What is Aave (AAVE)?

With the wind of DeFi (decentralized finance) in the crypto world, it has become possible to give and receive loans without banks. Aave is one of the major protocols at this point. Aave is an open-source lending and borrowing protocol running on the Ethereum blockchain, which allows users to lend and borrow crypto assets without the need for intermediaries. In short, thanks to Aave, you can get a loan with collateral or start earning interest by providing liquidity with a few clicks from your wallet. Here's everything you need to know about this interesting crypto project, which has become a giant since its launch...

Definition and Emergence of AAVE

Aave is one of the leading protocols in the world of decentralized finance (DeFi). Basically, it is described as a non-custodial and open-source liquidity protocol that allows users to borrow, lend and earn interest on crypto assets. It works without the need for intermediary institutions in the traditional financial system. The answer to the question of what is Aave is that this platform functions as an Ethereum-based credit system. As a defi lending protocol, it allows users to interact directly with each other or with the platform's liquidity pools through smart contracts. Users can earn interest by supplying their assets to liquidity pools, while they can access funds through collateralized borrowing from these pools.

Aave has its origins in a project launched in 2017 under the name “ETHLend”. The initial concept of ETHLend was to provide a peer-to-peer platform for decentralized finance applications that matches borrowers and lenders. The project raised nearly $17 million in funding through a successful Initial Coin Offering (ICO). However, the peer-to-peer model faced liquidity issues and inefficiencies, especially during the bear market in 2018. These challenges pushed the team to completely redesign the platform. A new parent company, Aave, was established in late 2018. Aave means “ghost” in Finnish. The new platform implemented a liquidity pool system where lending rates are determined by an algorithmic function.

The ETHLend platform was closed with the launch of Aave V1 in January 2020. This rebranding and technological shift made Aave a major player in the DeFi space. Aave offers a secure and efficient money market that automates credit transactions with smart contracts.

AAVE's History: Key Milestones

Aave's evolution has paralleled the growth of the DeFi ecosystem. Here are the main stops on Aave's journey:

• Founded in 2017: The project was founded as ETHLend by Finnish entrepreneur Stani Kulechov. A lawyer with an interest in RegTech (Regulatory Technology), Kulechov was exploring how digital solutions could change the legal and regulatory functions related to finance. ETHLend held an ICO in November of the same year, and this is generally considered the starting point for the Aave launch date. The ICO issued 1.3 billion LEND tokens, 75% of which were offered in a token sale. About 17 million dollars in funding was raised. The initial concept was based on peer-to-peer lending.
• In 2018, the first steps for Aave were taken: Towards the end of 2018, a new parent company called Aave was established and the new liquidity pool model of the Aave lending platform was designed.
• In 2020, the rebranding happened: The Version 1 (V1) platform of the rebranded Aave protocol went live in January 2020. With this launch, the ETHLend platform was shut down. V1 offered a system using liquidity pools and algorithmic interest rates. In December of the same year, Version 2 (V2) was launched. V2 built on V1 and focused on new risk mitigation features and improved capital efficiency, taking into account the exponential growth of the DeFi ecosystem. Also in 2020, LEND tokens were converted into Aave tokens at a 100-to-1 ratio, resulting in a total of 13 million Aave tokens. An additional 3 million Aave tokens were created for the project reserve and protocol incentives. The management of Aave was transferred from the for-profit organization to token holders. Additionally, Aave Companies received investment in October 2020 with a $25 million venture capital round.
• 2021 Aave Pro was released: Aave consolidated its dominance in the DeFi space. The Aave Pro (later rebranded as Aave Arc) platform targeting enterprise users was launched in July. Due to high Ethereum gas fees, the decision was made to expand to Polygon in April, then Avalanche.
• In 2022, it expanded to Polygon, Avalanche, Arbitrum, Optimism: Nearly 2 years after Aave V2 was released in December 2020, Version 3 (V3) went live on six different blockchains (including Polygon, Avalanche, Arbitrum, Optimism) in March 2022. V3 is the most significant upgrade to the Aave protocol. It introduced innovations such as multi-chain support (such as Polygon, Avalanche, Arbitrum, Optimism, Base) and the “Portal” feature. The Portal feature aims to increase cross-chain mobility by allowing cross-chain bridges to mint and burn aTokens representing Aave deposits. V3 also offers enhanced risk management tools (Isolation Mode, Efficiency Mode - E-Mode, Siloed Borrowing), improved capital efficiency and approximately 25% lower gas fees. The differences between V1, V2 and V3 can be seen in the table below:

Feature	V1	V2	V3
Launch	2020	Late 2020	2022
Flash Loans	✔️	✔️	✔️
Cross-Chain	❌	Partial	Full support
Risk Management	Limited	Intermediate	Advanced
Gas Optimization	❌	Partial	✔️ (approximately 25% lower)

• GHO launched in 2023-2024: Aave's native stablecoin GHO was launched on the Ethereum mainnet in July 2023. GHO is an algorithmic stablecoin backed by collateral surplus. As of April 2024, GHO was also deployed on the Arbitrum network via Chainlink's CCIP protocol. The Aave DAO plans to launch GHO on multiple networks over time. In November 2023, Aave Companies announced its rebranding to Avara and the acquisition of Ethereum-based crypto wallet Family in an effort to expand its Web3 reach. Aave Protocol and Aave Labs will continue to exist under Avara's umbrella brand. The company aims to go beyond DeFi and bring Web3 to global users with different use cases. Projects such as the decentralized social networking protocol Lens are also under the Avara umbrella. A V4 launch is also planned.

