Blockchain-Based Lending: AAVE Protocol Simplifies DeFi

Author: Uniera, medium Translation: Shan Ouba, Golden Finance

Technological advances have brought about a new way of financial processing: DeFi (Decentralized Finance) protocols based on blockchain technology. One of the key aspects of this financial revolution is the ability to obtain loans directly on the blockchain in a fast, secure and transparent manner. Among the various DeFi protocols available, AAVE stands out as an accessible and user-friendly alternative.

In this article, we explore how lending works on the blockchain and demonstrate how the AAVE protocol makes this task simple and efficient. If you're curious about getting a loan using crypto assets, or want to learn more about the possibilities in DeFi, read on to learn how you can take your first steps in this innovative space.

We will illustrate the lending process on the blockchain through an analogy with a traditional pawnshop and highlight the advantages of using AAVE as a lending platform. Additionally, we will discuss the risks involved with this type of loan and how to mitigate them.

If you've heard about centralized finance in the past but haven't explored all of its opportunities, then this article is for you. Get ready to dive into the world of decentralized lending and learn how the AAVE protocol can revolutionize your financial transactions.

Many people are skeptical about using DeFi protocols to obtain loans directly on the blockchain, but these days, it has become a relatively simple task. Today, there are numerous DeFi protocols with user-friendly interfaces that can undoubtedly compete with major centralized financial products, one of which is AAVE.

**How do loans on AAVE work? **

It's simple to operate; it's similar to a pawn shop. You go there and leave a $2,000 watch as collateral. The pawn shop then lends you $1,500. When you return, you will need to repay the amount borrowed plus interest and get your watch back.

The situation is similar when it comes to cryptocurrencies. The asset you will accept as collateral for the protocol, usually WBTC, ETH, etc. The operation will always be overcollateralized. For example, if you leave the equivalent of $2,000 in collateral, you will have approximately $1,600 available to borrow, which could be in stablecoins or other assets, depending on your strategy.

You earn by providing $2,000 and borrowing $1,600 with interest.

** What are the risks? **

The assets you offer may fluctuate. For example, if you provided $2,000 worth of ETH, and due to volatility, the value of that collateral dropped to $1,700, your operation would be liquidated. When collateral reaches a minimum threshold, a liquidation penalty is incurred. Therefore, it is important to monitor operations to maintain healthy margins. Before being liquidated, you can add more ETH as collateral to keep the operation running. In this case, the risk would be to be liquidated and paid.

Under what circumstances are loans interested?

Using ETH as an example, let's say you need $1,000 for an emergency, but have $2,000 worth of ETH and are optimistic about the market. You do not want to sell your ETH at this time. So, you provide $2,000 worth of ETH and borrow $1,000 in stablecoins. If ETH appreciates, and the value of the provided ETH (originally worth $2,000) doubles to $4,000, you simply repay the borrowed $1,000 plus interest to get your ETH back, now worth $4,000.

**How do I get a loan using the AAVE protocol? **

Now that you understand the loan mechanism in DeFi protocols, let's follow the step-by-step guide to get a loan.

1. Visit the AAVE website.
2. Connect your wallet in the upper right corner, as shown below:

3. On the screen below you will see on the left the assets you can offer as collateral and on the right you will see the assets you can borrow.

4. Select the asset you want to offer as collateral and click Supply. Then, select the quantity you want to offer and approve the transaction, as shown in the image below.

4. Select the asset you want to borrow on the right, click "Borrow", select the amount you want to borrow, and approve the transaction.

Congratulations! You have now provided collateral and made your first loan directly on the blockchain.

By clarifying the function of loans on the blockchain and using the AAVE protocol as an example, we hope to provide you with a clear and understandable perspective on the possibilities of DeFi. Now you are ready to explore this fascinating world on your own.

With the emergence of increasingly user-friendly and complex DeFi protocols, decentralized finance is clearly gaining ground and competing on an equal footing with centralized financial products. AAVE is just one of many options available, each offering unique opportunities to maximize your financial potential.

Remember to manage the risks involved because while blockchain lending can have significant benefits, it is crucial to monitor asset volatility and maintain a healthy margin to avoid unnecessary liquidations.

As you progress on this journey, develop strategies and explore new opportunities, stay on top of the changes and innovations shaping the cryptocurrency market.

Now that you have the tools, knowledge and confidence to embark on your blockchain lending journey, we wish you success with your transactions and encourage you to take full advantage of DeFi. Be part of the financial revolution and discover a new world of financial freedom and autonomy.