Crypto Academy Week7 Homework Post for [@gbenga] | Introduction to Defi and Yield Farming (100% powered up)

Hello steemians,

With the arrival of the Ethereum project blockchain and its principle of decentralized finance (DeFi), many opportunities have emerged for investors seeking passive income.For this, the AAVE protocol was launched. Today i write an article that deals with this protocol in the 7th week to terminate the homework of our dear professor @gbenga. Good reading!

A general view of DeFi :

This market represents a total capitalization of approximately $ 41,1 billion. There are different categories, such as lending, payments or decentralized exchanges. The Aave protocol is included in the category of lending, which represents a capitalization of approximately $ 18,3 billion, or approximately 44% of the total value of the DeFi.

The image below shows you the category of lending within the Defi. The Aave protocol ranks third among players in this segment with a total capitalization of 4.86 billion dollars, just behind the leader Maker DAO and Compound, which dominates the market with around 68% of the market share.

What is the Aave protocol ?

Aave is a decentralized finance platform, allowing its users to lend or borrow cryptocurrency on a non-custodial basis. For the protocol to work you need lenders, borrowers, connected wallets to deposit or withdraw funds, and also applications.

Today, for example, Aave offers its users the possibility of triggering a loan via the offers on the Uniswap platform, other partnerships are being developed to offer a more diversified range.

The idea of Aave is simple, you can deposit Ethereum tokens from the available list and you will receive interest on those deposits, depending on the market. The more tokens are borrowed, the more interesting it is to deposit. Obviously, on the other side of the trade, you need borrowers. So it is the stablecoins, which are very useful for traders and other cases of borrowing, that are the most interesting to lend.

How it works?

For the protocol to work you need lenders, borrowers, connected wallets to deposit or withdraw funds, and also applications.

Aave offers its users the possibility of triggering a loan via the offers on the Uniswap platform, other partnerships are being developed to offer a more diversified range.

The Aave protocol is backed by smart contracts through the Ethereum blockchain, it is these contracts that will act as a central entity to guarantee user security. The protocol defines the interest rates (fixed or variable as desired for the user) and manages the collateral. The environment is linked to the various baskets available to users.

What is the use for users?

Lenders will provide liquidity when depositing their cryptocurrencies in a common basket. In this same basket, mutual funds can be borrowed by placing a guarantee, a collateral. Loans depend on mutual funds, also on the amounts borrowed and their collateral. This allows users to have instant loans through the shopping cart.

The image below is taken from Aave's white paper and illustrates how a loan works.

Borrowers

They will be able to borrow funds at a certain price. This price is variable depending on the cost of the money at time T, it depends on the liquidity available in the basket. Overall the more funds are borrowed in this basket, the more the available funds will decrease, which will increase the interest rate as funds become increasingly scarce.

Lenders

The interest rate for lenders will be determined by an algorithm. It reserves part of the liquidity to guarantee withdrawals at any time.

Interest is based on a 1: 1 aToken system. That is, if you deposit 1000 Dai, you will receive 1000aDai. People who own aTokens will receive two types of rewards:

• Interest on loans made via the initial Token
• Part of the costs associated with Flash Loans of your initial Token

You will receive interest in real time according to the interest rate of your Initial Token. These can then be exchanged for the underlying asset (aETHvs ETH for example).

Borrow

The borrower wants to get Dai, but for that he has to deposit more collateral than the amount he wants to borrow, he is said to support his position. In this case, he will have to deposit Ethers as collateral.

Whitepaper Aave

Collateral

All the values ​​used by the borrower as collateral will be calculated in ETH to back up his loan. Each asset will have a loan value (Loan-To-Value or LTV), this is calculated as the weighted average of all the LTVs of the values ​​used as collateral.

Namely that each loan can be opened with a stable rate or a variable rate (that is, it can be updated or partially repaid early).

Whitepaper Aave

Be careful, if the value of your collateral drops and is no longer sufficient to secure your loan, your position will be liquidated. This is called the liquidation threshold. This is the weighted average of the collateral assets.

The liquidation contract allows any external actor to buy part of the collateral at a reduced price.

How does the “AAVE” token work?

The Aave token is an ERC-20 token, it is the center of the protocol and allows its holders to participate in the governance of the project. In this way the user will be able to vote in favor of the proposals for improving the protocol.

This token is used to:

• Vote in favor of the proposals for improving the protocol
• Stacking to ensure the security of the ecosystem, this will allow you to generate passive income
• Reduce your costs for the various services offered by Aave
• Authorize a third-party account to use your funds through a signature, this allows gas-free transactions (Ethereum network fees) and one-time transaction approvals

Conclusion :

The Aave protocol is an innovation and today plays a main role within the DeFi.

This protocol attracts investors who wish to deposit their funds to earn passive income. Borrowers, on the other hand, can take out a loan without the blocking of a central entity. The global basket allows the availability of capital thanks to the security levels defined by mathematical rules according to each asset.

Be careful all the same to closely monitor the protocol which is evolving rapidly thanks to the developers and the community which can follow and decide on the follow-up to be given to its evolution. Aave offers innovative products but not without risk and each investor must understand and know the ins and outs before subscribing to one of their services.