One of the most well-known names in the world of decentralized finance is none other than the Aave protocol. Now, it appears that it has taken a very important step for any decentralized finance (DeFi) project; the governance rights of the protocol have now officially been transferred to its token holders. On October 29th, 2020, an official announcement was made where Aave revealed that the admin keys of the DeFi protocol had been transferred. Taken from the core developers, these keys were moved to the numerous governance communities that are commanded by individuals who hold its native utility token known as LEND.
A vote had been held for the first Aave Improvement Proposal (AIP) and the community had voted in favor of it. With this approval, it will allow migration functionality to be introduced between the new AAVE governance token and the LEND utility token. The ratio that will be followed will be 100 LEND to 1 AAVE. Once this is done, the governance rights will be handed over to AAVE holders. There are a total of 16 million AAVE tokens that currently exist and almost 13 million of the total are redeemable by those holding LEND tokens. The remaining three million AAVE tokens will be set aside as an ‘Ecosystem Reserve’.
There are a lot more benefits given to AAVE holders than just being able to vote on AIPs. In fact, they also have the capability of staking their tokens for earning some protocol fees. AAVE holders are allowed by Balancer to stake an AAVE/ETH pairing, which allows them to earn BAL tokens, in addition to the trading fee. It is possible to use the AAVE tokens for voting on AIPs, regardless of whether they are staked or in cold storage. It was in January of this year that the Aave DeFi project had been established and it didn’t take it long to become the top DeFi projects of the sector.
The protocol gained a lot of popularity because it gave the option of issuing ‘flash loans’, which are regarded as the first uncollateralized loan option to be introduced in the DeFi space. It is possible for liquidity providers to pool in their funds and they can be borrowed by traders and bot operators for performing arbitrage or any other form of yield generation strategy. If the required transaction is executed and the borrowed funds are returned in a setting ETH (Ethereum) block, it doesn’t take more than 20 seconds and makes this deal a win.
If not, the transaction is simply reversed by the protocol, as if it didn’t happen to begin with. A fee of 0.9% is charged by Aave on profits that are made through these flash loans and the profits are divided amongst those who funded the pool in the first place. As of now, Aave holds the fifth spot in the DeFi space in regard to Total Value Locked (TVL) and it boasts more than $980 million in staked funds. Back in August during the DeFi bubble, the TVL had been $1.7 billion.