New financial tools like flash loans have pushed Aave, the biggest name in DeFi right now, to new heights.
Aave has issued more than $300 million in flash loans since its inception. But at the beginning of July, that figure was just $14 million. According to data collected from Aavewatch, a decent chunk of that $300 million is from an August 29 flash loan worth $14 million in Dai, the largest-ever transaction on the platform.
The explosion in flash loans on Aave shows the huge appetite for novel financial products and the liquidity being provided through DeFi protocols.
Aave started life as Ethlend in 2017 and rebranded to Aave in January 2020. It offers crypto lending and borrowing capabilities and introduced flash loans—loans that are only issued for the duration of a single Ethereum block, about 15 seconds.
Loans are only issued if the borrower can repay the borrowed amount within one block, otherwise the issuing transaction from Aave will fail. Flash loans are used by traders in scripted Ethereum arbitrage transactions, where profits are won by purchasing and then immediately selling an asset to a different buyer at a higher price. Arbitrage trades are what keep prices on automated market makers like Uniswap and Balancer in line with market prices.
“The biggest consumer of flash loans is DeFi Saver, allowing users to change borrowed collateral using flash loans instead of paying back and taking out new loans separately, quite an interesting functionality,” Aave CEO Stani Stani Kulechov told Decrypt. “We also have increased flash loan activity from arbitrageurs using flash loans to make their operations more efficient, and lately Furucombo, which allows users to try flash loans without coding, has taken off.”
DeFi Saver and Furucombo both aim to allow more users to take advantage of DeFi networks built atop Ethereum by removing the need for technical coding skills. Parts of open source smart contract code for Ethereum can be swapped out or connected together as a core feature of the protocol, technically termed “composability.”
For example, Furucombo provides smart contracts that allow users to transfer debt positions between DeFi protocols like Aave and Maker in a single transaction with a few clicks. Without composability, such a transfer would take multiple transactions, increasing gas costs and complexity for users.
Aave has seen rapid development in 2020. It recently released testnet code in preparation for the rollout of decentralized governance, dubbed ‘Aavenomics’. It also released credit delegation capabilities, which allows authorized users to take out loans using collateral provided by third-party liquidity providers.
Last week, Aave grabbed the top spot on DeFi Pulse for amount locked in user liquidity with more than $1.5 billion. Digital assets locked in Aave now make up more than 18% of all value locked in the DeFi market.