the Ethereum network as well as Polygon and Avalanche. Aave Version 3 now supports Ethereum but expands the list of Ethereum-compatible networks to include Arbitrum, Optimism, and more. Version 3 is the default and brings enhanced risk management as well as a broader range of networks and tokens.
Aave’s platform is non-custodial, meaning you control transactions from your own crypto wallet. However, when supplying on Aave, you deposit your tokens into a smart contract which can liquidate your (collateral) tokens if needed to repay a loan.
While you don’t have complete control over your tokens, you can withdraw at any time (if your tokens aren’t used as collateral for a loan).
Expert Review: Aave In Action
I took Aave for a spin, testing its features, pushing and prodding to see what breaks. Nothing broke, although some of Aave’s features (flash loans) may remain out of reach for traders without coding chops.
Wallet Connection And Supported Networks
Aave V3 supported networks:
I connected Aave to MetaMask to explore, choosing the fast and affordable Polygon network to perform transactions.
Aave supports 20 crypto assets for deposit on Polygon, but other networks offer fewer choices. For example, I could only choose from nine types of crypto to deposit on Arbitrum.
If needed, you can buy tokens through a third party on Aave. I was offered Transak in my region. Transak didn’t support all tokens on Aave, however.
Here are the purchase fees for WETH (wrapped Ethereum):
|Purchase Amount||Base Fees||Card Fees|
|$100||2.75% Zelle, Cash App, Venmo||3.99% Visa, Apple Pay, Google Pay|
|$500||1.5% Zelle, Cash App, Venmo||3.99% Visa, Apple Pay, Google Pay|
|$1000||0.95% Zelle, Cash App, Venmo||3.99% Visa, Apple Pay, Google Pay|
To fund my account, I chose MATIC I bought on Coinbase. A click on the “supply” button let me choose an amount of MATIC to deposit and then whisked me away to an approval page in MetaMask.
Deposit values are shown in token quantities and USD market values. Aave uses an oracle, a link to the outside world, to get up-to-date pricing from exchanges. A fallback in the code sources token prices from Uniswap.
Every token you can supply on Aave pays a yield (except for the Aave token itself).
Most yields range from under 1% to 2.5%. The MATIC token I initially deposited paid 1.47% APY (annual percentage yield). A sortable list of supported tokens made it easy for me to choose a token with a higher yield.
Aave’s protocol sets rates by supply and demand. Supplied tokens go into a pool. As borrowers access a larger percentage of the pool, borrowing APYs increase. This increase in rates benefits suppliers for that token. Only a portion of your supplied tokens will be borrowed, however, so you’ll see a gap between the Borrow APY and the APY yield you earn.
CRV and SUSHI tokens were in high demand at the time, so I swapped MATIC to CRV and SUSHI. CRV was paying over 50% APY.
In the background, Aave replaces your tokens with an Aave-specific equivalent token, such as aWMATIC (Aave wrapped MATIC) or aCRV (Aave CRV). When swapping, Aave offered to add the new tokens to my MetaMask wallet.
When supplying (lending), your token balance increases to reflect your earnings while the per-token price updates in real time.
I wasn’t able to find a report to view earnings, however. A visit to the Discord channel suggested that many investors track the starting and ending token quantities on a spreadsheet. Take notes when you start a position.
The tokens you supply on Aave become collateral for borrowing if you take a loan. Most assets can be used as collateral, but some are restricted, including Tether (USDT).
When borrowing, I could choose from stable APY rates (which can still fluctuate) or variable APY rates (which can vary considerably). When a small percentage of the pool is borrowed, variable rates are lower than stable rates. But when the utilization rate exceeds the optimal level, rates can spike, as seen in the example below for CRV.
A low-interest rate might not stay low, and variable borrower rates of up to 100 APY% or more are possible.
Collateral requirements for Aave loans depend on the collateral you supply. For example, when I supply DAI, the DAI position will be liquidated when the debt value equals 80% of the collateral value. However, when I supply SUSHI as collateral, liquidation takes place when the debt value reaches just 45% of the collateral value.
Using volatile assets as collateral is riskier because your collateral may be liquidated due to changes in market price, which then results in a liquidation penalty of 5% to 10%.
Loan-to-value (LTV) limits also differ from token to token. The Max LTV for DAI is 75%, whereas the Max LTV is only 20% for SUSHI.
I borrowed DAI, and Aave gave me the option of a stable rate or variable rate. You can change this selection throughout the course of the loan. The new loan appeared at the top of the dashboard, along with an update to my “health factor.”
Aave assigns a health factor to accounts with loan balances based on the LTV and liquidation risk.
My “net worth” also decreased by the amount of the loan.
Loan repayments are intuitive, and Aave gave me the option of paying my loan with the borrowed asset or with collateral.
You can repay in full or in part, or not at all. Interest on the loan accrues according to the utilization rate for the token you borrow. There’s no fixed repayment schedule, but interest will chew away at your LTV until you repay or the collateral is liquidated.
If I had to choose my least favorite part of Aave, it’s staking.
By staking the Aave token, you can earn a variable yield based on how much Aave is staked. But you have to stake on the Ethereum network. The Ethereum blockchain bases fees on the complexity of the transaction. Aave’s staking smart contract is complex, resulting in higher gas fees and making Aave staking a pricey proposition if you aren’t staking large amounts.
