Aave (AAVE)

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Money markets protocol

Basics

"A leading decentralized interest rate protocols in DeFi, currently holding nearly $5B on its balance sheet. The protocol allows anyone to deposit capital in return for interest as well as borrow in an overcollateralized or undercollateralized fashions (via flash loans or credit delegation)."

History

"Aave began as ETHLend in 2017 after it raised $16.2 million in an Initial Coin Offering (ICO) to create a decentralized lending platform. Later, they announced a parent company, Aave, which would house multiple different products including EthLend, Aave Lending, Aave Pocket, Aave Custody, Aave Clearing, and Aave gaming."

"Aave’s shifted from a decentralized P2P lending strategy (direct loan relationship between lenders and borrowers, like in ETHLend) to a pool-based strategy. Lenders provide liquidity by depositing cryptocurrencies in a pool contract. Simultaneously, in the same contract, the pooled funds can be borrowed by placing collateral. Loans do not need to be individually matched, instead, they rely on the pooled funds, as well as the amounts borrowed and their collateral. This enables instant loans with characteristics based on the state of the pool."

"What Ethereum lending was back then was just a small project that I founded while I was studying law in the University of Helsinki, Finland where I’m originated from. What actually happened is that we started as a community project and we wanted to create, the first lending protocol on Ethereum and test how we could create a bit more complex financial transaction than trading or transferring funds from one address to another.

One thing led to another, we had an interesting market back then and this was ages before stablecoins or liquidity pools or an idea of total locked value. I think, the transition from ETHLend to Aave was natural, as we saw liquidity starting to pull together and we started to think how we could utilize more of this locked liquidity, locked value in a more capital-efficient way. And that is how we came up with the Aave protocol."

Audits & Exploits

  • Bug bounty program can be found here. The prizes are up (22-1-2020) to $25.000USD. Got updated (16-8-2021): AAVE's Bug Bounty program offers up to 250k in rewards.
  • Scored 77% on DAOmeter (21-2-2023), scoring low on Community (no clear on and off boarding, no working groups) and a bit low on Voting (delegates do not get compensated), Security (centralized Aave Guardian) and Treasury (for not having custom treasury software).
  • GHO's audit was conducted by leading security firm Open Zeppelin, which has found no critical or high-severity bugs in the codebase. However, the firm did find two medium-severity bugs in the codebase (19-10-2022).
  • Used Certora's Prover tool with formal verification technology to complement/assist their manual audits (2-10-2022). "Certora received an Aave grant for Continuous Formal Verification."
  • The V3 deployment has been audited by several firms including Sigma Prime, Trail of Bits, and PeckShield (16-3-2022).
  • Got updated to a 91% score (27-12-2020). And again updated to a 96% (16-8-2021. With the comment: "With every single category reaching over 91%, AAVE is clearly an impressive example of what a transparent protocol looks like"
  • Scored a 84% on DeFi Safety (9-2020); "​Two audits were performed before deployment. These audits were on private repositories. Each audit found multiple issues and the bulk were fixed. In both audits the code was considered a work in progress. It does not seem the audits were on the deployed code. As the repositories are private, we cannot know the difference between the audited code and the deployed code. This is a concern.'AAVE meets the standards for a 100% score as they have multiple audits with public results and fixes that were implemented. However, the auditor does not know what code was audited and how similar the deployed code is to the result of the audit. Therefore the score is 75%."
  • Does bi-weekly security reports (3-2-2020).
  • By Open Zeppelin.
  • Aave Security Report
  • Blockchain Security DB shows 2audits. The latest was in 1-2020.

Risk Framework

  • From their blog (23-4-2020):

"[The] Risk Framework that describes our methodology for measuring risks, adding a new currency in Aave Protocol, and setting the risk parameters. It also includes a detailed risk assessment for each currency."

Bugs/Exploits

"The latest upgrade of ReserveInterestRateStrategy in Aave V2 (Polygon) has caused a temporary halt of the protocol, impacting assets worth ~$110M! [funds seem to be frozen] The root cause is the new ReserveInterestRateStrategy is only compatible with Ethereum, not compatible with Polygon."

"After warning of a trading strategy which could leave Aave with bad debt last month, trader Avraham Eisenberg has put his plan into action. The results have been mixed, but the trader’s actions ultimately left Aave with $1.6M in bad debt."

  • From Blockthreat (28-4-2022):

"Aave V3’s Price Oracle Manipulation Vulnerability reported by Hackxyk."

Governance

Admin Keys

  • Was classified Degree 2 DeFi on the HackerNoon rankings of 25-4-2019. "These DeFi products are non-custodial and have one additional decentralized component which could include price feeds, initiation of margin calls, margin liquidity, interest rate determination, or platform development, while the rest are still centralized."
  • A BIG side note, is that the blog was written by Kyle J Kistner who is Chief Vision Officer at bZx. He gave his own project the highest ranking. What a surprise.

