How does Aave work?

Aave is a decentralized, open-source protocol for lending and borrowing digital assets.

It is built on Ethereum and allows users to lend and borrow digital assets in a secure, trustless, and permissionless manner. The Aave protocol works by allowing users to deposit their digital assets into a pool of liquidity. This pool of liquidity is then used to facilitate lending and borrowing of digital assets.

When a user deposits their digital asset into the pool, they receive an equivalent amount of Aave tokens (LEND). These tokens can then be used to borrow other digital assets from the pool at a fixed interest rate. When a user borrows an asset from the pool, they must also provide collateral in order to secure the loan.

This collateral is held in escrow until the loan is repaid. If the borrower fails to repay the loan, then the collateral will be liquidated in order to cover the outstanding debt. The Aave protocol also allows users to earn interest on their deposits by staking their LEND tokens in what is known as “flash loans”.

Flash loans are short-term loans that are secured by LEND tokens and can be used for arbitrage or other trading strategies. The interest earned on these flash loans is paid out in LEND tokens as well. Finally, Aave also provides users with access to DeFi products such as yield farming and liquidity mining through its platform.

Yield farming allows users to earn rewards for providing liquidity to certain pools while liquidity mining rewards users for providing liquidity to certain markets or protocols.