Lend Coin was an Ethereum-based ERC20 cryptocurrency token launched by ETHLend, a DeFi (decentralized finance) project that sought to establish a peer-to-peer marketplace for lending and borrowing digital assets. ETHLand was founded in 2017 by Stani Kulechov who was studying Law in Helsinki at the time.
ETHLend raised around 16 million USD in its initial coin offering (ICO) during November of 2017, selling 1 billion LEND tokens to customers around the world. ETHLend founders kept 23% of the token supply for themselves and for the future of the project.
Come 2018, ETHLend announced it would migrate operations to AAVE, a London-based company founded by Stani Kulechov (CEO). AAVE, meaning ghost in Finnish, planned to offer more DeFi solutions and switch to a pool lending mechanism from ETHLend’s original peer-to-peer marketplace model.
ETHLend officially closed down operations in 2020, as all ETHLend operations now take place on AAVE platform. ETHLend’s Lend Coin has been replaced with the platform’s native AAVE tokens that provide voting rights and governance capabilities to token holders. From now on, we will refer to Lend Coin as the AAVE token.
Who Is Behind AAVE?
AAVE was founded by Stani Kulechov, who also founded ETHLend in 2017. Kulechov is a long-time entrepreneur who started coding in his teenage years. He built ETHLend as a law school student in Helsinki before Ethereum started hosting any lending applications, hoping to broaden the limits of decentralized finance available on the platform.
What Is AAVE?
In 2018 Stani Kulechov rebranded ETHLend as AAVE in order to offer more blockchain-based financial services to the cryptocurrency community. AAVE protocol Version 1 (V1) launched in the beginning of 2020, changing the company focus from decentralized peer-to-peer lending to a pool lending strategy. AAVE quickly garnered interest from the cryptocurrency community thanks to its innovative features, including its flagship lending model Flash Loans. AAVE protocol Version 2 launched in 2021 introducing more financial tools designed for a better user experience.
What Is a Decentralized Money Market?
Fundamentally, money markets are marketplaces that connect lenders and borrowers. Borrowers are required to put an asset, or a certain amount of money, as collateral, in order to take short-term loans to make an investment in one currency, such as Euros. If the borrower can’t pay their debts at the end of the lending period, the collateral is liquidated to close their debts. If they can pay the loan, the collateral is returned to them.
Borrowers pay an interest rate for the amount they borrow, generating yields for lenders. Interest rates change depending on market conditions and supply and demand. Different money markets offer different interest rates.
In the DeFi ecosystem, users can borrow and lend their digital currencies on decentralized crypto exchanges like Uniswap or money market protocols like AAVE.
What Is the Aave Protocol?
AAVE protocol is the company’s main financial product, an open-source and non-custodial money market for the Ethereum blockchain. Users who provide liquidity to the lending pools of the platform by depositing funds can earn interest on their funds. Borrowers can draw loans from the lending pools by putting up a collateral.
The loans are not matched between a lender and a borrower, and a loan can be instantly drawn from the lending pool, its conditions depending on the amount of the funds in the pool and amount being withdrawn.
What Is the AAVE Token?
AAVE protocol issues two different tokens for different purposes. The first is AAVE, the native token of the protocol that is used for governance. AAVE holders can vote on the future of the protocol and all AAVE policies. AAVE owners get discounts and better deals on the platform in general. AAVE holders can earn staking rewards if they stake their tokens to provide insurance to the protocol.
The second type of token is aTokens. These interest-bearing tokens are minted upon deposit and given to lenders to be burned once the borrowed amount is redeemed. The aTokens equal the value of the underlying asset that the depositor lends. Lenders earn interest through aTokens in real time. aTokens can be traded on the protocol as well.
There are 13 million AAVE tokens in circulation and the total supply is 16 million. You can buy AAVE tokens with fiat currency on centralized crypto exchanges like Coinbase, Kraken, Gemini.
What Are Some Important AAVE Features?
AAVE certainly introduced innovative mechanisms to decentralized money markets and DeFi apps in general. One of their most celebrated features is known as flash loans.
Flash Loans
Flash loans are loans that require no collateral and as the name suggests, they can be taken out in a flash. That is because flash loans actually benefit from a well-known blockchain feature: a group of transactions have to be added to the blockchain in a block and the network should accept the transactions before they are finalized. If the transactions are canceled before they are on the blockchain, it is as if they never happened.
Adding a new block to the Ethereum blockchain takes around 13 seconds. Aave takes advantage of this feature to issue flash loans. That means a flash loan is issued and settled in a 13-second time-period.
A borrower who wants to take out a flash loan has to return the funds and a 0.09% fee within 13 seconds. Basically, the fee needs to be paid in the same block as the original transaction. If the borrower doesn’t have the funds to pay the fee, both transactions are cancelled before the block can be added to the blockchain. A smart contract handles the entire process.
The fact that transactions can be cancelled means that both the lender and the borrower are safe from risk. A borrower can swap cryptocurrencies in an instant to make a profit from trading but will still be fine if it doesn’t work out.
Rate Switching
Thanks to rate switching borrowers can switch between floating and fixed interest rates. Price volatility makes interest switching an attractive opportunity for borrowers.
Which Cryptocurrency Tokens Are Available?
There are 19 tokens and cryptocurrencies available on Aave. These include Ethereum (ETH), DAI, USDT Coin (USDT), ChainLink (LINK), USD Coin (USDC), Binance USD (BUSD), etc. The lending platform doesn’t offer Bitcoin (BTC).
Collateral requirements differ among crypto assets on the platform due to differences in price volatility. Stablecoins provide loan-to-value ratios but collateral depends on Aave’s risk assessment of each asset.
How to Lend on Aave
In order to start lending with Aave, you need to connect your web 3.0 wallet to the AAVE marketplace. You can easily deposit the asset you wish to invest once you connect your wallet to the AAVE protocol. You receive interest bearing aToken for your deposit. aTokens match the price of the underlying asset and as you earn more interest, you receive more aTokens.
A Few Words Before You Go…
The AAVE protocol is one of the most popular DeFi products in the cryptosphere. Thanks to its innovative features, this lending pool is popular with both lenders and borrowers hoping to make profits through decentralized money markets. The AAVE token, previously Lend Coin, is a governance token for the protocol that gives owners voting rights on AAVE protocol policies, as well as several other benefits when it comes to lending and borrowing.
