How Lending Protocols Like Aave Work

 How Lending Protocols Like Aave Work


Aave is a decentralized lending protocol built on blockchain that allows users to lend and borrow cryptocurrencies without banks or intermediaries. Everything runs through smart contracts, making the system transparent and automated.


🔹 How It Works:


Lending (Supplying Liquidity)


Users deposit their crypto (like ETH, USDC, or DAI) into Aave’s liquidity pool.


In return, they receive aTokens (interest-bearing tokens) that automatically earn interest.


Borrowing


Borrowers can take a loan from the pool by providing collateral (more valuable assets than the loan amount).


Example: Deposit $1,000 worth of ETH, borrow $600 worth of stablecoins.


Interest Rates


Interest rates are determined algorithmically based on supply and demand in each pool.


More demand → higher interest rates.


Collateral & Liquidation


If the value of collateral falls below a safety threshold, the loan can be liquidated.


This ensures the protocol always stays solvent.


Special Features of Aave


Flash Loans: Borrow without collateral, but must repay within the same transaction block.


Stable & Variable Rates: Borrowers can choose between fixed-like stable rates or variable rates.


Governance: AAVE token holders vote on protocol upgrades and rules.

Learn Blockchain Course in Hyderabad

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