Here’s how Aave is revolutionizing traditional finance
Decentralized financing protocol (DeFi) Aave (CRYPTO: AAVE) attracted over $ 25 billion in promised cryptocurrency since the launch of the borrowing and lending platform in January 2020. Additionally, Aave tokens have had a breathtaking run from their initial coin offering (ICO) in 2017, dropping from an initial price of 1, $ 76 (adjusted for the last 100 to 1 year trade) to almost $ 400 at the time of writing. They are now the 30th largest cryptocurrency with a market cap of nearly $ 5.1 billion.
Curious investors are probably wondering how the platform and the service has been able to attract so much capital in such a short time. Ultimately, Aave offers a huge value proposition by bringing to the general public a practice previously reserved for high net worth investors. Let’s take a look at what this means.
The beauty of asset lending
Let’s say an investor, Chloe, worked hard to save $ 10,000 to invest in Ether. Two weeks after her purchase, however, she has a family emergency and must sell some of her newly acquired Ether to cover her expenses, which causes her to abandon her original financial goals. Other alternatives would be to take out a personal line of credit, which banks can extend to maximize interest income, or a payday loan, which is almost always predatory. High net worth individuals do not face this problem as they can simply pledge their investments, such as stocks and gold, as collateral and receive a loan at very low interest rates to cover unforeseen expenses.
This is no longer the case. Chloe can now pledge her ETH on platforms like Aave and take out a loan to manage her family emergency. And here is the kicker: while the ETH it publishes is a immobility, she receives a loan in the form of stable coins As IAD (CRYPTO: DAI), which has a one-to-one exchange rate with the US dollar. Later, she can directly transfer her DAI to a crypto-fiat exchange such as Coinbase to cash out.
In this setup, Chloe could borrow 75% of the amount of ETH she promised ($ 7,500) and pay as little as 4% interest per year until she repays the loan with her regular income. . It’s a good deal and not even close to what the major credit card companies charge for interest.
Readers are probably wondering what the catch is. There is none, other than the fact that the interest rate is variable, and like all variable loans, it can go up and down. But it is generally low due to the smart contract functionality of the Aave network.
If Chloe defaults on the loan, her ETH tokens will automatically be seized by the lender. As a result, there is no “borrower default premium” that is factored into the interest rate as is the case with traditional peer-to-peer (P2P) lending. There is often no recourse for the latter if, for example, a US borrower takes out a loan from a lender in Japan and runs away.
Not just a one-ride pony
Aave also offers other advantages. For example, investors can deposit their stablecoins on the platform to earn interest with much more attractive rates of return than traditional savings accounts.
Let’s say an old-fashioned investor, Eugene, wants absolutely nothing to do with the volatility of cryptocurrencies and is content to deposit his money into a savings account. However, he can get a much better rate on his deposit than the 0.50% per annum that the big banks offer him by exchanging his money for the DAI stablecoin on an individual basis and then depositing it at Aave. That way, he earns the previously mentioned 4% interest per year (or more) – minus fees – and his funds are fully secured.
Overall, Aave is a DeFi platform with huge potential, and I recommend cryptocurrency investors to check out its services alongside the token.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.