Aave is an open source liquidity protocol that allows its users to earn interest on crypto and borrow various crypto assets. Aave is structured as a decentralized autonomous organization, with $AAVE as the governance token.
AAVE allows users to borrow and lend assets across various liquidity pools. AAVE allows for secured borrowing (against crypto assets) and also for flash loans (loans that are borrowed and repaid in the same transaction block). Lending on AAVE is considered secure, and the protocol currently manages almost USD 18 billion in liquidity across 7 markets and 13 networks (as at 25th April 2022).
The $AAVE token allows holders to vote on various proposals for governance of the protocols, including risk and lending criteria. Users can also stake their $AAVE and earn yield and help secure the network. Aave is built on the Ethereum network, using ERC20 tokens.
Lending is done via liquidity pools, where a lender gets an a-token representing the amount invested in a specific pool. For Example a lender depositing DAI in a liquidity pool, will get aDAI in return. A-token holders then get a portion of the interest earned via flash loans and the secured lending. The interest earned depends on the surplus liquidity of each pool, for example the AAVE Ethereum pool provides a rate of 0.51% as currently there is a supply of USD 4.04 Billion with $1.47 Billion being borrowed. The AAVE market rates across different pools can be viewed at https://app.aave.com/markets/.
Staking on AAVE
In addition to lending, participants can stake $AAVE on the platform and earn yield in the form of rewards to help secure the protocol. The staked tokens operate a number of functions, including validating transactions, providing voting power, or serving as collateral. In Aave’s case the staked tokens are deposited into a Safety Module, which is a Smart contract-based component, protecting against events that may cause a Shortfall Event for lenders (such as smart contract risk or bugs). Currently the maximum amount the protocol is allowed to use from the Safety Module is 30%. Currently AAVE has approximately USD 725 Million in the staking pool, with the staking APR at 7% (as at 28/04/2022).
AAVE for Corporate Treasury
We think AAVE makes a lot of sense for corporate treasurers who are looking to hold crypto assets, and maximize yield. With over USD 18 billion in assets, AAVE is one of the larger lending protocols and has more than one asset class (secured crypto loans and flash loans). They do have plans to launch more DeFi lending products, such as NFT collateralized lending, which will be interesting to see. You can get around 2% APR across various stable coins, with Binance USD offering 2.55%. Both the loan products we feel are fairly secure, with adequate risk mitigation in place. In addition the protocol benefits from the Safety Module which protects participants from bugs and smart contract risk.
In addition to investing in lending pools, treasurers could also consider allocating a part of their holdings to staking on AAVE. This generates a higher yield of 7%, although there is more risk in case of any protocol failures. However given the track record of the AAVE protocol, along with the fact that governance of the Safety Module is via transparent smart contracts, some of the risks are dampened.
Note: These are just thoughts and opinions of Coracana’s writers and should not be taken as investment advice. We advise readers to do their own research before making any investments