Decentralized finance (DeFi) is a new financial system based on distributed ledgers that are similar to those used in cryptocurrencies. The system decentralizes authority over money, financial products, and financial services from banks and institutions. In the traditional centralized banking system, your money is kept by banks and financial corporations whose overarching objective is to make money.
Third parties who facilitate money flow between parties abound in the financial system, each charging a charge for their services. This can give an open way for a lot of frauds, errors, and scams to be conducted. So, when the global economy was crippling in 2008, Satoshi Yakamoto came up with a paper that described a concept and technical aspects of a decentralized currency and financial system. This currency was called Bitcoin.
Following the footsteps, everyone has been trying to develop a decentralized financial ecosystem. One such area is the Decentralised Money Markets segment. Money markets have evolved over time, but their essential structure has remained mostly unchanged. Borrowers utilize money markets to obtain a short-term loan (usually less than a year) to borrow one currency (e.g. dollars) while pledging another currency (e.g. Euros) or an asset (e.g. real estate) as collateral. If the borrower fails to repay their loans, the collateral must be auctioned to make the lender whole.
Otherwise, the collateral is returned to the borrower when the debt is paid off. Decentralized money market protocols like Aave and CREAM enable users to borrow and lend their on-chain cryptocurrencies (and tokenized assets) with just an internet connection, thanks to the emergence of the DeFi ecosystem.
One such DeFi system is Aave. In this article, we shall read more about Aave, its background, and the biggest highlights of its system.
About Aave: An overview and background of the Aave DeFi
Aave is a decentralized finance (DeFi) technology also commonly referred to as a decentralized money market, that allows people to lend and borrow cryptocurrencies without going through a centralized middleman. The product was previously called as ETHLend until it was rebranded as Aave. Both of the brands were developed by a team that was led by Stani Kulechov, a law student from Finland.
The company, which was previously known as ETHLend, raised $16.2 million in its Initial Coin Offering (ICO) which was held in the year 2017, it had sold 1 billion units of its AAVE cryptocurrency, which was previously known as LEND.
ETHLend differed from Aave in the sense that, rather than pooling funds, it attempted to match lenders and borrowers on a peer-to-peer basis. ETHLend was rebranded to Aave (which means “ghost” in Finnish) in 2018 and became a subsidiary of Aave. The LEND cryptocurrency was converted to AAVE, with 1 AAVE equaling to 100 LEND Tokens, bringing the total quantity of AAVE to 18 million.
A trading desk to handle huge deals, a game studio focused on blockchain games, and a payment system was among the other products and services disclosed at the time of the rebranding of the DeFi.
Biggest Highlights Of Aave And Its Working Structure
Furthermore, Aave is a smart contract solution that allows these assets to be handled by a widespread network of computers running its software. It runs on the Ethereum blockchain. All the tokens on the Aave’s network use Ethereum’s blockchain technology for processing the transactions; These tokens are known as ERC20 tokens.
The Aave network users have to deposit virtual assets into “liquidity pools,” which the protocol can use to lend out funds. Aave is a decentralized autonomous organization (DAO) in and of itself. As a result, it is managed and ruled by the people who own and vote their opinion with AAVE tokens.
This means that Aave users do not have to entrust their funds to a specific institution or person. They merely have to trust that the code will run as intended.
The Aave software, at its core, allows users to create lending pools in which they can lend or borrow 17 different cryptocurrencies, including ETH, BAT, and MANA. Borrowers on Aave must put up collateral before they may get a loan. Furthermore, they are only permitted to borrow up to the value of the collateral they have posted. They gain interest when they lend and pay interest when they borrow. Borrowers are given money in the form of a token, which is a specific token tied to the value of another asset. This coin is then encoded so that depositors can earn interest on their money.
Biggest Competition or Alternative to Aave:
Compound is a DeFi lending and borrowing mechanism based on Ethereum that functions similarly to a virtual money market. In the TVL rankings for DeFi protocols, Compound is ranked 5th with a Total Value Locked of $10.57 billion.
When you start placing your money into Compound, you can diversify your investment portfolio. In exchange, the protocol will continue to give you interest for as long as you keep your money. However, if you want to put your money somewhere else, you can borrow money from the protocol. Naturally, you will be the one to pay Compound interest for borrowing money from the protocol’s liquidity pool. The Compound Interest platform is powered by COMP coins. As a result, it is a community-driven crypto project with community decision-making authority.
Individuals, institutions, and protocols can access financial services using C.R.E.A.M. Finance, a decentralized lending protocol. It is a permissionless, open-source, blockchain agnostic protocol that serves users on Ethereum, Binance Smart Chain, Polygon, and Fantom as part of the yearn finance ecosystem. Users that keep ETH or BTC in a passive manner can deposit their assets on C.R.E.A.M. to receive interest, comparable to a typical savings account.
CREAM is an Ethereum-based peer-to-peer lending mechanism. Because CREAM is built on the Ethereum blockchain, it gives CREAM tokens that may be saved in any Ethereum wallet, providing mining incentives to anyone. The additional assets on CREAM, such as $CRV and $YFI, are what make it apart from Compound Finance.