What is Aave (AAVE)?
Aave (AAVE) is the largest lending and borrowing protocol in decentralized finance (DeFi). First launched as ETHLend by Stani Kulechov in 2017, it transformed into the current pool-based system in 2020. Today, Aave operates on Ethereum and many other blockchains, letting users lend and borrow crypto assets without any intermediary.
What roles does AAVE play in the protocol?
The AAVE token acts as the governance key for the protocol. Holders can vote on decisions that shape its future, such as adding new assets or adjusting interest rate models. Beyond governance, AAVE serves two more critical purposes: it provides a safety net and a revenue-distribution channel for the protocol.
Users can stake their AAVE to contribute to the protocol's insurance layer and earn rewards in return. With the "Aavenomics" update adopted in 2025, a portion of the platform's revenue is now used for regular AAVE buybacks from the market. This structure moves the token beyond a simple voting tool and ties it more directly to the protocol's success.
How do pools, interest rates, and flash loans work?
Aave uses liquidity pools instead of matching lenders and borrowers one-to-one. Those who want to lend deposit their crypto into these pools and earn interest. Borrowers withdraw assets from the same pools by locking up collateral worth more than the amount they take. The interest rate in any given pool is set algorithmically, based on the current balance of supply and demand.
The most distinctive tool Aave brought to the sector is the flash loan. This feature allows borrowing without any collateral, but under one strict condition: the loan must be repaid within the same transaction block. If repayment fails, the entire chain of actions reverses as though it never happened. This mechanism is commonly used for arbitrage and liquidity operations.
Another product from Aave is its own stablecoin, GHO. Minted against collateral locked in the protocol, GHO directs all its interest income straight into Aave's community treasury.
