You know how when you buy a car that's just a little too expensive, but it's really nice so you do it anyways? Well, to do it, you have to get a loan from the bank. You tell them they can have the title to the car until you pay off that loan. That way, if

you don't pay the loan, they can come and take your car. Or what about if you're getting ready to buy your first house? Well, for most people, you definitely need a mortgage. You put up a down payment of twenty percent so that way you can borrow the other eighty percent and then

make payments on it. Well, the money for the car and the money for that house come from a bank. They lend money knowing that you will pay high interest on it, and they give that interest to their lenders. Well, of course, the bank takes their cut. Well, Aave is the cryptocurrency version

of that bank. Hello and welcome to Whiteboard Crypto, where we break down difficult crypto topics into easy stories and examples so that way you can better understand them. In this video, we are going to explain what Aave is, so simple that your grandpa could understand it. With that being said,

what is Aave? Aave is a decentralized finance application that allows people to lend and borrow cryptocurrencies in turn for getting and paying fees. Aave is basically peer-to-peer lending using cryptocurrencies as the asset that is traded. However, Aave uses an algorithm to determine lending rates and to match the

lenders to borrowers. Aave also has an associated Aave token, which is an Ethereum token that powers the governance on their platform. In short, the idea of this token is that token holders get to vote on changes to the application as time goes on. Around 2017, there was a team of

developers who were creating something called EthLend. They essentially created an MVP platform that matched lenders to different borrowers, and it wasn't automatic. The borrowers had to wait around for a lender to meet them. Two big problems that they faced were liquidity, which is the amount of money in the

system, and actually matching borrowers to lenders. So during the start of 2020, they overhauled EthLend, creating Aave. The creator said the cryptocurrency bear market was the best thing to help them pivot their product. Aave utilizes smart contracts, which are just pieces of code that get run

automatically based on certain conditions to run the platform. Now, if you're new to smart contracts, you should definitely go watch our video on it where we break it down really simply using stories and analogies. Back to Aave, this time instead of using peer-to-peer

lending where a borrower had to match with a lender, Aave used a peer-to-smart contract method. So lenders could deposit money into a smart contract and earn interest, and also borrowers could deposit their collateral into another smart contract and borrow from any smart contract they

wanted to borrow from. They used new algorithms in the smart contracts to determine the loan rates based on how much liquidity was in each smart contract. That was really confusing, but by the way, Aave is a Finnish word that means 'ghost.' They stuck with this for the branding

because when you lend your money or borrow your money, it's all anonymous. No banks regulate it, nobody else can see what you're doing, and specifically you don't know who is on the other side of that smart contract. So that's how Aave was formed, but let's get into what they

So if you go to app.ave.com/markets, you can see the current rates for borrowing and lending. For example, if you look here, you can see USDT, which is Tether, is offering a pretty decent deal. And then you can also see that Ethereum is offering quite a low rate.

This is because Tether is a stable coin and it won't move much in price, but Ethereum is very volatile at the moment. So with lending comes borrowing, and so how this works is you lend your crypto to Aave, and they pay you interest on it. We won't get into the technicals of how that actually works, though. However, with lending comes borrowing, so after you deposit some of your crypto to Aave to earn interest, you can also decide to borrow against it. Let's move on to over-collateralized loans.

Whenever you borrowed 80% of your house to make payments on it, the house was collateral. This means if you couldn't pay the loan back, the bank would just kick you out and take your house. In short, you gave them collateral that they can take if you don't pay. Well, crypto loans don't necessarily work like this.

