AAVE Live Chart

What is Aave?

Aave is a decentralized finance protocol for lending and borrowing cryptocurrencies. The platform allows lenders to deposit funds into a smart liquidity pool. Borrowers can borrow the funds by depositing collateral, eliminating the need for matching lenders and borrowers. The loan processing is therefore faster. AAVE is the native token of the Aave protocol. There are 13,444,185.61 AAVE tokens in circulation, from a total supply of 16 million, and a matching hard cap. The borrowing interest rate is determined by the cost of money and the available funds in the liquidity pools. As the funds decrease, the interest rate rises.

Aave holds reserves in various currencies where the total amount in Ethereum is termed as the total liquidity. Users have to put in bigger collateral than the borrowed amount. Low-risk tokens are considered for collateral purposes. The amount to be borrowed is based on the deposited currencies available in reserve. The lenders earn interest, which is determined algorithmically, with the mechanism guaranteeing enough liquidity for instant withdrawal. A borrowing position can attract a variable or stable interest rate. The borrowing duration is infinite, and a portion of the full repayment can be made anytime.

The protocol liquidates borrowed positions in the event of price fluctuations. When the collateral price falls below a given amount, which is known as the liquidation threshold, it is liquidated. Aave is based on the Ethereum blockchain, which currently uses the proof-of-work consensus mechanism, but plans to transition to the proof-of-stake model. The Aave token gives the holders discounted fees on the platform, where it also serves as a governance token. The protocol allows users to borrow and lend in more than 20 cryptocurrencies. Stani Kuchelov founded Aave in 2017, and the platform was initially known as ETHLend.

DeFi adoption

Decentralized Finance adoption is surging globally, as shown by the total value locked in various DeFi projects. There is a need for online borrowing of cryptocurrencies to leverage on the arbitrage opportunities in the sector, as cryptocurrency holders search for ways to earn from it.

Cryptocurrency Market Capitalization

The growing adoption of cryptocurrencies and the resulting growing market capitalization will drive the price of AAVE to the upside. The growth in cryptocurrency market cap means that there are disposable cryptocurrency assets to fund the AAVE DeFi pools. The hype around Decentralized finance and its benefit in streamlining the traditional field of commerce could fuel a positive momentum in Aave.

Flash Loans

Aave features flash loans, which are uncollateralized securities, which must be paid on the same transaction. Flash loans are the unique selling point in the AAVE protocol. The loans are used in loan refinancing, automatic swapping of cryptocurrencies and collateral swapping. Flash loans are managed by a code for the overall system security. A user must repay the loaned coins in the same Ethereum transaction as that in which the borrowed funds are held. The flash loan feature lets users borrow and lend funds without counterparties.

Factors Hindering Adoption

Security Risks

Aave faces security risks in the execution of smart contracts. The protocol should complete the borrowing and lending transactions, manage the borrowed assets and conduct a risk assessment regarding security breaches. If there is a security violation in Aave, the loss of assets could shake investor confidence and the price of the token could fall as a result.

Network Governance Risks

The risks surrounding the management of the Aave protocol could also negatively affect the price of AAVE in the long term. The risks include inadequate voter participation and concentration of voting power. The Aave protocol depends on oracles that transfer asset prices to the protocol. The oracles are used to identify the value of outstanding liens and assess the ones in default. In the event of manipulation of the oracle’s price entries, securities that are not in default would be liquidated, causing the loss of funds for customers.

Market Risks

Aave faces the market risks of falling asset prices. In the case of falling collateral value, under-collateralization will result in insolvency. The loss of liquidity in the external markets also leads to a lack of incentives by the users in the external market to fund the liquidity protocols. The regulatory policy framework is another factor that the Aave protocol faces, and policies in different jurisdictions may also affect the price of AAVE.

It would be correct to say that AAVE/USD has failed to live up to its previous milestones. At the current trading price of around $285, AAVE/USD is trading below the midpoint of its May highs, which topped $665. In the middle of December 2021, Aave was trading below $160, which, so far, has been the lowest price in 2021. Nonetheless, growing use cases for AAVE/USD in the decentralized finance sector makes for a strong bullish case.

AAVE/USD Daily Chart Shows a Rebound, Key Level to Tackle

Looking at the daily chart, AAVE/USD was attempting to rebound from the low of 2021, which it hit on December 13. Further bullish signs can be seen in the moving averages, with the 50 MA (red) and 20 MA (blue) joining support for higher prices. However, $311 remains a key hurdle to the upside for AAVE/USD, as this is a level that has acted as resistance in the past, when prices have been below it, while acting as support to the upside. With the overall crypto sentiment improving at the end of 2021, AAVE/USD could successfully break past the resistance of $311 in early 2022. The $311 level should be the area to watch for AAVE/USD, as the pair could surge quickly if it succeeds in breaking to the upside. This could see the level becoming the immediate support in early 2022, putting AAVE/USD on track for reaching and surpassing its former highs.

AAVE/USD Weekly Chart – Moving Averages Yet to Join Support

On the weekly chart, moving averages have yet to join support for AAVE/USD. This suggests that we could witness some consolidation as the token approaches the key level at $311. The level was broken to the downside after a week-long bearish candlestick that formed on October 25. Based on the weekly chart and recent price trails, $311 is still the level to break for AAVE/USD, if the bulls can sustain meaningful and long-lasting bullish momentum. Thus, keeping an eye on the resistance zone will indicate where AAVE/USD is likely to go next, although a clear rebound would set the pair up for higher levels.