AAVE works by using smart contracts to create a peer-to-peer lending platform. Users can lend their cryptocurrency to the platform, which then loans it out to borrowers. The platform uses a collateralized debt position (CDP) model to ensure that borrowers have sufficient collateral to cover their loan.

When a borrower wants to take out a loan, they need to provide collateral in the form of a cryptocurrency. The platform currently supports several cryptocurrencies, including Ethereum, Bitcoin, and DAI. Once the borrower has provided collateral, they can borrow a certain percentage of the collateral’s value in another cryptocurrency. The amount they can borrow is determined by the platform’s loan-to-value (LTV) ratio, which varies depending on the collateral’s volatility.

One of the benefits of AAVE is its variable interest rates. The interest rates are determined by supply and demand, with borrowers paying interest to lenders based on the amount of cryptocurrency they borrow. The interest rates are updated in real-time, ensuring that they remain competitive.

• Decentralization: AAVE is a decentralized platform, which means that it operates without a central authority. This provides users with greater control over their funds and reduces the risk of a central point of failure.
• Lower Fees: AAVE charges lower fees than traditional lending platforms because it does not have the same overhead costs associated with a centralized authority.
• Instant Loans: AAVE allows users to borrow and lend cryptocurrencies instantly, without the need for approval from a central authority. This makes it an ideal platform for people who need to access funds quickly.
• Competitive Interest Rates: AAVE uses a variable interest rate system, which ensures that the interest rates remain competitive based on supply and demand.
• Community Governance: AAVE is governed by its community through a decentralized autonomous organization (DAO), which allows the community to control the platform’s development, decision-making, and fee structure.