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Aave, formerly known as ETHLend, is an open-source decentralized finance (DeFi) protocol which was initially built on the Ethereum blockchain and released in 2020.[1][2] It is one of the largest cryptocurrency liquidity protocols.[3][4] The Aave Protocol uses smart contracts to automate processes, including distributing funds and handling collateral.[5][3]
Overview
Aave Protocol allows anyone with a cryptocurrency wallet to supply and borrow cryptocurrency assets across Ethereum, Polygon, Avalanche, and other EVM blockchains by posting collateral,[3][1] without third-party intermediaries such as banks and brokerages.[6] Suppliers share the interest paid by borrowers, who deposit cryptocurrency assets into different liquidity pools.[3] In turn, suppliers can use their cryptocurrency assets as collateral to borrow at stable or variable interest rates.[3][1] There are currently three versions of Aave, each of which established upgrades to the protocol: V1, V2 and V3.[3][7]
V3 introduced lower transaction fees and the ability to supply and borrow across virtually all Layer 2 blockchains that use Ethereum as a settlement layer.[8][3]
Gudgeon et al. (2020) examines collateral liquidations on Aave, where arbitrageurs repay loans in exchange for discounted collateral, often using flash loans. By analyzing blockchain data, it highlights the price effects of these liquidity trades on decentralized exchanges and demonstrates both temporary and permanent impacts on asset prices.[9]
In October 2021, Aave reached approximately $28 billion in Total Value Locked (TVL) across multiple chains, including Ethereum, Polygon, and Avalanche.[1][10]
The Aave Protocol is governed by AAVE token holders who form the Aave Decentralized Autonomous Organization (DAO).[1][3] The Aave DAO governs the protocol and proposes, discusses and votes on any changes to the protocol via Aave Improvement Proposals (AIPs).
Gudgeon et al. (2020) reviews the methodologies for setting interest rates in DeFi Protocol for Loanable Funds (PLFs), which are decentralized markets using distributed ledgers and smart contracts to facilitate borrowing and saving, with interest rate mechanisms balancing supply and demand. The study reviews the methodologies for setting interest rates in three major DeFi PLFs, empirically analyzing their behavior under varying liquidity conditions and investigating the relationships between interest rates across different protocols using a Vector Error Correction Model.[11]
A study by Ao et al. (2022) applies social network analysis to measure decentralization in DeFi token transactions on the Ethereum blockchain, focusing on the AAVE token. It finds a core-periphery structure in the transaction network, with centralized exchanges at the core, and demonstrates that greater decentralization is associated with higher returns and lower volatility in AAVE markets.[12]
History
The Aave Protocol was founded and released on Ethereum mainnet in January 2020 by Aave Labs founder Stani Kulechov,[3][1][13]Russian-born Finnish programmer and lawyer who had moved to Finland with his family as a child.[14][15]Aave means "ghost" in Finnish.[16][17]
Aave was preceded by ETHLend, also developed by Kulechov, which launched in 2017.[16][18]
In July 2023, Aave released GHO, an Aave-native, decentralized stablecoin. GHO is backed by assets available in the Aave Protocol.[4]
Journal articles
Below is a list of relevant peer-reviewed journal publications that discuss Aave Protocol.
Heimbach, Lioba; Schertenleib, Eric; Wattenhofer, Roger (2023-12-05). "Short Squeeze in DeFi Lending Market: Decentralization in Jeopardy?". Lecture Notes in Computer Science. Cham: Springer Nature Switzerland. doi:10.1007/978-3-031-48806-1_22. ISBN978-3-031-48805-4.
Green, Aaron; Giannattasio, Michael; Wang, Keran; Erickson, John S.; Seneviratne, Oshani; Bennett, Kristin P. (2023). "Characterizing Common Quarterly Behaviors in DeFi Lending Protocols". Lecture Notes in Operations Research. Cham: Springer Nature Switzerland. doi:10.1007/978-3-031-48731-6_4. ISBN978-3-031-48730-9.
Gudgeon, Lewis; Werner, Sam; Perez, Daniel; Knottenbelt, William J. (2020-10-21). Proceedings of the 2nd ACM Conference on Advances in Financial Technologies. New York, NY, USA: ACM. doi:10.1145/3419614.3423254.
Lehar, Alfred; Parlour, Christine A. (2022). "Systemic Fragility in Decentralized Markets". SSRN Electronic Journal. doi:10.2139/ssrn.4164833. ISSN1556-5068.
Gudgeon, Lewis; Perez, Daniel; Harz, Dominik; Livshits, Benjamin; Gervais, Arthur (2020). 2020 Crypto Valley Conference on Blockchain Technology (CVCBT). IEEE. arXiv:2002.08099. doi:10.1109/cvcbt50464.2020.00005.
^Gudgeon, Lewis; Werner, Sam; Perez, Daniel; Knottenbelt, William J. (2020-10-21). "DeFi Protocols for Loanable Funds". Proceedings of the 2nd ACM Conference on Advances in Financial Technologies. New York, NY, USA: ACM. pp. 92–112. doi:10.1145/3419614.3423254. ISBN978-1-4503-8139-0.
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