Theodore back for another famous WhiteboardCrypto explanation!

Today it’s on AAVE.

First off, how do we pronounce this?

When a doctor tells you to open your mouth and say “Ahhhh”…

Well, add “Vay” to the end of that. So you get “Ahh Vay”.

Secondly, why is it called that?

AAVE is the Finnish word for “Ghost”.

Which is perfect for what they do, let me explain:

AAVE is a money market built on the blockchain.

If you’re like I was, you’re probably wondering “What on earth is a Money Market?”

Money Market: A tool that connects borrowers to lenders.

Long story short, you can do 2 things with AAVE:

1) Lend out your crypto and earn an interest rate

2) Borrow against your crypto.

AAVE connects borrowers to lenders anonymously (hence, “ghost”).

The first is very simple. You let the platform use your crypto and you can earn from 1% to up to 18% interest depending on what coin and what the current market is doing.

The borrowing portion is a bit more complicated.

However, all you need to know is that AAVE will never let you borrow more than you have deposited. They will never let you be overleveraged.

So if you want to borrow $100 of USDC, you’ll need to deposit $150 worth of Ethereum. This way something is always backing it.

(*cough* Mortage Crisis of 2008 *cough*)

This makes crypto borrowing and lending very secure.

Notice I didn’t say “safe”… and this is because on September 1 you might deposit .01 Ethereum to get $150, but 4 days later it might be worth $120.

AAVE fixes this by ‘liquidating’ you if you if the money you have backing your loan falls below a certain percentage.

In short, they take the collateral you deposited to borrow against, cash it in, and give it back to the lender so they don’t lose money. You’re stuck with whatever you borrowed.

Liquidations get very complicated very quickly, and you can also create leveraged positions by using these borrowing and lending tools, but that’s for another day.

All you need to know today is that AAVE lets you lend out, and borrow against, your crypto.

They let you do this without asking for your personal information, without charging ridiculous fees, and you can reverse a decision in seconds. They are a better, cheaper, and faster bank.

– Theodore