Ever since their introduction to DeFi, lending protocols have become a valuable tool for crypto investors for many different reasons. Token holders can use them to earn passive income by lending crypto to others, or they can use their existing cryptocurrency as collateral and take out loans. That is why we will be looking into AAVE and show you how you can easily become a lender or borrower in a few easy steps.
How To Use AAVE? #
As already mentioned, AAVE can be used for both lending and borrowing crypto assets. In order to use any of these options you will first need to have some cryptocurrency in your wallet.
In this example we will use AAVE on Ethereum to take out a loan using ETH as collateral. If you don’t have any ETH in your Metamask wallet you can purchase some on a centralized exchange and withdraw it directly to your wallet.
Once that is done simply go to the AAVE homepage, enter the app and connect your wallet to the protocol.
This can be done by clicking on the “connect” button at the top right corner of your screen.
For Metamask wallets select “Browser Wallet”. For any other wallet, select the corresponding option and finalize the process.
When connected, click on the “DEPOSIT” tab and the interface will show your wallet balance.
Select Ethereum and enter how much you want to deposit in ETH. There is no minimum or maximum deposit, so it is up to you how much ETH you want to deposit into the AAVE protocol.
Click on the “Continue” button and if you are using the protocol for the first time, specifically ETH deposits, you will need to approve two transactions. The first one allows ETH spending and the second one will deposit the funds into the contract.
When both transactions are confirmed you should be able to see your available deposit balance by selecting the “MY DASHBOARD” tab. From there you will have three options to choose from: use deposited ETH as collateral, withdraw and swap.
If your collateral option is switched to “Yes” this means that your deposited funds can be used as collateral to take out a loan.
The withdraw option will let you take out the deposited ETH and the swap function will give you the ability to swap your ETH for some other currency that is available on AAVE.
Turning on the collateral option also opens up access to the “BORROW’ tab where you can take out a loan in a few simple steps.
The process is very much the same. Select the currency you want to borrow, enter the borrow amount and approve the transaction. As soon as it gets confirmed you will have the selected cryptocurrency deposited directly to your wallet.
Loans will sometimes have two borrow rates, stable and variable, but in most cases you will be forced to use the variable APY. This means that your interest rate will be changing based on market conditions and many other factors such as supply and demand rates on AAVE.
Repaying a Loan on AAVE #
Now that we have completed the whole process of borrowing it should be easy to repay the loan. Both your deposits and loans will be visible on the dashboard and simply visiting it will give you an option to repay the loan.
Select the “Repay” option and follow the instructions on the screen. Just like with every other step, once the transactions are confirmed your dashboard stats will change to reflect your current financial status on AAVE.
It is worth mentioning that loans don’t have to be repaid all at once. If you want to repay a fraction of your loan that is also an option. In this case your loan will be generating less interest fees over time.
Also, if you only want to earn passive income by being a lender simply deposit your ETH to AAVE and let it sit there. As soon as it enters the contract it will start generating fees based on the demand on the platform. Borrow and deposit rates are displayed in the “MARKETS” tab.
When used properly, lending protocols can give your crypto assets much more flexibility. Depositors can earn passive rewards just by keeping their crypto on the lending platform while borrowers can take out loans by using their cryptocurrency as collateral.
The protocol will always make sure that everyone gets their fair share of rewards and that every loan is fully collateralized during volatile times in the market. Everything else is up to the users.