If you want to borrow crypto, you have to be over-collateralized. This means if you want to borrow $100, you must give the bank $120. For most people, you might think this is crazy. Why in the world would you give someone more money than you want to borrow, especially if you already have that money? Well, imagine this: if I gave you $100 worth of Ethereum and you lent me $80 worth of Tether, which is a stable coin pegged to the US dollar, you use that $80 for a few months and...

then you decide to pay it back and get your ETH well by then Ethereum has doubled in price and so you cash out your 100 of Ethereum but you actually get two hundred dollars worth of value because Ethereum raised in price This is a double-edged sword though because Aave

has something called a liquidation threshold where they will automatically sell your collateral to cover the loan that you have created this way investors never lose money Let me use an example so you put up a hundred dollars of Ethereum and what is called the maximum loan to value of

Ethereum is eighty percent which means you can borrow eighty percent of that hundred dollars so you decide to borrow 80 dollars of Tether well if that Ethereum price drops to more than 82 and a half percent of its value which is the liquidation percentage Aave

will automatically take your Ethereum and pay back the lender however you get to keep that 80 that you borrowed Speaking of loans we were actually wondering if you wouldn't mind giving us a loan of one like you can have it back later but right now

we really need likes so that we can grow this channel and that our hard work is rewarded Sound good Let's move on to the next topic using Aave you can create a very leveraged position which is essentially borrowing on steroids and to understand this we're

gonna go over an example really quick so let's say you have a hundred dollars of Ethereum you deposit your Ethereum to Aave and withdraw eighty dollars worth of USDC which is an Ethereum stable token you take that 80 dollars worth of USDC

go over to Uniswap and then trade it out for more Ethereum, which you then go back to Aave and deposit. So now you've deposited 180 of Ethereum, but you can still take out eighty percent of that eighty dollars that you deposited, which is sixty-four

dollars of USDC. So now you take that sixty-four dollars of USDC, trade it for more ETH, and then add it back to your account in Aave. So now you have 244 dollars of Ethereum that you've borrowed against, even though you only had an original one

hundred dollars. So if ETH goes up ten percent, you gain twenty-four dollars and forty cents compared to if you didn't create that leveraged position, you would have only gained ten dollars. However, if the price of Ethereum goes down, all I can say is you're screwed if

you pass the liquidation threshold. Next up, let's talk about paying those loans back because you might be wondering how you pay back those loans that you borrowed. Well, since you technically put up more than a hundred percent for the loan, you just have to log into Aave and repay

the loan every now and then, just a little bit. Aave loans aren't like traditional loans where you have to pay it all back by a certain date. Here's what the official Aave website says: "Now the question is when do I need to pay back the loan? Aave says there is no fixed time

period to pay back the loan as long as your position is safe. You can borrow for an undefined period. However, they say as time passes, the accrued interest will grow, making your health factor decrease, which might result in your deposited assets becoming more likely to be liquidated."

The last thing I want to talk about in this video is something that Aave offers called flash loans. It is a new feature that they have that is actually one of their main selling points. We've actually been working on an entire video for flash loans, so you should

consider subscribing if you've made it this far in the video. In short, a flash loan is a cryptocurrency loan where you can borrow up to millions of dollars without putting up any collateral. Here's the catch though: a flash loan must be paid back in the same

cryptocurrency block that it was borrowed in. Well, you might be wondering why would you need a loan that you have to pay back almost immediately? Well, let's say you could buy Ethereum at Binance for one dollar and sell it to Coinbase for a dollar and

a penny each time you did that, you would make a penny. Imagine if you use millions of dollars to do that millions of times. This is one example of why you might want to take out a flash loan, even though you'd have to pay it back in

around 13 seconds if you use the Ethereum network. Now there's a lot more to flash loans, but this video is about Aave, and we've covered almost everything there is to know about it at this current point in time. So, as we end this video, we want to thank you for watching

our videos and supporting our channel, and most of all, we hope that you learned something. Thank you guys so much for watching, and we hope to see you in the next video.

What is AAVE? (Animated) Crypto Borrowing and Lending Explained

Welcome to whiteboard crypto, the #1 YouTube channel for crypto education and here we explain topics of the cryptocurrency world using analogies, stories, and examples so you can easily understand them.