What is Aave and what role does the AAVE token play?
Aave lets you pool crypto to earn interest, borrow against collateral, and vote with AAVE. It is not a bank, so deposits are not FDIC-insured.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
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- Borrowers lock collateral worth more than the loan.
- A drop in collateral value can trigger a liquidation.
- AAVE holders vote and can stake as a backstop.
The protocol runs as open source software on Ethereum and other networks. You do not need the AAVE token to lend or borrow.
How does Aave work?
Aave launched on Ethereum in January 2020 and now runs on other networks too. Suppliers add coins to shared pools and earn interest, while borrowers lock up collateral worth more than their loan. Rates move with supply and demand.
- Collateral stays locked while the loan is open.
- A health factor compares your collateral with your debt.
- A drop below the threshold triggers a liquidation that repays the debt.
What is the AAVE token used for?
AAVE is the native token of the Aave protocol, and lending or borrowing does not require it. Holders use it to vote on the protocol's direction and can stake it as a safety backstop.
How is Aave different from related protocols?
Aave, Compound and Sky, the protocol formerly called MakerDAO, are lending systems built on public blockchains. Aave is known for flash loans and for pools on several networks.
What legal and regulatory issues surround Aave?
US regulators have not settled how securities law applies to DeFi lending or to the AAVE token. The SEC has brought enforcement cases against DeFi projects, and the IRS treats crypto as property, so interest you earn is taxable.
Frequently asked questions
No. You lend and borrow with coins you already hold; the token is for governance and staking.
The open software can be reached by anyone, though some front ends block certain countries and US tax rules still apply.
The protocol liquidates the loan: the debt is repaid and the collateral is sold.
Borrowers pay interest, which goes to suppliers and to a protocol reserve.