Why is AAVE valuable?

How Aave works and why it is important can be summarized in the following points, based on the main benefits offered by the protocol:

The unbanked financial system puts Aave at the forefront

Aave works without a central authority or intermediary. Users have the ability to borrow collateral and earn interest by lending their crypto assets, even if they do not have access to the traditional banking system. This democratizes access to financial services. This means that users have full control over their funds (non-custodial).

One of the pioneers of the DeFi ecosystem

Aave is seen as a pioneer in the decentralized lending space. It brought an innovative solution to scalability issues in the industry by moving from ETHLend's peer-to-peer model to liquidity pools. It introduced revolutionary features such as flash loans. These are known as unsecured loans where the borrowed amount is repaid within the same blockchain transaction. In particular, the requirement of repayment within a “one-block” transaction makes flash loans unique.

High liquidity, risk management and collateral structure

Aave is one of the largest DeFi protocols and hosts billions of dollars of Total Locked Value (TVL). This high TVL provides a deep pool of high liquidity for borrowing and lending on the platform. Liquidity pools allow lenders to deposit tokens and earn the bulk of the fees and interest that borrowers pay.

Borrowers often have to maintain a collateralized borrowing position that exceeds the value of the borrowed funds. This overcollateralization mechanism protects the protocol and users and helps to ensure stability. Aave dynamically adjusts parameters such as LTV (Loan-to-Value) ratios and liquidation thresholds to reduce the risk of loans. Features introduced in V3, such as Isolation Mode and Siloed Borrowing, make it possible to list less liquid or more volatile assets as collateral, while improving overall protocol security. While sources mention specific collateral ratios such as 55% LTV (i.e. 200% collateral) using the LEND token during the ETHLend era, features such as E-Mode in Aave V3 could improve efficiency by providing higher borrowing power for certain correlated assets.

Transparent structure and support for multiple blockchains

Aave works completely transparent with its open-source structure. All transactions can be seen on the blockchain, users can connect with their wallets and track both past transactions and the current status of the protocol. The system, which initially worked only on Ethereum, is now active on many networks such as Polygon, Avalanche, Arbitrum, Optimism. Thanks to the cross-chain feature introduced with V3, Aave can be easily accessed from different ecosystems.

AAVE token economy and functions

An important answer to the question of what the Aave token does is governance. AAVE token holders are empowered to make decisions about the future of the protocol. Proposals for new features, asset listings, risk parameters and other adjustments are submitted and voted on through the Aave Governance Portal. Token holders can vote themselves or delegate their votes to others. This decentralized Aave governance token structure ensures that the protocol is driven by the community. AAVE tokens also gain value through a portion of the fees and spread collected by the protocol; these funds are used to purchase and burn AAVE tokens. Furthermore, AAVE token holders can benefit from discounts and improved terms when joining the platform.

Delving deeper into the question of what is an aave coin, we find that the AAVE token has several critical functions for the protocol. As mentioned earlier, one of the most important answers to the question of what is an aave token for is the governance of the Aave protocol.

AAVE tokens play a central role in the operations and security of the protocol. By staking AAVE in the Safety Module, AAVE token holders contribute to providing a backstop mechanism against the protocol's capital shortage. AAVE staked in the Safety Module helps to maintain collateralized borrowing positions in the event of a liquidity shortfall in the protocol (reserves used to cover illiquidity in lending pools). AAVE tokens staked in this module earn a staking return on treasury reserves. In the event of a deficit, a maximum of 30% of the staked AAVE can be slashed. In case the security reserves are insufficient, Aave treasury reserves will be used to cover the remaining deficit. There has been no need to support liquidity in the protocol to date. This functionality makes the AAVE token a “backstop” or support asset for the protocol.

The AAVE token accumulates value through a portion of the fees and spread collected by the protocol. The spread and fees collected by the protocol are used to purchase AAVE tokens on the open market. Aave has committed to token burning. Sources state that about 80% of the fees paid on the platform are used for this burning purpose, while 20% is used to incentivize lenders. Ultimately, the goals of Aave reserves are to grow the ecosystem and increase token value. Because governance is decentralized, token holders can direct decisions about the use of the reserves.

Over the years, the Aave coin price has fluctuated with the market. For example, the LEND token reached an all-time high of $0.442615 in January 2018. According to CoinMarketCap, AAVE's all-time high price was $541.28. As of 2025, the AAVE token is trading at around $160. However, current prices are constantly changing. In summary, the AAVE token plays a central role in the protocol's governance, security (through staking), value accumulation (through burning) and user incentives.

