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Draft:Aave Protocol

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Aave Protocol
Communication protocol
PurposeDecentralized finance
Developer(s)Aave Labs
IntroductionJanuary 2020; 4 years ago (2020-01)[1]
Websiteaave.com

The Aave Protocol is an open-source, decentralized finance (DeFi) protocol built on the Ethereum blockchain and released in 2020.[2][3] It is one of the largest cryptocurrency liquidity protocols.[1][4] The Aave Protocol uses smart contracts to automate processes, including distributing funds and handling collateral.[5][1]

Background

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Aave Protocol allows anyone with a cryptocurrency wallet to supply and borrow cryptocurrency assets across Ethereum, Polygon, Avalanche, and other EVM blockchains by posting collateral,[1][2] without third-party intermediaries such as banks and brokerages.[6] Suppliers share the interest paid by borrowers, who deposit cryptocurrency assets into different liquidity pools.[1] In turn, suppliers can use their cryptocurrency assets as collateral to borrow at stable or variable interest rates.[1][2] There are currently three versions of Aave, each of which established upgrades to the protocol: V1, V2 and V3.[1][7]

V3 introduced lower transaction fees and the ability to supply and borrow across virtually all Layer 2 blockchains that use Ethereum as a settlement layer.[8][1]

Gudgeon et al. (2020) examines collateral liquidations on Aave, where arbitrageurs repay loans in exchange for discounted collateral, often using flash loans. By analyzing blockchain data, it highlights the price effects of these liquidity trades on decentralized exchanges and demonstrates both temporary and permanent impacts on asset prices.[9]

In October 2021, Aave reached approximately $28 billion in Total Value Locked (TVL) across multiple chains, including Ethereum, Polygon, and Avalanche.[2][10]

The Aave Protocol is governed by AAVE token holders who form the Aave Decentralized Autonomous Organization (DAO).[2][1] The Aave DAO governs the protocol and proposes, discusses and votes on any changes to the protocol via Aave Improvement Proposals (AIPs).

Gudgeon et al. (2020) reviews the methodologies for setting interest rates in DeFi Protocol for Loanable Funds (PLFs), which are decentralized markets using distributed ledgers and smart contracts to facilitate borrowing and saving, with interest rate mechanisms balancing supply and demand. The study reviews the methodologies for setting interest rates in three major DeFi PLFs, empirically analyzing their behavior under varying liquidity conditions and investigating the relationships between interest rates across different protocols using a Vector Error Correction Model.[11]

A study by Ao et al. (2022) applies social network analysis to measure decentralization in DeFi token transactions on the Ethereum blockchain, focusing on the AAVE token. It finds a core-periphery structure in the transaction network, with centralized exchanges at the core, and demonstrates that greater decentralization is associated with higher returns and lower volatility in AAVE markets.[12]

History

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The Aave Protocol was founded and released on Ethereum mainnet in January 2020 by Aave Labs founder Stani Kulechov,[1][2][13] Russian-born Finnish programmer and lawyer who had moved to Finland with his family as a child.[14][15] Aave means "ghost" in Finnish.[16][17]

Aave was preceded by ETHLend, also developed by Kulechov, which launched in 2017.[16][18]

In July 2023, Aave released GHO, an Aave-native, decentralized stablecoin. GHO is backed by assets available in the Aave Protocol.[4]

Journal articles

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Below is a list of relevant peer-reviewed journal publications that discuss Aave Protocol.

  • Ao, Ziqiao; Cong, Lin William; Horvath, Gergely; Zhang, Luyao (2022-02-02). "Is decentralized finance actually decentralized? A social network analysis of the Aave protocol on the Ethereum blockchain". Papers. arXiv.org.
  • Heimbach, Lioba; Schertenleib, Eric; Wattenhofer, Roger (2023-12-05). "Short Squeeze in DeFi Lending Market: Decentralization in Jeopardy?". Lecture Notes in Computer Science. Cham: Springer Nature Switzerland. doi:10.1007/978-3-031-48806-1_22. ISBN 978-3-031-48805-4.
  • Green, Aaron; Giannattasio, Michael; Wang, Keran; Erickson, John S.; Seneviratne, Oshani; Bennett, Kristin P. (2023). "Characterizing Common Quarterly Behaviors in DeFi Lending Protocols". Lecture Notes in Operations Research. Cham: Springer Nature Switzerland. doi:10.1007/978-3-031-48731-6_4. ISBN 978-3-031-48730-9.
  • Gudgeon, Lewis; Werner, Sam; Perez, Daniel; Knottenbelt, William J. (2020-10-21). Proceedings of the 2nd ACM Conference on Advances in Financial Technologies. New York, NY, USA: ACM. doi:10.1145/3419614.3423254.
  • Lehar, Alfred; Parlour, Christine A. (2022). "Systemic Fragility in Decentralized Markets". SSRN Electronic Journal. doi:10.2139/ssrn.4164833. ISSN 1556-5068.
  • Gudgeon, Lewis; Perez, Daniel; Harz, Dominik; Livshits, Benjamin; Gervais, Arthur (2020). 2020 Crypto Valley Conference on Blockchain Technology (CVCBT). IEEE. doi:10.1109/cvcbt50464.2020.00005.

