Guide to Decentralized Borrowing and Lending – Aave

This article was published as a part of the Data Science Blogathon.

Introduction

Borrowing and lending have always been essential components of the financial world. Without this, banks, governments, and businesses worldwide would be unable to function. When you borrow money from a bank, a bank is lending out someone else’s money. The bank, in this way, becomes the middlemen. One of the main principles of decentralization is to eliminate the middlemen. This is where decentralized finance (DeFi) comes into play. With DeFi, people can borrow and lend money without any middlemen.

This guide will go through how to use Aave, a decentralized application that allows users to borrow and lend without going through a middleman.

What is Aave?

Aave is a decentralized application that offers decentralized finance services of borrowing and lending platforms. In short, Aave is a decentralized lending and borrowing platform. Users can earn interest for lending their assets on the platform and must pay interest when borrowing them. Aave is currently the largest decentralized application in the entire crypto space, with around $8.7 billion worth of assets on its platform. Aave currently holds ~ 10% dominance of all the decentralized applications across all blockchains.

Aave supports several blockchains, including Ethereum, Polygon, Avalanche, Arbitrium, Fantom, and many more. Aave’s smart contracts code has also been audited by some of the top leading security organizations, such as Trail of Bits and Sigma Prime. Due to this, there is a very minimum chance that a hack can take place on the platform. Furthermore, Aave is also governed by its community with over 120k+ members.

You may visit the Aave website by clicking here.

Use of Wallet and Blockchain

Wallet:

To demonstrate Aave’s functions and capabilities, I will use the MetaMask Web Wallet.

 

MetaMask is a Web3 crypto wallet that enables users to store, send, receive, buy and swap their crypto assets in a secure and decentralized way.

Blockchain:

As stated in the above section, Aave supports several blockchains. I will use the Polygon blockchain in this guide due to its fast transaction speeds and cheap transaction fees.

 

Polygon is a layer-2 scaling solution that was built to scale the Ethereum blockchain.

Launch Aave App

You may visit the Aave website by clicking here. On the Aave website, you can view all the features Aave offers.

You may launch the Aave app by clicking on the Launch App button on the top right-hand of the Aave homepage.

Connect MetaMask to Aave

To access Aave’s features, you must connect your Web3 wallet to the protocol. After following the step in the above section, you will reach the following page.

On this page, you can connect your wallet using the steps below:

1. Click on the Connect Wallet button.
2. Select which account of your wallet you want to connect Aave to.
3. Click on Next.
4. Click on Confirm.

Your wallet is now connected to Aave. You can now begin harnessing the power of decentralized finance.

Aave Dashboard

Your Aave dashboard will display all the details of your investments and assets, such as:

1. Your total net worth
2. The net APY (interest) you are currently earning.
3. The collateral you have deposited.
4. The amount you have borrowed.
5. The assets which you can add as collateral.
6. The assets which you can borrow.

Currently, I have not borrowed or lent any assets. As a result, nothing shows on my Supplies and Borrow section. After I supply and borrow assets, these sections will be updated in the next section.

After borrowing and lending, your dashboard may look somewhat like this:

Lending

Lending refers to giving someone else your assets. By lending your assets, you earn an interest rate. In the Aave protocol, lending is also referred to as collateral.

You can add collateral only with the assets you have in your wallet. Based on the asset, you earn interest on the collateral supplied.

Adding Collateral

You can add collateral by following the steps below:

1. In the Assets to Supply section, choose the asset you want to add as collateral and click on the Supply button.
2. Enter the number of tokens you want to add as collateral.
3. Click on the Supply button.
4. Click on the Confirm button in your wallet.
5. Click on Ok, Close.
6. Your asset has been added as collateral and is earning yield.

Once the collateral is added (assets are deposited), you are free to borrow assets.

Withdraw Collateral

You can withdraw the collateral you have added by following the steps below:

1. In the Your Supplies section, click on the Withdraw button.
2. Enter the number of tokens you want to withdraw from collateral.
3. Click on Approve to Continue.
4. Click on Confirm in your wallet.
5. Once approved, click on the Withdraw button.
6. Click on Confirm in your wallet.
7. Click on Ok, Close.
8. The assets you had added as collateral and the interest it earned are added back to your wallet.

Borrowing

Borrowing is the opposite of lending. You will receive assets and have to pay interest on your borrowed amount when you repay the asset.

We must put an asset down as collateral to borrow assets on Aave.

Depending on your collateral amount, you can borrow on Aave in the following way:

1. In the Assets to borrow section, choose the asset you want to borrow and click on the Borrow button.
2. Enter the number of tokens you want to borrow.
3. Select the borrow APY rate – Variable or Fixed.
4. Check the checkbox.
5. Click on the Borrow button.
6. Click on the Confirm button in your wallet.
7. Click on Ok, Close.
8. The asset has been borrowed successfully and is added to your wallet.
9. You can view your borrows in the Your borrows section of Aave.

