Since his arrival, decentralized finance (DeFi) it opened the door to new ways for cryptocurrencies to work. Flagship protocols include Aave has quickly established itself as the benchmark when it comes to monetizing its cryptocurrencies in a decentralized manner. In practice, Aave enables the lending of assets in decentralized liquidity pools in exchange for interest.
In this article, we’ll walk you through the steps to get a return on Aave, with real examples of funds and some tips to optimize your interactions.
Aave: lending comparison protocol
Aave is a decentralized financial protocol type of credit platform. However, over time, Aave has evolved into a much more complex protocol that offers a multitude of services.
First launched in 2017 under the nameETHLendAave has made a name for itself as a cryptocurrency lending and borrowing platform with fully decentralized management and perfect security to date.
At Aave, the concept is simple: you store your cryptocurrencies in a liquidity pool. These cryptocurrencies are then available to other users who can use them borrow for interest.
So by depositing your funds, you earn interest on your deposit, a bit like a savings account, but in a crypto version.
In practice, when you deposit your cryptopos, they are converted to “aTokens”. For example, ETH becomes aETH, USDC becomes aUSDC, etc. These assets track the value of your deposits and earn interest at the same time.
Today, with its latest version (Aave V3), the protocol is accessible on 13 blockchains. This of course includes Ethereumamount layer-2PUSH BNB chain or even Avalanche to name just a few. This opens up a wide range of options for diversifying your income while minimizing fees.
Earn revenue on Aave
If you want to expand your cryptocurrencies on Aave, you will have to choose from several pools.
Overall, through the various versions deployed on 13 blockchains, Aave has more than 140 different pools. Suffice to say, finding the most profitable fund can be time-consuming.
But don’t worry, we have a trick. Really, tools like Defillama allows you to track returns of each fund in real time and identify the best opportunities.
To do this, you need to go to the “Yield” section of Aave’s presentation on DefiLlama. You can then sort the pools by APY (Annual Percentage Yield)which makes it possible to identify the most profitable pools at a given time on Aave.
Get your ETH return through WETH Pool (AAVE V3 – Base)
For ETH holders, the WETH pool on Base sa option is currently attractive 2% Annual Return (APY) at the time of writing this article. However, it can be interesting check in advance on DefiLlama that another pool is not more interesting for ETH.
In our case, selection Base is interesting because it is a fund that has good liquidity and a layer 2 basis that has some of the lowest transaction fees.
In addition, the pool has historically a Relatively stable APYwith some temporary increases over the period allowing for a modest increase in annual yield.
Let’s get into practice! Here’s how to deposit your ETH into the WETH Aave v3 pool on Base.
Before that you will need to have a Ethereum walletsuch as MetaMask Or Rabbit wallet. You will then need to send ETH to the mainnet. To do this, you can either withdraw ETH from an exchange that supports the Base network, such as Binance. Either send ETH from another network using a bridge.
Deposit your ETH into the WETH pool on Base
Once you have your ETH on Base, go to the WETH pool on the Aave website: link to ETH pool.
Connect your wallet to the Aave website and make sure your wallet is properly connected to the underlying blockchain.
Now you can put your WETH into the fund and start earning interest. To do this, you have two options:
- You have ETHyou can save them to pools, which will take care of changing them to WETH;
- You have WETHyou can put them directly in the pool.
Get your stablecoins (USDC) return via USDC pool (AAVE V3 – Base)
For those who prefer a less volatile option, stablecoins can be an interesting alternative. Currently it is USDC pool on Base offers an attractive yield of 14.5% APY. A very attractive yield for a stable asset, ideal for investors looking for stability.
It will be necessary for that get USDC by converting your ETH through a decentralized base exchange, such asAirport finance.
Once you have USDC, go to the dedicated fund on the Aave website: USDC fund link.
Now you can deposit your USDC into the fund and start earning interest. For this it will first be necessary approve the expense USDCand then complete the deposit transaction.
View and track your positions
The Aave website allows you to do just that track and monitor your positions. To do this, go to the section “Dashboard” from the Aave menu.
Here you will find the “Your Stock” section which summarizes your deposits as well as the effective APY.
Use your deposits as collateral for a loan on Aave
Now that you have deposited cryptocurrencies into Aave funds, you have them the option to go further by using them as collateral to borrow other cryptocurrencies.
This is one of the main features of Aave: thanks to your deposits in aTokens, you can get a loan continue to benefit from the returns on your flag.
By depositing your cryptocurrencies on Aave, you not only earn interest, but you can also use them to secure a loan. In practice, the collateral system allows you to borrow new funds using already deposited assets as collateral.
Watch out for liquidations
Be careful, it is not without risks! There are loans on Aave “over-secured”which means that the value of your collateral must always remain higher than the amount borrowed.
Therefore, if the value of your collateral drops too significantly, the protocol can trigger a disposal.
Liquidation is an automatic mechanism that is triggered if the value of your collateral falls below the “liquidation threshold” called Health Factor on Aave. In other words, if the value of your deposited property drops too much compared to the amount borrowed, the log Aave will liquidate part or all of your collateral to repay the loan.
This mechanism helps prevent the protocol from ending up with unsecured debts, but can result in significant losses for the borrower.
Let’s say you deposited $1000 in ETH and borrowed $800 in USDC. If the market drops sharply and the value of your ETH drops to $850, your position is dangerously close to liquidation.
At that point, Aave can automatically sell some of your ETH to repay some of the borrowed USDC. This avoids the risk for the protocol, but causes a loss of capital for you.
Optimizing revenue on Aave: some practical advice
Beware of transaction fees
Earning on Aave is good, but optimizing your earnings while minimizing fees is even better.
THE The returns of the aave fund vary by blockchain and market conditions. But be careful, some blockchains like Ethereum store high fees that can quickly erode your winnings.
If you deposit only a small amount, your Ethereum fund return can be destroyed by these fees. For example, 2% APY on Ethereum may not be attractive if fees are costing you a significant part of your earnings.
Conversely, Tier 2, such as Base, offers much lower transaction fees. Although the yield may be slightly lower, the absence of significant fees can make the investment more profitable, especially for small and medium-sized investors.
Diversify your investments to better spread your risks
It is often relevant on Aave diversify your investments into several channels and multiple asset types to maximize your gains without over-exposure.
An investor could put part of their funds in a stable fund like USDC on Base for a safe return and another part in an ETH fund to benefit from the potential increase in ETH.
In addition, returns on Aave funds vary depending on demand and market conditions. In order to avoid unpleasant surprises, it is therefore essential to regularly monitor your investments and adjust your strategy if necessary.
Defillama, which we introduced earlier, allows you to track the APY rates of Aave pools in real time.
DeFi risks: watch out for flaws and volatility
It is important that DeFi and in fact Aave is not without risks. Despite audits and tests, it still exists the risk of errors in smart contracts.
A simple error in the code can expose the protocol to hacks, leading to a partial or even complete loss of funds. Keep this in mind when putting funds into Aave or any other DeFi protocol.
As you have understood, Aave offers a number of opportunities to grow your valuable cryptocurrencies. Between the ETH and USDC pools on Base, there’s something for everyone, whether you’re a fan of calculated risk or a fan of the safety of stablecoins. Don’t forget to follow Defillamo to adjust your investments and monitor transaction fees to avoid unpleasant surprises. With a little strategy and tracking Aave can become your ally in your search for passive income in the world of DeFi.