"Custody: The ETHLend contracts are closed source and non-custodial from the point of loan origination.

Initiating Margin Calls: Margin calls are initiated by the lender. They are prevented from prematurely liquidating a position through the price feed. The fact that only one party is in charge of initiating a margin call makes this aspect of the protocol centralized.

Margin Call Liquidity: Lenders are in charge of liquidating positions, and they receive an 8% discount on collateral for doing so. ETHLend collects 2% as a fee. The sourcing of margin call liquidity is centralized to the lender.

Interest Rates: Interest rates are agreed upon freely by borrowers and lenders. This aspect of the protocol is decentralized.

Development: The ETHLend contracts are closed source and partially mutable. The protocol is centrally developed by the team. The core functions are not mutable, but auxiliary functionality such as single loan repayments can be built on top."

"Our protocol has been audited and secured. The protocol is completely open source, which allows anyone to interact with our user interface client, API or directly with the smart contracts on the Ethereum network. Being open source means that you are able to build any third-party service or application to interact with our protocol and enrich your product."

This is conflicting information with what Kistner wrote (see above).

"Aave's protocol is 100% upgradeable via an admin key that is owned by an Aragon DAO. The DAO has 5 members and can approve admin key transactions with 3 "Yes" votes on a proposal. The key is capable of making sweeping changes to the protocol.

The security of user funds are dependent on opsec of admin key.

Has no timelock on admin key. "DAO voting keys in cold storage"

"Current Admin Key Config- Time Lock: No

Current Admin Key Config- Multisig: 3-of-5 tokens (Aragon DAO)

Claimed Admin Key OpSec: "Voting keys in cold storage"

Verified Admin Key OpSec: Unverifiable

Is security of deposited funds dependent on opsec of admin key?: Yes

Admin Key Address: Link

Documentation on Admin Key Powers: Open Zeppelin Audit Summary

Additional Info (if any)? Aave Security Report"

"Currently, Aave is keeping the ownership of the protocol to audit and respond to any issues that may arise. However, once all of the kinks and bugs are worked out, the next step will be for Aave to transfer the ownership of the protocol into the hands of the community.

We are doing a series A round with VC’s. Since we have a token, we will just try to sell tokens to VCs, who can then participate in the governance. We also want to engage more with traditional financial institutions and let them participate in the governance too."

More can be read under 'roadmap'.

"Aave’s community now has a direct say in the governance of the platform with the very first Aave Improvement Proposal (AIP) looking to approve the token migration from LEND to AAVE."

"Aave announced today the official handover of admin keys to governance contracts controlled by the AAVE token holders, allowing decentralized governance votes to have direct control over changes to the protocol."

"In V2 governance, both AAVE and stkAAVE holders have voting rights, so staking will not be a hurdle for participating in the governance."

"I recently discovered that Aave's Polygon Market is governed by an undocumented multisig admin key.

  1. We know that Aave has a 3-of-5 admin key on its Polygon implementation.
  2. We do not know who the signers are.
  3. We do not know if 5 individuals hold the 5 signing keys uniquely.
  4. It is possible that 1 Aave team member holds all 5 keys.
  5. It is possible that this key can be used to severely compromise the Polygon market."

"AAVE admin access control information can easily be found.

a) Some protocols are clearly labelled as immutable (i.e LendingPoolAddressesProvider), and others are clearly labelled as upgradeable.

b) Defined voting roles and structure are clearly outlined

c) Capabilities for change in contract can be found here.

The AAVE Pause Control function is called Pause Guardian and is documented in the governance subgraph and tests from May 2021 can be found at https://github.com/aave/governance-v2/blob/f16655ae3d91d6043c5e345f59c0111d8207771b/test/governance-admin.spec.ts."

DAO

  • Has Flipside and Llama as some of their professional delegates, they are also on the Aave Grant Committee (30-11-2022). Gauntlet is a delegate as well.
  • Is launching cross-chain governance (27-8-2021), with Polygon as the first extra chain. Seems to be done through CCIP (17-7-2023).
  • Governance has finally become more clear and described when their Aavenomics were released (29-7-2020).
  • Aave token holders will govern the Insurance Pool, Money Markets and the Ecosystem Reserve (Component receiving and managing the distribution of fees from the different Aave Markets).

"The Governance Process is fuelled by governance forums at governance.aave.com and ratified through on-chain Aave Improvement Proposals (AIPs) using AAVE. The following diagram explains how the governance process will flow, from the inception and definition of the concept to the actual implementation: The community creats an AIP -> The community evaluates the AIP, feedback is collected, AIP is pollished -> The community signals to implement the proposal -> the genesis team implements the proposal and submits it to the governance -> the governance evaluates the implementation and approves or rejects the proposal.

