What is Aave?
Aave works similarly to a bank, where you take out a loan against collateral – but with cryptocurrencies and without a middleman.
Comparison with a bank:
Imagine you have gold and deposit it in a bank.
The bank allows you to overdraft your account or take out a loan in euros because your gold serves as collateral.
As long as the value of your gold remains high enough, you can continue using your overdraft.
If the value of your gold drops too much, the bank will require you to either provide more collateral or repay the loan.
How it works with Aave:
You own Bitcoin (or another cryptocurrency) and deposit it as collateral on Aave.
In return, you can borrow Ethereum (ETH) or another cryptocurrency.
As long as the value of your deposited Bitcoin remains high enough, your loan stays open.
If your Bitcoin loses too much value, your deposited funds can be automatically sold to cover the loan (liquidation).
The difference from a bank:
There is no central authority. Everything runs through smart contracts on the blockchain – automatically, without manual intervention.
But isn’t it crazy to use cryptocurrency as collateral and take out a loan instead of just selling it?
At first glance, yes – but there are good reasons why some people do it:
1. Tax advantages
In many countries, you pay taxes on profits when you sell crypto.
A loan is not a sale, so it might be more tax-efficient.
Example: You own Bitcoin, which has increased significantly in value.
- If you sell it, you have to pay capital gains tax.
- If you use it as collateral instead, you get liquidity without paying taxes.
2. You keep your crypto & potential price increases
When you sell cryptocurrency, it’s gone.
If you use it as collateral instead, you can still benefit from potential future price increases.
Example: You bought Bitcoin at $30,000. Now it’s worth $60,000. Should you sell or borrow?
- Sell: You get cash, but if Bitcoin rises further, you miss out on future gains.
- Borrow: You take out a loan and use the funds while keeping your Bitcoin.
If Bitcoin rises to $100,000, you still own it!
3. Cheaper than traditional loans
With traditional banks, you often pay high interest rates, deal with bureaucracy, and undergo credit checks.
With Aave, no credit score is required – your crypto is the collateral.
Some crypto loans have very low interest rates, especially with stablecoins.
4. Arbitrage & leverage
Some traders borrow against their coins to reinvest the borrowed money (e.g., in DeFi farming or arbitrage).
Risk: If your deposited coin drops significantly in value, it can be liquidated.
Conclusion:
Yes, borrowing crypto incurs interest, but it offers:
✅ Tax benefits
✅ Retention of your crypto while getting liquidity
✅ Potential to profit from future price increases
✅ Faster & more accessible loans than traditional banks
Whether it’s worth it depends on interest rates, your time horizon, and market conditions.