AAVE is a cornerstone of the Defi space which focuses on providing an open and transparent Peer-To-Peer (P2P) lending and borrowing money market. Requiring no KYC (know your customer) verification, AAVE can be accessed by anybody with an appropriate web wallet such as Metamask (read our full guide to Metamask here). AAVE allows users to lend, borrow and stake a range of crypto assets. Originally built on the Ethereum blockchain, AAVE has more recently moved to Polygon to avoid the high transaction fees associated with Ethereum.
Instead of lenders and borrowers being matched 1:1, multiple lenders supply their funds to a liquidity pool. These funds act as a reserve that all borrowers can take from. Instead of charging interest for these loans, as traditional banks would, AAVE rewards lenders with transaction fees for providing liquidity. All transactions on the network operate automatically through the utilisation of smart contracts. When depositing tokens to the AAVE platform, lenders receive aTokens in return. These are pegged 1:1 to the value of the underlying asset (deposit 1 ETH, receive 1 aETH). While the underlying assets are loaned out, ATokens accrue interest in the lender's AAVE wallet. ATokens are minted when funds are deposited and burned when redeemed. Borrowers lock up assets within the AAVE platform when taking out a loan. This acts as collateral in the event of non-repayment.
The native token to the AAVE platform (also named AAVE) can be used as a governance token - holders can stake it to vote on changes to the protocols. Stakers of AAVE can also receive rewards for doing so. Furthermore, borrowers who use AAVE as collateral against loans they take out receive discounted transaction fees. The AAVE token is regularly burned meaning it is a token in diminishing supply. The maximum supply of AAVE is capped at 16 million.