Improvement policies define rules under which ecosystem improvements are incepted, developed and applied to the ecosystem, including but not limited to:

  1. Smart Contracts
  2. Governance processes
  3. Governance contracts
  4. Safety Module
  5. AAVE Token contract

Incentives Policies define the rules under which token incentives in Aave are generated. Financial incentives are used to shape behaviours within the ecosystem to achieve a common objective [11]. For Aave, the common goal is to ensure the safety of the Aave Protocol, cost-efficient usage by the market participants, and proper ecosystem incentives to drive innovation and long-term growth of the ecosystem.

Safety Incentives ensure the safety of the protocol by incentivizing AAVE holders to participate in the Safety Module. This is achieved with a set of incentives pushing behaviour to naturally create a positive feedback loop within the Aave Protocol. In that sense, the essence of those systemic incentives is to materially fade away while having lasting impact on participants behaviour [12]. This behaviour materializes with the birth of policy motivated agents that have incorporated the sustainability of the system they now belong to [13].

AAVE holders participating in the Safety Module earn both Safety Incentives in the form of AAVE and fees from the protocol.

Liquidity Providers and Liquidators (in the form of a single user or as a DeFi end-user interface) are two key components of the sustainability of a decentralized finance protocol by enabling liquidity within the protocol. As stakeholders and maintainers of the Aave Protocol, they should be rewarded with governance power through the Ecosystem Incentives."

Treasury

  • The USDC depeg of early 2023 left Aave with bad debt:

"Avalanche was hit worst worst, incurring almost $300k of bad debt. This prompted the Aave Guardian to freeze the USDC, USDT, Dai, Frax, and Mai markets on Aave v3 Avalanche. E-Mode on Avalanche yielded almost $2.5m last year."

Token

 ICO

"Aave’s governance tokens were initially distributed in a November 2017 token sale that raised nearly $18 million for development of the protocol."

Token allocation

  • Original distribution was Founders & Project 23% and Investors 77% according to Messari.

Utility

  • A portion of the interest accrued was distributed to LEND tokenholders via burns. This changed when the token was moved to AAVE.
  • With the Aavenomics released (29-7-2020), things will change quite a bit. There will be Safety Incentives (staking rewards), Liquidity Incentives (liquidity mining) for both markets and the backstop pool.
  • From Bankless (2020 Q3 report): "Total interest paid to suppliers."
  • From Bankless (5-2-2021):

"The core value of AAVE is its use as collateral of last resort for the Aave protocol. If Aave experiences a shortfall event—a period where the protocol incurs a deficit—AAVE is used to re-collateralize the system. The difference from other ‘collateral of last resort’ assets, like MKR in Maker, is that rather than forcing holders to deal with the dilution in the instance of a shortfall event, Aave allows holders to opt into slashing events by staking into the Safety Module (SM).

In return for staking AAVE as protocol insurance, stakers receive a portion of the ecosystem incentives including incentives from the ecosystem reserve as well as protocol fees. At the current rates, this results in roughly ~6% APY for AAVE stakers."  

Token Details 

"Fees are earned on loan origination which is split between lenders and the protocol. Protocol fees are used to burn LEND tokens."

"LEND tokens will be used to govern Aave protocol. Features include proposing, voting and deciding on new additions, features, assets and to decide on the protocol parameters. Additionally LEND token is burnt based on the fees gathered by the protocol."

"As it stands today, fees earned from borrowing are allocated as follows:

~80% used to burn LEND

~20% allocated to liquidity providers and referral programs

The current borrowing fees are slotted at 0.025% at the moment of origination with Flash loans incurring 0.09% fees."

To see the burnings, click here (1-5-2020).

"With the introduction of the Aave protocol, we bring the Aave Token $LEND at the center of the ecosystem. Compared to the current use cases with our legacy apps, the following has been implemented:

  1. Deflationary economy: The protocol will collect part of the fees collected by the platform and burn them, forever. Right now 10% of the collected fees are burned, and the burning parameter will be configurable through token-based governance in the future.
  2. Governance: We are introducing two governance layers, that will define how the Aave pool and the protocol will be configured and updated. Specifically the platform features a Protocol Level Governance, that will empower the community with the possibility of deciding the future of the protocol by voting on proposals by the dev team, especially on smart contract upgrades.

And in the short term future a Pool level Governance, which will allow depositors and borrowers to vote on the economic parameters of the pool, including new currencies, base interest rates, and liquidation configuration. Voting power within the protocol level governance will be solely based on the LEND token:

  1. This is only the first iteration of our governance model and we will continue to add features to empower the protocol and its stakeholders within our path towards decentralization.
  2. Additional token utilities: LEND will retain some token utilities from our legacy products, including the possibility of being deposited, borrowed, used as collateral and for fee reductions. Specifically, borrowers will be able to reduce the borrow fee by 80% after depositing 500.000 LEND into the protocol."
  • As of the 30th of October, 1,118,916,024 LEND have migrated [towards AAVE], representing 86.07% of total supply. This could be seen as a move to benefit from unit bias.

