Aave is a system of smart contracts that enables assets to be managed by a distributed network of computers running its software. This means Aave users do not need to trust a particular institution or person to manage their funds.
Users who want to lend or borrow must pay a certain collateral. For example, if a person wants to borrow $100 worth of Ethereum, he/she must first make a deposit of more than $100 in another cryptocurrency. Collateral is placed in the so-called. lending pool, something like a mutual fund.
When someone wants to take a loan, they get the amount from this mutual fund.
To make the whole process easier, Aave issues 2 tokens:
AAVE cryptocurrency and aToken.
AAVE is the nativecryptocurrency within the Aave network. Users who use the AAVE token as collateral may receive a discount on transaction fees, while users who borrow the AAVE will not be charged a fee.
aTokens are issued when assets are deposited into Aave’s liquidity pool in a ratio of 1:1. They are marked according to the cryptocurrency stored. They are burned when they are restored.