I wrote a post not too long ago about why you should never sell your Bitcoin. One of the points I made is that you can easily borrow against it with a lending and borrowing platform.
Today, I want to talk about the most well-known platform in all of crypto. AAVE has been battle-tested repeatedly, and it is one of the safest protocols in the space.
Here is all of the information you need to know about borrowing against your assets. Let’s get started.
Table of contents
What is Aave?
Aave is a decentralized lending platform that allows users to borrow and lend digital assets safely and securely. The platform uses a unique lending model that allows users to get loans with lower interest rates than traditional lending platforms. Aave also enables users to earn interest on their digital assets by lending them out to other users.
The platform is powered by the Ethereum blockchain and is fully decentralized, meaning that it is not controlled by any central authority. This makes it an ideal platform for both borrowers and lenders, as there are no middlemen or third parties involved in the process.
Aave is a trustless platform, which means that users can be sure that their loans will be repaid and that their digital assets are safe.
The platform is also highly transparent, as all transactions are visible on the Ethereum blockchain. Overall, Aave is a powerful and convenient decentralized lending platform that offers borrowers and lenders a great way to manage their digital assets.
How Does the Aave Protocol Work?
When users collateralize their assets, they are essentially creating a security deposit that can be used to borrow funds from the platform. The Aave protocol uses a system of collateralized debt positions (CDPs) to collateralize user assets and track loan balances.
CDPs are smart contracts that hold user collateral and debt positions on the blockchain. When users want to borrow money, they create a CDP and deposit their collateral into it. The Aave protocol then mints new tokens and lends them to the user. The user can then use these tokens to purchase other assets or pay back their loan.
If the collateral value decreases, the Aave protocol will automatically liquidate the CDP and sell the collateral to repay the loan. This system allows users to collateralize their assets and borrow against them without worrying about the risk of default.
Why You Should Use AAVE
Aave is a decentralized platform that enables you to earn interest on your deposits and borrow cryptocurrencies with confidence. Aave offers a comprehensive protocols suite that allows users to interact with lending markets in a simple, efficient, and compliant manner.
In addition, Aave is one of the most trusted lending platforms in the space, with a solid track record of security and compliance. As such, it is an ideal way to access the services of a traditional financial institution without having to go through a centralized third party.
How to Use AAVE
After going to the website and launching the dApp, you’ll be prompted to connect your wallet. Find the asset you want to supply as collateral. I recommend clicking on the Details button to read up on information, especially if you’ve never borrowed crypto before.
The screen will probably look like this:
I want to discuss what the percentages mean under the phrase Collateral usage. You should see three different boxes with different percentages in them: Max LTV, Liquidation threshold, and Liquidation penalty.
The max LTV is the maximum amount you can borrow against your crypto. So if you own 1 Bitcoin, you can borrow .7 Bitcoin or the equivalent in another asset.
Liquidation threshold is the point where Aave can liquidate your collateral. What this means is that if Bitcoin crashes in price and your debt is now worth 70% of your collateral, you can be subject to liquidation.
The Liquidation penalty percentage is how much the protocol charges you in the event a liquidation occurs. Many people think that if they’re liquidated, they will lose everything. This is not the case. The following quote is directly from Aave’s docs. I highly recommend you read the entire thing before opening a leveraged position:
“In a liquidation, up to 50% of a borrower's debt is repaid and that value + liquidation fee is taken from the collateral available, so after a liquidation that amount liquidated from your debt is repaid.”
Depositing Funds
Once you’ve done all of your research and understand the risks, it’s time to borrow some crypto. To get started, click on the Supply button. Enter the amount you would like to supply as collateral and click OK.
Make sure you can use that particular token as collateral. Aave doesn’t allow every token to be collateralized. Next, go to the Dashboard, and you’ll be met with some helpful figures and graph information.
This screen is where you can keep an eye on your health factor. Any health factor that drops below 1 is subject to liquidation. To avoid this, you’ll need to either pay off some of your loan or add more of the tokens you collateralized to get your health factor back into a comfortable position.
Borrowing and Repaying a Loan
To borrow against your Bitcoin that you deposited, click on Borrow and follow the simple instructions. The protocol provides a sliding graph to give you an idea of how safe your position will be.