Aave's Stablecoin GHO

  • 17-6-2023 it got launched on Ethereum after a governance proposal was passed. After two days it had a $2.5M market cap. After 4 days $5.56M.
  • From Decrypt (2-11-2022):

"Aave will allow users to mint GHO against multiple types of collateral rather than creating a separate vault for each asset, like Maker. “The key difference is that the AAVE community is using the AAVE protocol for creating that stablecoin. So as a liquidity provider, you actually provide liquidity into the AAVE protocol and you earn on those assets that you’re supplying,” Kulechov said. “And at the same time, you can mint the stablecoin."

Coin Distribution

"The [LEND-AAVE] migration went live on 2 October 2020. At present, less than two weeks later, over 70.5% of LEND tokens have been voluntarily migrated to AAVE.

As the migration takes place, the number of addresses holding AAVE is increasing rapidly. However, it currently sits at only around 2200, as opposed to the 160,000 addresses still holding LEND.

This is likely because many addresses holding LEND represent small balances of lost/forgotten coins or abandoned dust. On the other hand, the reason AAVE isn't held in more addresses is because much of it is still held in the migrator contract, on exchanges, or in the staking contract - and as such, it is not directly in the hands (or wallets) of its owners."

"The DeFi Pulse Index is already a top holder of AAVE (owning around ~0.3% of the total supply)"

Tech

Implementations

"Aave launched its v3 iteration on March 16. The new platform has been deployed to the Fantom, Avalanche, and Harmony networks, and Ethereum’s leading L2s Arbitrum, Optimism, and Polygon. It will launch on the Ethereum mainnet at an unspecified later date."

V3 deployment on Aptos passed a first DAO check, making it possibly the first Aave non-EVM deployment (9-2024).

How it works

"Aave’s shifted from a decentralized P2P lending strategy (direct loan relationship between lenders and borrowers, like in ETHLend) to a pool-based strategy. Lenders provide liquidity by depositing cryptocurrencies in a pool contract. Simultaneously, in the same contract, the pooled funds can be borrowed by placing collateral. Loans do not need to be individually matched, instead, they rely on the pooled funds, as well as the amounts borrowed and their collateral. This enables instant loans with characteristics based on the state of the pool."

Fees

Upgrades

  • Aave V3.2, developed by bgdlabs (8-10-2024), brought "Liquid eMode for greater control and flexibility over borrowing and collateral, users benefit from improved gas efficiency and customizable risk management." Went live across all instances (28-10-2024).
  • From Dose of DeFi (30-5-2024):

"Aave v4, which was announced last month, is awfully similar to Euler v2. It comes after Aave zealot Marc “Chainsaw” Zeller said that Aave v3 would be the end state of Aave because of its modularity. Its soft liquidation mechanism was pioneered by Llammalend; its unified liquidity layer is also similar to Euler v2's EVC. While most of the impending upgrades aren't novel, they’re also yet to be widely tested in a highly liquid protocol (which Aave already is). It’s crazy how successful Aave has been at winning market share on EVERY chain. Its moat may be shallow, but it’s wide, and gives Aave a extremely strong tailwind."

"Aave V3 introduces the following features (among others):

  1. Portal : allows assets to seamlessly flow between Aave V3 markets over different networks;
  2. High Efficiency Mode : allows borrowers to extract the highest borrowing power out of their collateral;
  3. Isolation Mode : limits exposure and risks to the protocol from newly listed assets by only permitting borrowing up to a specific debt ceiling;
  4. Risk Management Improvements : provides additional protection for the protocol through various risk caps and other tools;
  5. L2-Specific Features : designs specific to Layer 2 networks to improve user experience and reliability;
  6. Community Contribution : facilitates and incentivizes community usage through a modular, well-organized codebase."

"Aave launched a market yesterday which will allow users to deposit liquidity provider (LP) tokens from automated market makers (AMM) and use them as collateral for borrowing. The market, called AMM Market, initially accepts deposits for 14 of Uniswap’s, and two of Balancer’s LP tokens. It has over $5M currently locked in its smart contracts without liquidity mining, as Aave CEO Stani Kulechov said in an interview. The release post emphasized that the initial 16 LP tokens chosen were only the beginning. The AMM market will not initially be covered by Aave’s Safety Module, which serves to offset lost funds by selling locked AAVE tokens, though governance can vote to change this."

"Aave v2 is live. Native credit delegation, gas optimizations, swap collateral, fixed and variable rate borrowing."

Staking 

  • From their docs (29-7-2020):

"Staked AAVE will be freely tradable after a cooldown period. All rewards accrue in real-time and are distributed as AAVE is withdrawn or transferred from the Safety Module.

