Definition
Aave is a decentralized finance (DeFi) protocol that creates on-chain money markets where crypto assets can be supplied as liquidity or borrowed against posted collateral. It operates through smart contracts that algorithmically set interest rates based on supply and demand for each supported asset. The protocol is non-custodial, meaning control of funds is managed by code rather than a centralized intermediary.
As a lending and borrowing concept in DeFi, Aave is often grouped with other protocol-based credit markets such as Compound and Maker. It focuses on overcollateralized positions, where borrowers lock more value than they borrow to manage protocol-level risk. The design allows for permissionless participation within the rules encoded in its smart contracts, aligning with broader decentralized finance practices.
Context and Usage
Within the DeFi ecosystem, Aave is a core primitive that underpins various strategies and products, including those associated with Yield Farming. Liquidity supplied to Aave’s markets can generate variable returns, which may be combined with other protocols like dYdX or Maker in more complex DeFi constructions. Its interest rate mechanisms and collateralization model influence how capital flows across different lending platforms, including alternatives such as Compound.
The protocol’s design interacts conceptually with broader DeFi risks, including those that can lead to Impermanent Loss in liquidity provision on other platforms, even though Aave itself centers on lending markets rather than automated market making. As a concept, Aave represents the shift from centralized credit intermediaries to smart contract–based credit systems, where transparency, collateral requirements, and interest dynamics are visible and enforced on-chain.