Key Components of the AAVE Protocol

As a decentralized finance (DeFi) developer, it’s important to understand the key components of the protocols you’re working with. In this article, we’ll provide a detailed overview of the key components of the AAVE protocol, which is a decentralized lending and borrowing platform built on Ethereum.

The AAVE protocol is designed to allow users to lend and borrow a variety of assets, including cryptocurrencies and stablecoins, using smart contracts. It utilizes a unique liquidity pool model, which allows users to earn interest on their deposited assets and borrow assets at competitive rates.

In this article, we’ll explore the various components of the AAVE protocol, including the interest rate models, the collateral system, and the safety measures. We’ll also provide examples of how to interact with these components using the aave-js library.

Interest Rate Models

One of the key components of the AAVE protocol is the interest rate model, which determines the rate at which users can borrow and lend assets. The AAVE protocol currently supports three interest rate models: the stable rate model, the variable rate model, and the flash loan rate model.

The stable rate model is a fixed interest rate model, where the interest rate for a given asset is set at a constant rate. This model is suitable for stablecoins, which are designed to maintain a stable value.

To borrow or lend assets using the stable rate model using the aave-js library, you can use the borrowStable() and lendStable() methods, respectively. These methods take three arguments: the asset (in the form of a symbol or contract address), the amount to borrow or lend (in wei), and the duration of the loan (in seconds). For example:

await aave.borrowStable('DAI', '100000000', '86400'); 
// borrow 100 DAI for 1 day (86400 seconds)
await aave.lendStable('DAI', '100000000', '86400'); 
// lend 100 DAI for 1 day (86400 seconds)

The variable rate model is a variable interest rate model, where the interest rate for a given asset is determined by supply and demand. This model is suitable for cryptocurrencies, which can fluctuate in value.

To borrow or lend assets using the variable rate model using the aave-js library, you can use the borrowVariable() and lendVariable() methods, respectively. These methods take the same arguments as the borrowStable() and lendStable() methods, respectively. For example:

await aave.borrowVariable('ETH', '100000000', '86400'); 
// borrow 100 ETH for 1 day (86400 seconds)
await aave.lendVariable('ETH', '100000000', '86400'); 
// lend 100 ETH for 1 day (86400 seconds)

The flash loan rate model is a special interest rate model that is only available for flash loans. Flash loans are a unique feature of the AAVE protocol that allow users to borrow assets instantly and repay them within the same transaction. The flash loan rate model is designed to allow users to borrow and lend assets at a rate that reflects the risk of the flash loan.

To borrow assets using the flash loan rate model using the aave-js library, you can use the borrow() method. This method takes two arguments: the asset to borrow (in the form of a symbol or contract address), and the amount to borrow (in wei). For example:

await aave.borrow('DAI', '100000000'); 
// borrow 100 DAI

Note that flash loans do not have a corresponding “lend” method, as the assets are automatically returned to the protocol within the same transaction.

Collateral System

Another key component of the AAVE protocol is the collateral system, which allows users to collateralize their loans and borrow at lower rates. When borrowing assets, users have the option to provide collateral in the form of AAVE tokens or other supported assets. If the value of the borrowed assets falls below a certain threshold (known as the “liquidation threshold”), the collateral will be sold to repay the loan.

To provide collateral for a loan using the aave-js library, you can use the provideCollateral() method. This method takes two arguments: the asset of the loan (in the form of a symbol or contract address), and the amount of collateral to provide (in wei). For example:

await aave.provideCollateral('DAI', '100000000'); 
// provide 100 AAVE as collateral for a DAI loan

It’s worth noting that the AAVE protocol imposes certain requirements on the collateral system, such as a minimum collateralization ratio (the ratio of the collateral value to the loan value) and a maximum loan-to-value ratio (the ratio of the loan value to the collateral value). These requirements are designed to protect the protocol from potential losses and ensure the stability of the system.

Safety Measures

The AAVE protocol includes several safety measures to protect the protocol and its users from potential risks. One of these measures is the emergency stop mechanism, which allows the protocol to be temporarily suspended in the event of a critical issue.

To trigger the emergency stop mechanism using the aave-js library, you can use the emergencyStop() method. This method takes no arguments and returns a boolean value indicating whether the emergency stop was successful. For example:

const success = await aave.emergencyStop(); 
// trigger the emergency stop mechanism

Another safety measure is the liquidation mechanism, which is activated when the value of a borrower’s collateral falls below the liquidation threshold. When a borrower’s collateral is liquidated, their loan is automatically repaid and the collateral is sold to cover any losses.

To trigger the liquidation mechanism using the aave-js library, you can use the liquidate() method. This method takes two arguments: the asset of the loan (in the form of a symbol or contract address) and the borrower’s Ethereum address. For example:

await aave.liquidate('DAI', '0x...'); 
// trigger the liquidation mechanism for a 
// DAI loan belonging to the specified borrower

Finally, the AAVE protocol includes a system for handling undercollateralized loans, which are loans that have a collateralization ratio below the minimum required by the protocol. When an undercollateralized loan is detected, the AAVE protocol will automatically sell a portion of the borrower’s collateral to bring the loan back above the minimum collateralization ratio.

To handle undercollateralized loans using the aave-js library, you can use the handleUndercollateralizedLoans() method. This method takes no arguments and returns a boolean value indicating whether the undercollateralized loans were successfully handled. For example:

const success = await 
aave.handleUndercollateralizedLoans(); 
// handle undercollateralized loans

Conclusion

In this article, we’ve explored the key components of the AAVE protocol, including the interest rate models, the collateral system, and the safety measures. By understanding these components, you’ll be better equipped to build DeFi applications on top of the AAVE protocol. We’ve also provided examples of how to interact with these components using the aave-js library.

Exercises

To review these concepts, we will go through a series of exercises designed to test your understanding and apply what you have learned.

await aave.borrowStable('DAI', '100000000', '86400'); 
// borrow 100 DAI for 1 day (86400 seconds)

await aave.lendStable('DAI', '100000000', '86400'); 
// lend 100 DAI for 1 day (86400 seconds)

await aave.borrowVariable('ETH', '100000000', '86400'); 
// borrow 100 ETH for 1 day (86400 seconds)

await aave.lendVariable('ETH', '100000000', '86400'); 
// lend 100 ETH for 1 day (86400 seconds)

await aave.borrow('DAI', '100000000'); 
// borrow 100 DAI