Aave is a lend-borrow application built on the Ethereum blockchain. Aave coordinates lending and borrowing.
People using Tori will lend their digital dollars (USDC) to Aave.
Borrowers are people who hold crypto tokens like ETH but want to get digital dollars without selling their crypto. Aave lets borrowers put their crypto as collateral and borrow USDC.
The borrowing process works as follows:
A borrower deposits a crypto asset (e.g., ETH) as collateral into Aave.
Based on the collateral's value, the borrower can borrow a percentage of that value in digital dollars (e.g., USDC).
The borrower pays interest on the borrowed amount, which is distributed to the suppliers who provided the digital dollars.
For example:
A borrower puts $200 worth of ETH as collateral
Depending on the collateral factor set by Aave, they'll be able to borrow up to $100 in USDC
The borrower must also pay 15% interest on the amount they borrow. This interest is automatically distributed to the lenders, rewarding them for their participation in Aave.
What happens if the borrower doesn't pay back?
Lenders on Aave are protected by the over-collateralization mechanism.
Borrowers must deposit more collateral value than the amount they wish to borrow. In the event of a borrower not repaying their loan or if the value of their collateral drops significantly, Aave automatically liquidates the collateral to ensure that suppliers can recover their funds along with the owed interest.
For instance, if a borrower has deposited $200 worth of ETH and borrowed $100 in USDC:
If the borrower fails to repay the loan, Aave will automatically sell the ETH collateral to recover the borrowed amount plus interest, ensuring that suppliers receive their funds back.
If the value of the ETH collateral drops to $150 (or any predefined threshold), Aave will automatically liquidate the collateral to pay back the suppliers and the interest owed to them.
Aave is a decentralized application, meaning that all the lending, borrowing, and liquidation processes are executed automatically through smart contracts. This ensures transparency and eliminates the need for intermediaries. Moreover, Aave does not impose lockups or withdrawal limits, allowing suppliers to access their funds whenever they desire.
Security is a top priority for Aave. The application has undergone rigorous audits by 6 leading security firms in the cryptocurrency space. Since its launch in November 2017, Aave is now securely managing over $16 billion in assets, establishing itself as a reliable, trusted, and longest running application within the decentralized finance (DeFi) ecosystem.