An updated guide to DeFi and how to use Aave Protocol, written by someone with zero technical knowledge or skills
What’s up Aave Community?
We’re back with an update to our OG “Zero to Hero Guide”, but this time it’s for the Aave Protocol V1 on Ethereum mainnet. Keep reading to learn how to use Aave Protocol!
You might want to put on your sunnies, because the future of finance is looking bright. Decentralised finance doesn’t require any paperwork or your ID. It’s way faster and more efficient than the traditional financial system, because it doesn’t require any middlemen.
By not relying on a centralised institution, like a bank, DeFi allows people to earn higher yields on deposits and borrow with ease and without worry of discrimination. In other words, you get more bang for your buck.
What is the Aave Protocol?
Aave is a decentralised protocol to earn interest on your deposits and borrow digital assets. It is open-source, meaning anybody has access to the code, and non-custodial, meaning you keep control of your funds. It’s an ecosystem of smart contracts on the Ethereum blockchain, so it is completely transparent, trackable, and auditable by anyone.
Users can deposit some assets into the Aave reserve pool of funds and earn interest on those assets (with historically higher returns than most traditional banks, I might add). Users can also borrow some assets from the pool, provided that they have enough collateral.
Aave Protocol provides new financial tools and services that you don’t get in traditional finance. For example, borrowers can switch between stable and variable interest rates, to keep the market on their side and get the best interest rate possible. Pretty cool, huh?
Dive into how to use Aave Protocol below!
Connecting your wallet to the Aave Protocol
Head over to the Aave Protocol to get started!
Here you have a few options to link your crypto wallet, depending on which type of wallet you have:
Converting Fiat Currencies to Crypto
Before you can use Aave Protocol, you’re going to want to have some crypto assets (see the list of assets supported by Aave Protocol below).
List of Aave Protocol assets: DAI, USDC, TUSD, USDT, sUSD, BUSD, ETH, LEND, AAVE, UNI, BAT, KNC, LINK, MANA, MKR, REP, SNX, WBTC, ZRX, ENJ, REN, YFI.
You can check the list of assets, interest rates, and borrowing rates on our website! Just scroll down.
If you don’t own any crypto but you want to join the fun, you’ll need to convert your fiat currency (normal money, like dollars, euros, etc.) into a cryptographic asset (like one of the above).
Lucky for you, Aave recently introduced a fiat to crypto onramp where you can buy crypto assets directly from the Aave Protocol application!
Just navigate to your dashboard and click “deposit” for whichever asset you’d like to buy or deposit. Now you can use Transak or Ramp Instant to buy the asset of your choice directly with a credit or debit card or wire transfer in just a few minutes.
Aave also has some very cool integrations which allow you to do this:
My Ether Wallet is a simple way to purchase ETH directly, and then either deposit your ETH in Aave Protocol or switch it to another asset. MEW has integrated Aave, so you can actually interact with the Aave Protocol directly from your MEW! For step-by-step instructions, read this.
Aave is also integrated with Trust Wallet, where you can directly buy ETH, BTC, and other assets. It’s worth noting that Trust Wallet is the official cryptocurrency wallet of Binance, a major cryptocurrency exchange, so you are able to make instant crypto trades. Thus, you could buy ETH, trade it for whichever asset you want (or keep it), and then deposit it straight into our protocol directly in Trust Wallet!
Some other ways to buy crypto include (but are not limited to):
*This is a limited sample of different ways to go about this — it’s definitely worth exploring the options to see which ones you prefer!
Once you have connected your wallet to the platform, you can deposit an asset into Aave Protocol. Right now, you can deposit: DAI, USDC, TUSD, USDT, sUSD, ETH, AAVE, BAT, KNC, LINK, MANA, MKR, REP, SNX, WBTC, ENJ, REN, YFI, UNI, BUSD and ZRX. From these assets, all of them can be used as collateral when you borrow except for BUSD, sUSD, and USDT.
When you click “deposit”, the interface will show you what you have available in your wallet to deposit. You then select the asset you would like to deposit, choose how much to deposit, and then voilá, you’ve done it!
How are interest rates determined?
The interest rate for depositors fluctuates based on the supply and borrowing demand. For example, if you deposit DAI and lots of people want to borrow DAI and there is a limited supply, then the interest rate you will earn on your DAI deposit will increase to incentivize more deposits. This also works the other way around, so if there is lots of DAI in the supply and not a lot of borrowing demand, the interest rates for DAI depositors will be lower. You can find the 30 day average for deposit rates on our website and in the Aave Protocol application.
All deposits in Aave Protocol have a corresponding “aToken”. This is an Aave interest bearing token pegged 1:1 to the value of the underlying asset. So for example, if you deposit 100 DAI, you get 100 aDAI! These aTokens accrue interest in real-time directly in your wallet! Seriously, you can watch your balance go up every second.
Now if you click on “dashboard” on the left side bar, you can see the assets you have deposited in Aave Protocol, the current APY, as well as your “aggregated balance”, which increases in real-time as you earn interest!
You can select “withdraw” at any time to take out funds.
Additionally, you can turn on/off the “use as collateral” option depending on whether or not you want to borrow against that asset.
Once you’ve deposited an asset that can be used as collateral, you are able to borrow from the Aave Protocol!
Select “borrow” on the left side bar, and now you can see all the assets that are available for you to borrow as well as the stable and variable APY rates.
Explaining stable and variable rates:
Variable rates are more volatile than stable rates. Stable rates act as a fixed rate (a rate that will not change) in the short term, but they can be rebalanced in the long-term in response to changes in the market. When borrowing, you can choose whichever rate benefits you the most.
Aave Protocol also lets you switch between stable and variable rates! For example, if you originally borrow at a variable rate but then the rate zooms up, you can switch to the lower stable rate option, and vice versa.
Now let’s say I want to borrow some DAI:
You can see how much interest you will have to pay back (at a stable rate or a variable rate) and you can choose how much to borrow. Borrowing 100% of what you are allowed to is riskier than borrowing only 25%, because you have more to pay back. You can select the amount you want to borrow, and then click “continue”. Then, you get to choose either a stable or variable rate.
*Remember: you can switch between stable/variable rate to keep the market on your side!
Repay your loan
You can repay your loan at any time with Aave Protocol. Remember you’re still earning interest on your deposits, so any money you get from this covers part of your loan cost!
There you have it folks!
For an amazing video tutorial about how to use Aave Protocol, I highly recommend this one by Chris Blec!
We hope this guide helps you get started, and we’re always available for answering any questions you might have — just pop into our Discord and ask away in the “Community-questions” channel :)