How does AAVE work?

Modified on Sat, 18 Feb 2023 at 08:02 PM

Users are able to both lend and borrow various crypto coins, whether it’s Stablecoins or Altcoins, through the input of Ethereum-based coins. In the case of lending, users are required to input their coins into the system’s coin pool to allow others to borrow them through the said pool. Once a user has borrowed their coins, an interest fee will be enforced wherein the borrower will have to return both the coins and system-demanded fees. The interest fee rate is dependent on the particular pool’s demand for various coins. If the coin is in low supply, the interest rate will be multiplied, and if high, the rates will be adjusted to be lower to stimulate increased borrows.

The Aave platform is also adept in the creations of flash loans. A flash loan is a variation of loans that do not require an input of collateral, but loans obtained must be returned before the Ethereum block in case the relation is closed, meaning that flash loans are beneficial for short-terms borrows for immediate profits. It is also required that once the profit has been made, the borrower must return the funds with an additional interest fee.

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