References

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  1. ^ a b c d e f g h i j Allcot, Dawn (2023-02-09). "What Is Aave Crypto Protocol?". AOL.com. Retrieved 2024-03-29.
  2. ^ a b c d e f Pandl, Zach (2021-10-22). "Opportunities and Risks in Decentralized Finance (Pandl/Rosenberg)". Goldman Sachs Research. Retrieved 2024-03-29.
  3. ^ Ao, Ziqiao; Cong, Lin William; Horvath, Gergely; Zhang, Luyao (2022-02-02). "Is decentralized finance actually decentralized? A social network analysis of the Aave protocol on the Ethereum blockchain". Papers. arXiv.org. Retrieved 2024-03-29.
  4. ^ a b Shen, Muyao (2023-07-15). "Biggest DeFi Lender Aave Set to Launch Decentralized Stablecoin". Bloomberg.com. Retrieved 2024-03-29.
  5. ^ Wade, Jacob (2022-11-15). "What Is Aave?". Investopedia. Retrieved 2024-03-29.
  6. ^ Chiu, Jonathan; Kahn, Charles M.; Koepp, Thorsten V. (October 11, 2022). "Grasping De(centralized) Fi(nance) Through the Lens of Economic Theory" (PDF). Bank of Canada. doi:10.34989/swp-2022-43. ISSN 1701-9397. Retrieved April 3, 2024.
  7. ^ Young, Sage D. (2023-01-24). "Aave Community Voting to Deploy Version 3 on Ethereum". markets.businessinsider.com. Retrieved 2024-03-29.
  8. ^ "Institutional DeFi: The Next Generation of Finance?" (PDF). J.P. Morgan. 2022. Retrieved 2024-11-01.
  9. ^ Lehar, Alfred; Parlour, Christine A. (2022). "Systemic Fragility in Decentralized Markets". SSRN Electronic Journal. Elsevier BV. doi:10.2139/ssrn.4164833. ISSN 1556-5068.
  10. ^ Melinek, Jacquelyn (2022-03-23). "Despite declines, the value of crypto assets in DeFi protocols is up 3x from a year ago". TechCrunch. Retrieved 2024-03-29.
  11. ^ Gudgeon, Lewis; Werner, Sam; Perez, Daniel; Knottenbelt, William J. (2020-10-21). DeFi Protocols for Loanable Funds. New York, NY, USA: ACM. doi:10.1145/3419614.3423254.
  12. ^ Ao, Ziqiao; Cong, Lin William; Horvath, Gergely; Zhang, Luyao (2022-02-02). "Is decentralized finance actually decentralized? A social network analysis of the Aave protocol on the Ethereum blockchain". Papers. arXiv.org. Retrieved 2024-11-06.
  13. ^ "Crypto Conversation: Aave 'LEND's Hand to Decentralized Finance Movement". TheStreet Crypto: Bitcoin and cryptocurrency news, advice, analysis and more. 2020-08-26. Retrieved 2024-03-29.
  14. ^ Eklund, Jesper (26 April 2022). "Stani Kulechov | Kryptomaailman avainhenkilöt #10". Coinmotion (in Finnish). Retrieved 11 July 2024.
  15. ^ Schiller, Ben (2023-12-04). "Stani Kulechov Defied Crypto Winter". markets.businessinsider.com. Retrieved 2024-11-06.
  16. ^ a b Nicolle, Emily; Kharif, Olga; Akhtar, Tanzeel; Miller, Hannah (2022-05-15). "Britain's Crypto List: Here Are the People to Watch". Bloomberg. Retrieved 2024-03-29.
  17. ^ "Stani Kulechov defied crypto winter". top-news.com.ua. Retrieved 2024-03-29.
  18. ^ Melinek, Jacquelyn (2023-11-16). "Aave Companies rebrands to Avara and acquires crypto wallet Family to expand its web3 reach". TechCrunch. Retrieved 2024-03-29.
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