Aave will be secured by a Safety Module (SM), a staking mechanism for AAVE tokens to act as insurance against Shortfall Events. Stakers earn AAVE as Safety Incentives (SI) along with a percentage of protocol fees.

Staking will feature plain AAVE alongside an AAVE/ETH pair. The latter will leverage Balancer to incentivize market liquidity and earn BAL along with trading fees."

Safety Module

  • From their docs (29-7-2020):

"The primary mechanism for securing the Aave Protocol is the incentivization of AAVE holders to lock tokens into a Smart Contract-based component called the Safety Module (SM). The locked AAVE will be used as a mitigation tool in case of a Shortfall Event within the money markets that belong to the Aave ecosystem. A Shortfall Event occurs when there is a deficit. The interpretation for the occurrence of a Shortfall Event is subject to the Protocol Governance vote, detailed in Governance.

In the instance of a Shortfall Event, part of the locked AAVE are auctioned on the market to be sold against the assets needed to mitigate the occurred deficit. The SM includes a built-in backstop mechanism to prevent excess flow of AAVE into the open market that would further reduce the value of AAVE itself. Participants’ decision to lock AAVE into the SM assumes the acceptance of a potential Shortfall Event as they secure the protocol in return for receiving rewards, in the form of Safety Incentives (SI) and fee distributions.

To contribute to the safety of the protocol and receive incentives, AAVE holders will deposit their tokens into the SM. In return, they will receive a tokenized position that can be freely moved within the underlying network. The holder of the tokenized position can redeem their share from the SM at any time, triggering a cooldown period of one week (which can be further extended by the governance).

SI rewards are subject to a cooldown period where tokens are unclaimable. The cooldown period is set to seven days. However, fees generated by the protocol are continuously allocated to the users participating in the SM and can be withdrawn. Fees generated from the protocol are redistributed to the SI participants. The reward plan for the SI is designed to incentivize participants contributing to the safety of the protocol in its early stages. The SI emission will be controlled by the governance and adjusted to the protocol's needs.

In case the SM is not able to cover all of the deficit incurred, the Protocol Governance can trigger an ad-hoc Recovery Issuance event. In such a scenario, new AAVE is issued and sold in an open auction for market price prioritizing the Backstop Module.

This module is a smart contract-based deposit pool to allow the Aave Community to deposit stablecoins and ETH acting as a buy order for the AAVE token at a price agreed-on by the protocol governance in the case of a Shortfall Event, to act as a buyer of last resort. Back-stoppers are incentivized to have liquidity in the Backstop, as protocol fees are shared with them. 

The issuance of AAVE in case of a Shortfall Event is mitigated by the existence of the SM. Prior to any issuance, the deficit of the protocol is first covered by the SM reserves.

The Safety Module is built on top of existing AMM technologies. An 80% AAVE/20% ETH liquidity pool using Balancer will be used to provide benefits in terms of market depth for the AAVE token and earnings from locking AAVE. This also extends to BAL tokens and trading fees on top of the SI and protocol fees, while reducing the impact of a Shortfall Event on the AAVE token itself.

The Safety Module solves the issues with traditional staking systems and market liquidity: Tokens with locking/reward schemes tend to suffer from low market liquidity and extreme volatility when high percentages of the total supply are being locked. With the ability of contributing to the SM not only by locking AAVE, but also by contributing with liquidity into an AMM, stakers create a trustless and decentralized market with deep liquidity for trading AAVE against ETH.

Since Balancer Labs is distributing BAL governance tokens to liquidity providers, having the SM liquidity in Balancer enables the users to receive BAL tokens on top of trading fees, protocol fees and SI rewards."

"The Safety Module holds $1.6B. $1.2B of $StkAAVE earning 7.2% this week. $432m of $StkaBPT earning 20% this week + $BAL rewards + Fees. The Safety Capital is $489 million (30% of the stakes) covering 32% of V1+2 outstanding loans."

Scaling

  • Discussions around L2 have started (21-2-2021). V3 will bring designs specific to Layer 2 networks to improve user experience and reliability (4-11-2021).

Interoperability

"Portal allows users to move their own assets seamlessly from deployments of V3 over different networks. At its core, the feature is quite straightforward: a user’s supplied liquidity can be transferred from one network to another simply by burning aTokens on the original source network (e.g., Ethereum) while minting them on the destination network (e.g., Polygon). A network interconnection built around this feature is called Port.

Portal can help bridging protocols like Connext, Hop Protocol, Anyswap, xPollinate and novel solutions that can be specifically built to leverage Portal, to tap into Aave Protocol liquidity to facilitate cross-chain interactions. Aave Governance will have the ability to grant any cross-chain protocol access to the Ports upon receiving a proposal to do so."

Other Details 

Their Projects

aTokens

"Aave has also introduced aTokens, which are interest-bearing tokens that are pegged 1:1 to the value of the underlying asset.