You don’t have to borrow Bitcoin just because that’s the token you supplied. You can borrow any asset available on the protocol, such as stablecoins, ETH, BTC, or the native token of whatever chain you’re on through Aave.
Once your borrow funds, a Repay button will show up on your dashboard. From Aave’s docs:
“You repay your loan in the same asset you borrowed. For example, if you borrow 1 ETH you will pay back 1 ETH + interest accrued. You can also use your collateral to repay in the new version 2 of Aave Protocol. If you want to pay back the loan based on USD price you can borrow any of the available stable coins as USDC, DAI, USDT, etc.”
Let’s give you an idea of how all of this would work. Bitcoin drops to $25k. You buy four coins for a total value of $100,000. Deposit these coins onto Aave and borrow $25k in USDC against your asset. Your LTV ratio is 25% and you have a low liquidation risk.
You take this $25k in USDC to your favorite DEX and farm there, earning 50% returns. You dump the token for USDC, go back to Aave, and start repaying the loan. Once the loan is paid off, you still have your Bitcoin, and you’re still farming and earning great yields. You can repeat this process or find a different strategy that works better for you.
Benefits of Using the AAVE Protocol
The protocol is community-owned and operated, and it offers a number of advantages over traditional lending platforms. First, Aave allows users to earn interest on their deposits without locking up their funds for a fixed period of time.
This means that users can earn interest on their deposited funds without worrying about missing out on potential investment opportunities. Second, the Aave protocol offers comprehensive security features that protect user funds from fraud and theft.
Finally, Aave is designed to be inflation-resistant, ensuring that users will not have to worry about the value of their deposits diminishing over time. These advantages make the project an attractive option for anyone looking to earn interest on their cryptocurrency holdings.
Aave Alternatives
Aave isn’t the only lending and borrowing platform in Defi. These protocols are among the most popular products in the space.
Some of these projects are forks of Aave, and some of them are doing something completely different. What’s a fork, you ask? This is a question I’ve wanted to write about for some time and this seems to be a good spot to talk about it.
What’s a Fork?
A fork in cryptocurrency is when a blockchain or project splits into two paths due to different sets of rules governing the conditions of the transaction. Forks can happen on purpose, as with Bitcoin Cash, or by accident, as with Ethereum Classic.
When forks occur, holders of the cryptocurrency on the original chain are given an equal amount of currency on the new chain. Forks can also result in creating new tokens, as was the case with Ethereum and Ethereum Classic.
In some cases, forks can be used to reverse transactions, as was the case with Bitcoin Gold. Forks can significantly impact the price of a cryptocurrency, as they can increase or decrease the supply of tokens in circulation.
As a result, it is important to monitor forked chains carefully and be aware of how they may affect the value of your investment.
In the case of Aave, it’s a battle-tested protocol. However, for a long time, it was only available on Ethereum. Eventually, they came out with a V2 which added Avalanche and Polygon. V3 is now live, with several other chains added to the project.
Going back to using Fantom as an example, we didn’t have Aave a year ago or even six months ago (at the time of this writing). So developers forked the code, creating their own projects with a different name. It looks and feels like Aave but with fresh branding.
Right off the top of my head, I can think of three Aave forks on Fantom: Geist, Scream, and the Granary. I don’t do much borrowing, so I’m not sure if they’re doing anything differently from the original protocol. But the point is, there is always going to be an alternative.
Some lending and borrowing platforms are nothing like Aave. The best way to find them is…you guessed it — trusty old Defi Llama. I’ve pulled up a complete list here. Just filter by the chain you want to explore and go from there.
It’s also important to remember that just because a developer team forked Aave’s code doesn’t mean the project is Aave. Teams can make changes and exploits can happen, as with Grim Finance, a fork of Beefy Finance. Any project, fork or no fork, carries smart contract risk.
Conclusion
Aave is a powerful and convenient decentralized lending platform that offers borrowers and lenders a great way to manage their digital assets.
The platform is trustless, transparent, and efficient, making it a great choice for anyone looking for a safe and reliable way to borrow or lend cryptocurrencies.
Thanks for stopping by and reading today’s post. Check out this one I wrote on UST and Luna if you enjoyed it.