Review the benefits of DeFi unsecured loans from AAVE

New Bloc Hedge Fund
5 min readFeb 4, 2021

On Jan 19th, ETH set a record of $1440, and the DeFi projects on the Ethereum chain was also favored by the market. Since May 2020, the topic around DeFi has been increasing. In less than a year, the total value locked in DeFi has increased by 25 times and its popularity is amazing.

We believe that DeFi continues to receive market attention due to the following reasons:

1. Landing application: DeFi was born to solve the shortcomings of traditional finance at the beginning and transfer the trust of the intermediary to the machine. Thereby reducing the cost of financial lending, and breaking the monopoly of credit institutions and central banks;

2. Low thresholds & high interest rates: Most DeFi projects have low participation thresholds, and because sometimes there are fewer lenders, higher interest rates will be generated to attract investors to deposit tokens, and eventually become LPs;

3. Low cost of DeFi: Although from a short-term perspective, the cost of purchasing a vending machine is much higher than the labor cost of hiring employees, but from a long-term perspective, the labor cost in this area will undoubtedly be gradually reduced while the efficiency of the machine will remain high.

If we regard digital currency as a medium of exchange, based on historical deductions, we can conclude that finance is an economic accelerator. The use of margin helps the economy to have a magnifying effect, but at the same time, it will also accelerate the decline of economy in an economic depression.

If the crypto market only gets tokens through mining, the price of mining machines will increase when the price of tokens rises, which will eventually lead to an increase in the computing power of the entire network and an increase in the difficulty of mining.

With the development of crypto to this day, its scale is already large enough. For the market, Bitcoin and altcoins have great differences in their liquidity and market recognition. The demand for financing between tokens and tokens is increasing day by day, and DeFi As the financial system of the cryptocurrency market, its demand will naturally see a spurt of growth.

Take a simple analogy as an example, With the integration of the global economy today, various countries and regions have exerted their own comparative advantages to conduct transactions. For example, you can simply regard Australia as a raw material country, China as a major consumer country, Europe and the United States as a major R&D country, different currencies have different economic structures.

The allocation of SDR can play a role in providing liquidity and supplementing the official reserves of member countries. During the financial crisis, the total distribution of the IMF to member countries in 2019 reached 182.6 billion U.S. dollars while SDR is an example.

Its value lies in connecting countries with different divisions of labor, providing them with liquidity, maintaining the stability of their currency values and reducing the risks to the economy caused by large currency fluctuations. For the cryptocurrency market, DeFi will carry out a similar mission, and its significance is to stabilize the risk of large fluctuations between different tokens.

AAVE

For the financial market, liquidity can be regarded as an important reference indicator of stability, and the current Aave liquidity pool has exceeded $3.3 billion. In terms of liquidity, AAVE has certain advantages in DeFi. However, the current DeFi projects are basically based on mortgage loans. When the market is small, mortgage loans can indeed avoid a lot of risks, so that the project can continue to grow. But today’s DeFi market already has a certain scale, in terms of market share, the continued mortgage loan model seems to miss more market share.

From a game perspective, when the market size is large enough to cover credit risk, unsecured loans will greatly improve capital efficiency.

For debits, mortgage credit is not created out of thin air, but based on OpenLaw to ensure that credit-based loans are repaid, and each credit entrustment creates a credit entrusted treasury based on smart contracts, which is built on Aave Debt wrapper.

The treasury allows users to set different commission parameters, including which currency debits can withdraw, the interest rate formula, and the most important credit limit. With OpenLaw, all these parameters are selected through a programmable legal agreement set by Karen and Chad, allowing Chad to withdraw funds freely and simply.

There are two sources of funds for credit entrustment, one is the trust between peers, and the other is the trust of smart contracts.

AAVE’s economic model

1. Issuance of new tokens and replacement of old

2. Start a security module SM

3. Introduce security and ecological incentives to drive the development of the agreement

4. Released a governance framework that grants decision-making power to Aave holders

5. Governance defines a set of policies for the Aave agreement and the capital market to comply

6. Introduced Aave Improvement Proposals (AIPs) for future protocol upgrades

AAVE reward mechanism

In Aave, two reward mechanisms are obtained through mining, one is the safety assurance incentive mechanism and the ecological incentive mechanism.

There are three ways to mine AAVE:

1. Staking AAVE to the security pool

2. Lending on the AAVE platform

3. Provide AAVE/ETH liquidity market making in Balancer

1.Staking AAVE to the security pool

AAVE’s security module SM, its operating mechanism is to use fund pledges as guarantees to solve the problem of insolvency that may arise during the loan process. The stake funds are AAVE, and users can obtain AAVE tokens by stake AAVE to the SM pool.

2. Provide AAVE/ETH liquidity market making in Balancer

With the combination of AAVE and ETH, put them on the Balancer platform to participate in liquidity market making, and obtain BAL and transaction fee sharing.

3.Lending on the AAVE platform

Lending on the AAVE platform is rewarded by the ecological incentive pool.

Looking to the future

With the development of the cryptocurrency market becoming more and more complete, the demand for financing between tokens is also increasing, and AAVE which dares to innovate in DeFi, is naturally favored by the market. For investors, it is important to control risks, but in view of the current market is still an incremental market, taking the lead in gaining share is something that must be done before the market matures.

According to market statistics, AAVE has increased by as much as 623.32% in the past three months, far exceeding mainstream currencies such as BTC and ETH. The market value of crypto assets has rushed to the 15th place in the world, and its market recognition is obvious. With the gradual improvement of the DeFi ecosystem, the advantage of using innovative models to seize market share will gradually appear. AAVE may be the leader in DeFi in the future.

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New Bloc Hedge Fund

Crypto hedge fund that invests in frontier block chain technologies,also a top market maker and growth advisory provider for the top 3 crypto exchanges.