How it works

The Aave protocol facilitates the creation of lending pools. If you want to lend some of your crypto, you can deposit it into a pool. Anyone who wants to borrow deposited assets can draw from Aave pools as long as they provide sufficient collateral.

To help users take advantage of arbitrage opportunities (where a crypto might be valued higher on one exchange than it is on another) and maximize profits in the DeFi ecosystems, Aave also provides flash loans. These loans require no collateral and are settled instantly. The condition is that the borrowed amount needs to be paid back within the same transaction, along with a 0.09% fee, or the whole process will be cancelled and no funds are borrowed.

Keep in mind

Standard loans on Aave require collateral (such as ETH) provided by the borrower. Because crypto can be volatile, it’s important to choose the collateral carefully if you use Aave to borrow crypto.  If your collateral’s value drops below a certain threshold it can be liquidated (as in: you won’t get your money back) and you might be subject to added fees. For this reason, stablecoins are a popular collateral option. Be sure to carefully read Aave’s terms and conditions. 

Released: November 2017