 

 

Repaying Borrowed Amount

You can repay your borrowed amount on Aave by following the steps below:

1. In the Your borrows section, click on the Repay button.
2. Select how you want to repay this amount – Wallet Balance or Collateral amount.
3. Enter the amount you want to repay.
4. Click on Approve to continue.
5. Click on Confirm in your wallet.
6. Once approved, click on the Repay button.
7. Click on Confirm in your wallet.
8. Click on Ok, Close.

You are now free of debt as you have repaid the borrowed amount.

Aave Markets

Aave supports multiple assets for each blockchain. The borrowing and lending rates of each asset vary from time to time as this rate depends on the supply and demand of the underlying asset.

On Aave, you can view each crypto asset’s lending and borrowing rates for the respective blockchain. You can do so by following the steps below:

1. In the navbar, click on Markets.
2. You will get a list of all the assets available for the particular blockchain.
3. Click on the details button for the asset you chose.
4. On this page, you will find all the details regarding the asset.

 

Bonus Tips!

Max LTV – refers to the maximum amount of assets you can borrow for your respective collateral. For example, you have deposited 100 MATIC tokens (collateral), and if the Max LTV=80%, you will be able to borrow 80 MATIC tokens.

Liquidation threshold – refers to when the amount which has been lent gets undercollateralized due to which the amount you deposit as collateral gets liquidated. For example, if the Liquidation threshold=80%, and the price of MATIC from the time you borrowed the token, falls 80%, your collateral amount will be liquidated.

Staking

AAVE token holders can stake their AAVE tokens on the platform to secure the protocol. For doing so, Aave rewards its users in terms of AAVE tokens. The current reward rate is 8.33% APY.

Users who decide to stake their Aave tokens are required to deposit their tokens in the Safety Module. You can stake your Aave tokens by following the steps below:

1. Select the Stake option in the navbar.
2. Enter the amount of AAVE token you want to stake.
3. Click on the stake button.

Confirm the transaction in your wallet, and you are done.

Currently, the staking on Aave is not available. To know more about staking the AAVE token, click here.

Bonus Tips!

Slashing – 30% of your staked AAVE tokens will be cut in case there is a security breach on the protocol, a smart contract failure, and funds are lost. (The Aave protocol has been audited by top security firms. Hence, there is a minimal possibility that the protocol will get hacked.)

Cooldown Period – The period for your AAVE tokens to get unstacked. The current cooldown period for unstacking your AAVE tokens is 10 days.

Governance

Aave is also a DAO, Decentralized Autonomous Organization. Hence, the AAVE token holders may vote on changes to be made to the protocol. The more amount of AAVE tokens and stkAAVE (Staked AAVE) tokens you hold, the more voting power you have.

The proposal will only be accepted if a maximum number of voters decide to vote in the proposal’s favor. You can request a change (proposal) by following the steps below:

1. Submit Aave Request.
2. Create a snapshot.
3. Submit an Aave request for improvement.

You may view the current proposals by following the steps below:

1. Select the Governance option in the navbar.
2. Here you will find the list of all the proposals which have taken place.
3. Click on any proposal.
4. On this page, you will get all the information about the proposal.

To know more about governance on Aave, click here.

Risks

Blockchain is still in its infancy, and it is not regulated, and blockchain applications have risks associated with them. Decentralized borrowing and lending have some risks associated with them. These risks include:

Smart Contract Risks – all blockchain applications use smart contracts to operate. It is possible that these smart contracts can be hacked.

Impermanent Loss Risks – the price of the asset which you decide to add as collateral to earn interest may decrease.

Liquidation Risks – once you have borrowed an asset, if the price of the respective asset falls below a certain threshold, it is possible that your collateral can get liquidated.

Conclusion

Voila! You now know how to lend and borrow assets in a decentralized way. There are risks associated with decentralized borrowing and lending. Therefore, please conduct intensive research before beginning to lend or borrow assets. In terms of security, Aave is one of the most secure dapps as it has been audited. Be aware of liquidations risks. All the content in this article is purely for educational purposes and does NOT provide any financial advice.

If you have enjoyed this guide, please let me know in the comments and consider following. Thank you for your time.

Key Takeaways

• Aave is a decentralized lending and borrowing platform.
• Aave is the largest dapp in terms of TVL (Total Value Locked) in the entire crypto space.
• Aave supports a number of blockchains, including Ethereum, Polygon, and Avalanche, to name a few.
• Before borrowing, users are required to deposit some assets on the platform as collateral.
• There are risks associated with decentralized borrowing and lending, including smart contract risks, software risks, and liquidation risks.
• This guide does NOT provide any Financial Advice.

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Myron Dsilva 10 Oct 2022