Innovative features: Flash loans, loan delegations...

Aave offers innovative features that stand out in the industry. Flash loans, a feature that enables unsecured borrowing that must be repaid in a single blockchain transaction, has opened up use cases such as arbitrage, debt restructuring and collateralized borrowing swaps. Credit Delegation allows one user to delegate borrowing power to another user. The platform offers a choice of floating and fixed interest rates that dynamically adjust according to market conditions. Collateral Swapping allows to swap collateral without exiting the borrowing position.

Aave not only maintains its existing services in the field of decentralized finance applications, but is constantly exploring new areas and expanding its ecosystem. Technical updates are planned, such as the launch of V4. This is likely to expand the answers to the question of what is Aave v3, which started with V3, and push the protocol's capabilities even further.

GHO stablecoin expands ecosystem

GHO is a decentralized stablecoin belonging to the Aave ecosystem. Users can mint GHO by pledging collateral. Controlled by Aave DAO, this system allows the platform to offer a self-contained lending experience.

Institutional adoption and broad vision

Aave is bridging the gap between traditional finance and DeFi by exploring enterprise-grade products (such as Aave Arc) and companies like Valour launching AAVE ETPs.

Who is the Founder of AAVE?

The answer to the question of who is the founder of Aave is the person who has been leading the project since its inception: Stani Kulechov. Stani Kulechov is the founder and CEO of Aave. He is also the founder of ETHLend. Sources describe him as “a young, entrepreneurial Finnish lawyer”. Kulechov became interested in Ethereum while studying law at the University of Helsinki and discovered its potential impact on the traditional financial system. He was particularly interested in RegTech (Regulatory Technology) and how digital solutions could change legal and regulatory functions, including those related to finance.

Kulechov is a self-taught programmer and has been programming since a young age. He launched ETHLend in 2017, creating one of the first DeFi DApps. Originally conceived as an Ethereum-based lending system, he later rebranded the platform as Aave, aiming to go beyond just ETH lending and include the broader crypto asset market.

Stani Kulechov placed great emphasis on growing the project with the developer community in an open-source manner. His mission is to create tools for an open, transparent and fair financial ecosystem through the Aave Protocol. With the recent rebranding of Aave Companies to Avara, the Kulechov-led company aims to expand beyond DeFi and bring Web3 to global users. He is particularly interested in decentralized social finance applications and is excited about projects such as the Lens Protocol.

Frequently Asked Questions (FAQ)

As you read about Aave, some questions may have been cleared up, but some may still be lingering. In this section, we've collected the most frequently asked questions from traders and enthusiasts with short and clear answers. Here you can brush up on the basics and find out the important details you need to know before using Aave:

• What is AAVE and how does AAVE work?: Aave is a decentralized finance (DeFi) protocol. It allows users to lend, borrow and earn interest on crypto assets without the need for traditional financial intermediaries. The protocol works on a system of liquidity pools where lenders can earn interest by depositing tokens and borrowers can access funds instantly by providing collateral or through flash loans. Interest rates vary according to demand on a token-by-token basis.
• What does AAVE coin do?: The AAVE token has a central role in the operations and governance of the Aave protocol. It is used as the gravity center of protocol governance. AAVE token holders vote on Aave Improvement Proposals (AIPs) and make decisions about the future of the protocol. AAVE can be staked to a reserve pool called the “Security Module”. This pool is designed to protect the protocol in case of capital shortages and stakers earn rewards. AAVE token holders are entitled to receive discounts on fees and improved terms when joining the platform. Also, part of the fees paid on the platform are used to buy back AAVE tokens from the market.
• How to borrow money on AAVE: Users can borrow other crypto assets from Aave pools by placing their crypto assets as collateral. Borrowers are usually required to hold collateral with a higher value than the amount borrowed (over-collateralization). Aave also offers flash loans, which allow users to borrow unsecured funds on the condition that they are repaid within the same transaction.
• Is AAVE secure: Aave uses various risk management mechanisms to protect its users and the protocol. Loans are usually over-collateralized. There is a Safety Module that is used to provide liquidity in the event of a vulnerability in the protocol. The Aave protocol code is publicly available and auditable. The V3 code has been audited and officially verified by leading security firms. The protocol also has an ongoing bug bounty program. While no protocol is considered completely risk-free, extensive steps have been taken to minimize these risks.
• Which networks can AAVE be used on? Aave was initially launched on the Ethereum protocol. It is currently available on multiple networks, including Polygon, Avalanche, Arbitrum, Optimism and Base.
• What is AAVE governance: Aave is a fully decentralized, community-governed protocol by AAVE token holders. AAVE token holders collectively discuss, propose and vote on protocol upgrades and adjustments. This decentralized governance structure allows the community to have a direct say in the development of Aave.

Check out our JR Kripto Guide series for comprehensive content on AAVE and DeFi protocols!