Staking in Aave’s “Safety Module” helps cover deficits if the market moves too fast to liquidate collateral for positions. Staked amounts can be slashed by up to 30% if needed to cover shortfall events.
Staking on Aave acts like a type of insurance. The stakers become insurers and make money – until there’s a loss. Staked amounts can be slashed to cover shortfalls on Aave.
There’s also a 10-day cooldown period, after which you have 48 hours to unstake before you have to start the process again.
Aave was first to market with flash loans, which are loans in which the borrowing, transactions, and repayment all take place during one block (about 12 seconds on average).In theory, I could borrow millions of dollars if the Ethereum network calculates that I could repay the loan within the same block, including fees. One common use for these loans is for arbitrage on decentralized exchanges. Most flash loans are written in code (Solidity) and executed by calls to Aave within the code.
There’s no GUI interface on Aave to take a flash loan. However, platforms like Furucombo offer a GUI to build a flash loan. I fiddled with Furucombo’s block-builder app but couldn’t find any arbitrage opportunities to make me rich (and still repay the loan). I guess I still have to work tomorrow.
Aave’s swaps are powered by ParaSwap, a decentralized exchange (DEX) aggregator that finds the best exchange rates from several DEXs. A preview panel for each swap allowed me to adjust the quantity and slippage (price range). The estimated fees for the swap matched the cost in my MetaMask wallet closely.
Swaps are limited to the assets supported by Aave on the blockchain you choose. Expect a narrow selection.
After a long day of chasing unsustainable yields, I wanted to withdraw my new-found riches. The process was simple. When withdrawing CRV, Aave automatically converted aCRV to CRV, depositing the CRV tokens into my MetaMask wallet.
But it may make sense to swap your high-yield tokens for tokens you want to hold before you withdraw, especially if you wandered into the weird-token weeds like I did.
Aave Vs. Centralized Lenders
Aave is similar to centralized crypto lenders in that you still have to deposit your tokens. Instead of depositing into a custodial wallet like you would with a centralized lender, you put tokens into a smart contract.
Both approaches bring risks.
- Centralized lenders might gamble your money away on risky bets.
- Decentralized protocols may have bugs, get hacked, or just disappear (rug pull).
But Aave is easier to use, doesn’t require ID, and brings more transparency. The source code is available for scrutiny; you can peek under the hood to see the mechanics.
By contrast, centralized lenders require a leap of faith. In 2022, centralized crypto lending titans Celsius and BlockFi both filed for Chapter 11 bankruptcy, locking user deposits indefinitely.
In addition to extensive documentation, Aave offers three ways to get support:
Chat and email are both available from Aave.com and aren’t visible when you’re in the Aave app. I reached out by email using the contact link to ask a question about the wide chasm between the supply APY and the borrow APY.
I received a friendly response within two hours, explaining that the large gap in APYs was due to the percentage of the pool that was borrowed (less than 100%) as well as a 10% reserve factor.
The reserve factor is used to promote Aave’s growth.
Aave Notable Features
|Supply (lending)||When supplying tokens to Aave, your tokens go into a pool that earns interest as others borrow from the pool.|
|Borrowing||Taking a loan couldn’t be easier, but Aave uses overcollateralized loans. If the market swoons, your collateral may be liquidated.|
|Flash Loans||With flash loans, you can borrow millions, but you’ll have to pay the loan back in the same block.|
|Staking||Aave lets you stake the AAVE Token or Aave Balancer Pool Token (ABPT) to earn a yield of up to 14% (ABPT).|
|Swaps||Easily swap your tokens if you find a better yield opportunity on Aave.|
Unless you’re borrowing, most fees on Aave are network fees. You’ll pay a network fee to supply or to swap tokens, the latter of which may come with swap fees as well (paid to other protocols). On the Polygon network, these fees are low. On the Ethereum network (Aave V2 and staking), gas fees can prevent smaller positions from achieving a profit.
|Staking||Network fees (smart contract)|
|Supply Tokens||Network fees only|
|Borrow Tokens||1% up to 100% or higher plus network fees|
|Swap Tokens||DEX fees, typically under 0.3%, plus network fees|
|Buy Tokens||Up to 3.99% plus spread|
|Flash Loans||0.09% one-time fee plus network fees|
To Sum It Up
Aave Version 3 offers a powerful way to lend or borrow, but the protocol’s liquidation process asks that you borrow responsibly. With a liquidation penalty of up to 10%, more than the loan balance is at risk. On the supply side, you’ll find a wide assortment of tokens paying varied yields, with the ability to swap to another token in a few clicks.
Frequently Asked Questions
Aave is a decentralized finance (DeFi) protocol. Decisions on the future of the platform are determined by the community. Holders of the AAVE token can participate in governance by voting.
The AAVE token is a governance token that enables token holders to vote on changes to the protocol. Token holders can also stake the AAVE token to earn a yield. Staking acts as a type of insurance for shortfall events.
Yes. Bugs or hacks are risks with any DeFi protocol. There’s also a risk in borrowing. Market price changes for your collateral can lead to unexpected liquidations. On Aave, a liquidation also comes with a penalty of 5% to 10%