Arguably the most innovative project in the entire realm of Decentralized Finance (DeFi), AAVE is now available in Crypto IRA Retirement Accounts at iTrustCapital.
The Aave team has never been afraid to flex some DeFi muscle. Led by founder and CEO Stani Kulechov, Aave is a decentralized lending and borrowing protocol built on the Ethereum blockchain. Users of the Aave protocol can deposit various approved digital assets, and in return are able to earn interest. Users can also opt to use the deposited assets as collateral and borrow other assets as a result. Borrowers can choose a fixed or variable rate of interest.
Let’s examine some use-cases for using digital assets as collateral to borrow against. Please note that while some of these strategies sound exciting, they are very complicated, and more importantly, extremely risky:
: Depositing your crypto into the Aave protocol allows you to earn interest on your assets, unlike cold storage which leaves the capital dormant.
: Springing to life in the Summer of 2020 (“DeFi Summer”), yield farming opportunities arise when shrewd DeFi users can profit from leveraging their deposited Aave assets. These opportunities most notably arose around stablecoins, which presented the highest average yield in DeFi.
Longing or shorting an asset
: If a user feels that an asset is going to increase in value, he or she can borrow a stablecoin, purchase this asset, and then sell it when the asset appreciates. After the loan gets paid back, this user can profit the difference. On the flip side, if a user feels like an asset is going to decrease, he or she can borrow the asset from the Aave protocol, sell it on an exchange (i.e. Uniswap), and when the asset depreciates, the user can re-purchase, repay the loan, and once again keep the difference.
It is also noteworthy that Aave, similar to Matic, is a by-product of a really creative rebranding! Aave used to be ETHLend. Ethlend certainly had similar goals to present day Aave, but had a very different approach. While Ethlend was decentralized, it relied on a Peer-to-Peer (P2P) lending approach where users would lend to each other directly. Aave innovated on this years later by implementing a pool-based strategy, enabling loans to be originated instantaneously. In addition, Ethlend’s native governance token, LEND, migrated to AAVE in 2020. The migration ratio was 100 LEND to 1 AAVE, meaning if you owned 1000 LEND tokens, you would end up with 10 AAVE tokens. We’ll circle back to the importance of the Aave governance token a little later.
Currently, tens of thousands of people from all over the world are using AAVE to earn interest, borrow assets and improve their financial life. This has allowed AAVE to become the #1 DeFi protocol (at the time of writing) in the world by Total Value Locked (TVL), which can be seen on Aave.com
[caption id="attachment_22696" align="alignnone" width="1024"] Source: AAVE.com on July 5th, 2021[/caption]
What makes Aave so exciting compared to legacy banks is the method it uses to determine interest rates. Many in DeFi argue that the rates being offered on protocols like Aave reflect the real rate of interest in society because of the dynamic way it manages liquidity risk. Whereas a traditional bank will unilaterally set a rate of interest, with little regard to changing market and liquidity conditions, the Aave protocol automatically manages the offered rate of interest based on the up to minute utilization of each asset. When interest rates are low, it’s safe to assume that there is ample capital to borrow. However, a change in the market, whether it be upward or downward volatility, can prompt an onslaught of borrowing, and rates will increase as a result.
With faith eroding in traditional institutions, there is a trend toward desiring stronger ownership of one’s assets.
Aave has pioneered a few tremendously valuable inventions/innovations that will ripple through finance for decades to come:
- aTokens are interest-bearing tokens of the AAVE ecosystem. When depositing an asset into AAVE, the user receives aTokens back. For example, when a user deposits ETH, they receive back aETH. This is a token that not only allows you to know you made a deposit, but these aTokens continuously increase overtime, as your original ETH is earning interest in AAVE.
- Flash Loans are loans that must be paid back within the same Ethereum block (15 seconds). They are a novel invention that allow anyone in the world to have access to hundreds of millions of dollars, leveling the playing field so that anyone in the world can be a “whale” if they know what they are doing. One example of the usefulness of flash loans is through arbitrage. This is when traders can make money when exchanges have the same coin listed for two different prices. If ETH is trading for $3,500 on Uniswap while SushiSwap has it trading for $3,850, this is a difference of 10%. A trader could borrow $1,000,000 in USDC from AAVE with a Flash Loan, buy the ETH from Uniswap, sell it on SushiSwap, and pay back the loan, all within the same Ethereum block (15 seconds). This would amount to a profit of $100,000 and would help bring the global Ethereum markets back into a healthy equilibrium.
AAVE the token gets its value from the ability to participate in AAVE governance. This means that token holders have a say in where the direction of AAVE goes. If they want to add a new asset to the AAVE protocol, they can create an Aave Improvement Proposals (AIPs) where they make their claim on why this new coin should be added to the protocol. After discussions, the AAVE community will vote on the AIP, using their AAVE tokens as their voting power. In the long term, AAVE token holders will likely create an AIP that will vote in cash flows, meaning that AAVE token holders could receive a dividend of some sort.
Important Note: All investments involve substantial risk of loss. All trading strategies are used at your own risk and you are responsible for the financial resources you utilize. If the market moves against you, you may sustain a total loss of the initial amount you allocated to the investment. you should not engage in trading unless you fully understand the nature of the transaction you are entering into and the extent of your exposure to loss. If you do not fully understand these risks, you should seek independent advice from your financial advisor. iTrust is not an investment specialist, tax specialist, financial planner (certified or otherwise), or retirement advisor, and iTrust does not provide investment advice, tax advice, financial planning services, or retirement planning or retirement-specific advice. iTrust facilitates the purchase of digital currency and precious metals, nothing more, and charges a fee for the service it provides. All investment decisions are made by iTrust users. Please read the full Risk Disclosure.
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