They work in a similar way to Compound Finance’s cTokens or chai.money’s CHAI token, which are also backed by other assets and earn interest. Whereas cTokens and CHAI earn interest via value appreciation, aTokens pay interest with an increasing balance of aTokens.

In this way, aTokens are always equivalent in value to their underlying asset."

"While the underlying asset is loaned out to borrowers, aTokens earn interest directly in whatever wallet you’re using (Metamask, Coinbase, etc.)! You can redirect the interest earned on aTokens at any time to any Ethereum public address, which gives you tons of control over where your money goes."

Aave Arc

  • Officially launched (6-1-2022) with the help of cryptocurrency custody firm Fireblocks, plus a “whitelist” of 30 licensed trading firms.
  • Rebranded into Aave Arc (30-7-2021).
  • From EthHub (6-7-2021):

"Aave Pro will be the first permissioned decentralized liquidity protocol being co-launched by Aave and Fireblocks."

In practicality this means whitelists governed by Aave token holders

Credit Delegation (CD)

"Aave depositors will be able delegate their credit lines. For example, Karen deposits an asset such as USDT to Aave and delegates her credit line to Chad, who draws funds such as ETH from Aave Protocol."

Cross-chain Governance

  • Is launching cross-chain governance (27-8-2021), with Polygon as the first extra chain.

dApp shop

"Zeller also noted Aave’s forthcoming wallet application, describing the dApp as a one-stop-shop for social media, DeFi, and fintech services powered by the GHO stablecoin."

Debit Card

“More than a year ago we tweeted about the debit card and… people forgot about that,” Zeller said. “Since then, we got the electronic money institution license and we have a full team on that.”

Flashloans

KYC Subnet

"The single most salient development here came with Ava Labs’ announcement that it will collaborate with Aave, GoldenTree Asset Management, Wintermute, Jump Crypto, Valkyrie, and Securitize to build a permissioned subnet with native KYC functionality.

Lens Protocol

“Eventually each creator could allow their followers to vote on the type of content they post through DAOs,”

"The company has had more than half of its team working on it since the beginning of the year."

Newt

The project’s research and development arm (18-12-2021).

Lending Rates

"Aave Protocol lets users switch between stable and variable rates, which is great for keeping the market on your side. We can’t just offer variable rates, because these are too temperamental and can fluctuate depending on liquidity in the pool, which is terrible for the end-user. Stable rates give users certainty on their interest rates, taking away the stress of taking out a loan. You can always switch– if you originally had a variable rate and the rate starts going up, you can switch to the stable rate and vice versa."

Oracle Method

"The Aave oracle network is now live on the Ethereum mainnet and currently securing 16 cryptocurrency price feeds. This represents a major milestone for DeFi, as Aave is the first lending protocol to leverage off-chain pricing data for calculating lending rates using a decentralized network of price oracles."

"Oracle Method

Aave uses separate Chainlink Price Reference Data contracts for each of the 15 price oracles needed to secure the accurate issuance and liquidation of cryptocurrency-backed loans. These data feeds are for assets priced against ETH and include LEND, LINK, BTC, MKR, MANA, KNC, USDC, REP, ZRX, BAT, DAI, TUSD, USDT, SUSD, and SNX.

Chainlink’s Price Reference Data Contracts are decentralized oracle networks made up of at least 7 independent, security reviewed, and Sybil resistant node operators. They derive from a growing pool of 30 independent node operators run by leading blockchain DevOps and security teams, many of which have extensive experience running POS nodes across multiple blockchain networks.

On-chain prices are calculated by having each independent node retrieve data from one of the numerous different market data aggregators, with every network containing at least seven independent data aggregator APIs. The nodes’ individual responses are then aggregated together on-chain into a collective response that becomes a new on-chain price update to the Price Reference Data Contract. Updates occur every 1% deviation in price (2% for less used assets), with a minimum time-based update every hour if the deviation threshold is not reached.

Source

https://medium.com/aave/the-aave-oracle-network-powered-by-chainlink-is-now-live-45bb8a5a8c4e

https://feeds.chain.link"

"The Aave Protocol Oracle System leverages oracles provided by Chainlink and backed by Aave, with an emergency backup oracle run by Aave. The decentralization process will consider providing adequate incentives for oracle providers."

Compliance

"Implemented address screening

Implemented TRM into IPFS

aave/interface#1017

https://twitter.com/sassal0x/status/1558326040920936448"

"Aave looks set to upgrade to version 3 under a business license that restricts use of their code for something like a year, according to a poll of AAVE holders that closed on Dec. 13. The poll closed fairly narrowly, with 388K AAVE voting for the more restrictive business license and 312K voting for one of two more open options.A large vote for the business license came in just before the vote closed, and while many scrambled to oppose it, it wasn’t enough, based on this tweet."

