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Aave (AAVE) is a decentralized financial protocol running on the Ethereum blockchain. Founded in 2017 by Finnish entrepreneur Stani Kulechov, the platform comprises a series of smart contracts that facilitate, sans middleman, the lending and borrowing of more than a dozen cryptocurrencies.
Interest-yielding digital assets deposited on the platform are authenticated and kept safe autonomously via a distributed network of computers (as opposed to one singular company).
Assets go into their own large, Aave-software-enabled liquidity pools tapped by borrowers. Aave’s system of smart contracts sets rates, whether fixed or variable. Only borrowing up to the value of posted collateral, users get special tokens, dubbed "aTokens," which are pegged to the value of that collateral and encoded, allowing lenders to receive interest. For instance, a user who deposited DAI would receive an "aDAI" token in exchange.
Interest on a Token accrues and compounds almost continuously with each new block on the Ethereum blockchain. Depositors can redeem the tokens at any time, receiving both their original deposit plus any interest. As of January 2021, there were upwards of $3.75 billion in deposits earning interest on the platform. That put Aave the network 2nd in terms of global total value locked (TVL).
AAVE is the platform’s native crypto; it’s a governance token that gives holders a voting interest in future decisions. Investors are incentivized to hold the token by way of reduced fees for using the platform. Holders of AAVE can also stake their funds into the protocol’s security module used to cover deposits in the event of a liquidity shortfall.
Currently, some 25% of the total AAVE in circulation is staked to the security module, with depositors receiving a 6.1% annual percentage rate for doing so.
Key to the platform’s appeal: flash loans. These are extremely short-term, uncollateralized loans issued and settled almost instantly. Flash loans require repayment before the block on which the transaction appears is authenticated. Such loans commonly are utilized by sophisticated traders or developers in need of short-term liquidity solutions.
Trading at around $250 as of late January 2021, AAVE shot up more than 200% just in that first month of the year; it has risen more than 900% from its all-time low of $25 reached in November of 2020. With a market capitalization exceeding $3 billion, AAVE ranks 16th among digital assets as measured by market cap.
Recent spikes in price have seen the token’s daily trading volume increase 400% in the past month to more than $1 billion worth, making AAVE one of the more heavily traded coins.
AAVE’s January price surge owes to massive volume increases (which can be partially attributed to investors acquiring large positions in AAVE for staking purposes); explosive flash loan growth also has fuelled the rally.
Currently, there are 12.3 million AAVE in circulation. The platform uses 80% of the funds it generates to burn tokens, reducing supply over time, likely leading to, some analysts have said, an increase in the price of AAVE in the coming years.
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