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The UK-based company offers “flash loans,” in which funds can instantly be borrowed with no requirement for collateral. The process takes place in a single transaction, and has one condition: that the liquidity is returned to the pool before the transaction ends.
If the user defaults on the loan, the transaction is reversed to effectively undo the actions executed until that point, guaranteeing the safety of the funds in the reserve pool.
Rate-switching and stable rate loans
Aave—the name is Finnish for “ghost”—defines itself by its evolving and imaginative technology.
Deposits are tokenized as aTokens which accrue interest in real time. Instead of being defined by an exchange rate like cDAI/Chai or other interest-bearing tokens available on the market, they are pegged 1:1 to the value of the underlying assets.
Other features include: “rate-switching,” allowing users to switch between stable and variable rates; “stable rate loans," which behave as a fixed rate loan, but can be re-balanced to respond to severe changes in market conditions, and “perpetual loans” which throw away payment schedules and let users set their own duration.
When borrowing, the fee is 0.025 percent of the loan amount, but for flash loans, it rises to 0.35 percent (which is split 70% for the lenders and 30% for the protocol,) according to Aave.
The startup points out that its features are targeted at those with some technical knowledge.
The future of DeFi—and governance
Announced 24 hours after the Ethereum mainnet launch, Aave’s partnership with Chainlink ensures that users will no longer have to rely on the lending platform itself for accurate off-chain price feeds, but can instead tap into a more trustless approach.
Chainlink guarantees the security of smart contracts that depend on data feeds by aggregating price data sourced from a pool of independent nodes backed by economic incentives, rather than from a single central party. In recent months, it’s collaborated with a host of startups and big players, such as Google.
Holders of LINK, Chainlink’s token, can also use their token as collateral in the Aave Protocol, capitalizing on its recent uptrend.
The Chainlink collaboration makes Aave the first lending protocol to use off-chain data for calculating lending rates via a decentralized oracle network. And Aave plans to gradually phase in complete decentralization.
“We see the future of DeFi [Decentralized Finance] as strictly connected to the ability to bring interchain communication and real-life assets to Ethereum, and this is the direction we want to head with our collaboration with Chainlink,” said Emilio Frangella, Software Engineer at Aave, in a post announcing the launch.
“The next step for Aave is to add governance smart contracts and transfer the ownership of the protocol to the community,” Aave CEO Stani Kulechov told Decrypt. He explained that Aave’s LEND token would be used to propose and vote on changes.
DeFi Pulse, which tracks growth in the DeFi sector, reports growth of 130% over the last 12 months, with $700 million now locked up in DeFi applications.