"Aave's U.K. business entity has been issued an Electronic Money Institution (EMI) license. Aave Limited was granted approval on July 7, according to public information published by the U.K. Financial Conduct Authority (FCA), which issued the authorization. Such an authorization allows the recipient to offer services such as issuing digital cash alternatives and providing payment services. According to founder and CEO Stani Kulechov, the application for the authorization was first submitted in 2018. Specifically, the service will allow users "to go from Fiat to stablecoins and other assets natively in the Aave Ecosystem and then use these assets in the Aave Protocol."

Roadmap

  • After V4, Aave plans to become the 'unified liquidity layer' as an L2 in 2025.
  • V2 specifications were released on 14-8-2020.
  • From an interview with the founder (5-3-2020):

"Over the next few weeks, we’ll be introducing insurance-like functions to further expand our value-added use-cases. By having mechanisms for additional risk tolerance through things like insurance using a protocol token – we can start to offer really unique incentives.

We’ve got a governance paper rolling out soon. We’ll be outlining our roadmap with some enhanced tokenomics.

The cool thing is utilizing a token model allows us to build freely – we have a ton of flexibility to iterate how we’d like. Over time, LEND provides the ability to get rid of the central power and transfer it into the hands of our community."

  • Back in 8-5-2019 the team claimed to have fulfilled most of it's roadmap. However, it has pivoted since then. This is what they wrote for the future back then:

"ETHLend technical roadmap is coming to an end in terms of development cycles, since most of the milestones have been fully deployed on the Ethereum mainnet. Currently, there would be the following milestones pending for ETHLend:

  1. Revenue scheme for AI Credit Risk bot creators on Q3 2018*
  2. Prediction Market to Assess Credit Risk on Q4 2018*
  3. Lending Other Altcoins and Tokens on Q4 2018* (partially implemented)
  4. Protocol to Enable Insurance Policies (with AI bots) on Q1 2019
  5. Expanding Decentralized Lending and Decentralized Credit Rating beyond Ethereum network Q4 2019*

the general roadmap of ETHLend:

  1. Opening Suggestions Venue for Public on Q4 2018
  2. Creating and Testing Democracy DAO on Q4 2018
  3. Protocol Voting on Q1 2019

In the next community update, Aave shall introduce how governance of the protocol and lending pools are structured and how the tokenomics would be part of this governance process."

As of July 2020 their tokenomics and governance proposals have been released.

Road to Decentralization

"As with many decentralized finance protocols, the Aave protocol plans to gradually phase into complete decentralization over an extended period of time, to ensure a smooth initial launch and public testing phase.

For this initial phase, the Aave team will retain control over the protocol, in order to more easily address any early incidents or issues.

The long-term governance plan is currently under development, and will be integrated once this development is completed. The system will incorporate the LEND token, and will all be published in a formal roadmap post within the next few weeks."

"We’ve got a governance paper rolling out soon. We’ll be outlining our roadmap which some enhanced tokenomics like we chatted about earlier.

From a wider lens, we’re looking to keep growing fast as slowly as we can. We’re always going to innovate and I’m very conscious of keeping security in mind.

"If we do it right, I have no doubt we’ll see DeFi TVL at $10B by this time next year.""

  • They released a new tokenomics Flash Paper (29-7-2020) with new governance mechanisms and a tokenswap. These upgrades will have to be voted on by LEND holders:

"The first step of the Genesis Governance is the initial bootstrapping of the Aave ecosystem, comprising the AAVE token contract, the migration contract from the LEND token to the AAVE token and a governance contract designed to have the AAVE token as the only voting asset.

The objective of the Genesis Governance is to enable this transition by submitting one or multiple proposals in a governance contract designed to have the LEND token as the voting asset. During this transitional period, the bootstrapping proposals will be submitted by the Genesis Team after being approved by the community via the Aave Improvement Proposal procedure defined in the AIP framework.

The Aave Protocol will eventually allow anyone to create a money market. However, to benefit from protocol incentives, the market parameters and assets selected must be within the realm of the Risk Policies."

Usage

"The current market size of Aave (total value locked + total borrowed) is $20M and has been growing steadily since its release on January 8th with an average growth rate of $0.5M per day. On the Aave futuristic realtime dashboard, users can view a variety of metrics including this one. Approximately 80% of all collected fees are used for burning the LEND token."

"Flash Loans Volume. Recently, one of the most interesting statistics is the huge increase in the volume of Flash Loans made on Aave Protocol the past 2 weeks. This spike occurred on 3/12, the day now known as Crypto Black Thursday. This increase was driven by the liquidations on Maker Dao. It is worth noting that DeFi Saver played a major role in driving up the Flash Loan volume on Aave on Crypto Black Thursday (source).

According to Aave Watch, 266.76 ETH have been collected for protocol fees so far out of a total 363.23 ETH (the remaining pending fees will be collected in the future)."

"Since the rebranding, we’ve seen Aave surge on the DeFi leaderboard. At the beginning of the year in January, Aave’s total value locked was a mere $328,000 according to DeFi Pulse. Fast forward to April and the lending protocol has captured a significant amount of value, reaching nearly $50M just last week.

A 150x increase in total value locked in less than 4 months is impressive to say the least. Value locked in ETH terms has also ballooned in recent months as Aave has locked over ~26,000 ETH into the protocol, up from ~1,200 ETH in January. Equally as important, we’re also seeing increased usage on the protocol level as deposits and borrows have surged. Aave’s surge in deposits is one of the most notable metrics for the lending protocol. The lending protocol has capitalized on Compound’s limited asset selection, allowing the protocol to capture value from other sources. 

In total, Aave has roughly 265,000 ETH (or ~$45M) in value locked across all asset types. The biggest derives from LINK as nearly $20M in value is locked from the decentralized oracle provider while the second-highest actually comes from the protocol’s native token, LEND. As of writing, nearly $7M worth of Aave’s LEND is locked in the lending protocol despite offering 0.00% APY on LEND tokens."

"This dashboard shows Aave’s current market size ($63.5M), total amount borrowed ($11.3m), and TVL ($52.2m) of the protocol."

"Aave’s growth in 2020 has been welcomed by token holders. The LEND token has increased by 2,500% while value locked in the Aave protocol grew from $0 to almost $1.3B. As a result LEND has been one of the most profitable tokens."

"Aave is rapidly approaching $5B on its balance sheet, including 0.35% of all ETH in circulation."

"The number of new daily users fell from ~400 in May 2021 to ~60 in Feb 2022. After the v3 launch, new users and price both rose significantly. The spike in new users led ahead of the price movement. The increase in number of new daily users (to 370/day) implies that users saw meaningful value in the new features."

Projects that use or built on it

  • 88mph; says they "are dependent on the success of other protocols" one of which is this one (25-2-2021).
  • AITO; building a yield generating NFT on top of AAVE (13-5-2021).
  • Enzyme; "has integrated the Aave Protocol, giving @enzymefinance Vault Managers access to Aave depositing" (18-3-2021).

Critique on their branding

"I tried looking into what the tokenomics of Aave actually is but was surprised to realise that I actually couldn't find it. Maybe they still have enough money in the bank, but they're wasting the use of a potentially powerful shilling tool (see: SNX spartans). Apart from tokenomics, I definitely think they could improve their branding to attract more liquidity. The dominant use of the blue/purple gradient is reminiscence of low quality ICOs and doesn't deliver confidence to users that their financial assets are safe. It's a minor point but commonly overlooked by engineering heavy teams."

Competitors

"Aave provides a money lending market similar to Compound. The major difference is that Aave re-uses locked assets within the Ethereum ecosystem, instead of just focusing on the total locked amount of assets. To get people into DeFi, you have to have more offerings– you can’t just do the same thing as everyone else. We decided to come up with different tools that utilize the assets in a better way, and that’s how we came up with flash loans."

  • From this tweet (6-10-2020):

"Compound currently has 3.6x more outstanding debt issued than Aave. However, TVL in Aave markets is higher, as more assets have been supplied compared to the outstanding debt.

Due to $COMP liquidity mining incentives, much of the activity on Compound revolves around $DAI. By contrast, the distribution of supplied assets is more even on Aave.

$DAI lending rates have historically been slightly higher on Aave than Compound."

"What’s novel and interesting about the GHO stablecoin, as opposed to decentralised alternatives such as DAI and Frax, is that GHO facilitates multi-asset collateral. This essentially means that users are able to mint GHO utilising a culmination of their entire Aave supply portfolio, be that ETH, LINK, wBTC etc."

Team, Funding, Partners

Team

"We aren’t a huge team– we are about 20 people. We are headquartered in London, and we have another office in Switzerland. Half the team are developers, and the other half do more support, research, outreach, etc." 

Funding

"Llama has prepared two income statements, one specifically for the Ethereum ecosystem and the other for Polygon, both denoted in USD translated at the EOD token value. August shows a total net profit of: Ethereum V1, V2 - $12,241,360, and Polygon - $4,437,190."

"Aave today announced a $25 million investment from Blockchain Capital, Standard Crypto, and Blockchain.com ventures, among others. The funding supplements $24 million that has been raised through three token sales since the project was announced in 2017."

"Right now, we have fees. There’s the origination fee and then fees on the flash loans. We are doing a series A round with VC’s. Since we have a token, we will just try to sell tokens to VCs, who can then participate in the governance. We also want to engage more with traditional financial institutions and let them participate in the governance too."

  • Part of the portfolio of SVK Crypto
  • By the end of 2017, ETHLend underwent an Initial Coin Offering (ICO), receiving approximately $16.2 million in funding.

Partners

Aave Ecosystem Grants

  • According to the announcement (2-4-2020): "Grants will range in size between 500 aDai to 5,000 aDai."

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