Over the past few months, decentralized finance (DeFi) has become one of the hottest topics in the crypto-sphere. The full implications when it comes to how DeFi will revolutionize cryptocurrencies have yet to be explored. But the excitement remains palpable.
Many possibilities linger on the horizon. Among these possibilities is the chance for individuals to make money on their crypto assets by participating in a DeFi lending protocol such as Aave or Compound.
While you've probably heard of Compound before, Aave represents a relatively new addition to the market. On the surface, these platforms look much the same. But a closer inspection reveals differences when it comes to features, usability, and even lending percentages.
Which of these platforms is ultimately better for you? It depends on how comfortable you are with crypto lending platforms and what you're looking for from a financial standpoint. With this in mind, let's take a closer look at Aave and how it stacks up against Compound.
What Is Aave?
Aave has taken its place among a group of emerging DeFi cryptocurrencies. This decentralized lending system permits end users to borrow, lend, and earn interest on their crypto assets. All without the necessity of a middleman.
What does Aave mean? In Finnish, Aave translates as "ghost." The team that created the company wanted a name that symbolized their attempt to craft a "transparent and open infrastructure for decentralized finance."
Who makes up the Aave team? The team includes creative directors, tech evangelists, risk managers, and other professionals. Their diverse backgrounds have gifted the company with a wide range of talent.
What's more, Aave's CEO, Stani Kulechove, and its COO, Lazaro Gustave, share backgrounds at ETHLend. Roles at this company prepared both to take the helm of Aave.
A decentralized peer-to-peer lending platform, ETHLand also inspired the concept behind Aave. Besides a network that offers lending by creating a market, Aave permits similar products to be constructed within its platform. Ethereum blockchain also supports these subproducts.
Powering a non-custodial money market, Aave involves borrowers, lenders, and depositors. The network gets its liquidity from depositors. This approach permits borrowers to receive loans using either an overcollateralized or undercollateralized approach.
Aave Facts: What You Need to Know
Aave runs on the Ethereum blockchain and is organized around a system of smart contracts.
These smart contracts enable assets to get managed via a distributed network of computers that run Aave software. What does all this mean for users? They don't need to rely on a specific person or institution to manage their funds.
The only faith they must place in the system rests in the code's functionality is written. The software that powers Aave permits the creation of lending pools. These pools allow users to borrow or lend 17 different cryptos, including MANA, BAT, and ETH.
Like some of the other DeFi lending systems that you may already be aware of, Aave users must post collateral before taking out any loans. The maximum amount they may borrow is equivalent to the value of this collateral.
Once the collateral gets posted, borrowers gain access to funds in the form of a Token. This special token is tied to the value of another asset. This coin gets encoded, permitting lenders to earn the interest tied to their deposits.
How may borrowers post collateral? By using DAI.
Then, they can go on to borrow in ETH. This process permits borrowers to get exposure to diverse cryptos without the necessity of outright ownership.
What Is Compound?
Now that we've taken a peek at what Aave provides, let's check out the capabilities with the Compound platform. Robert Leshner, Compound's CEO, and Geoffrey Hayes, CTO, created the platform as a way to do more with cryptos.
While most cryptocurrencies remain idle in wallets or on exchanges, Compound organized a platform permitting you to earn money via interest. In the process, Compound has transformed into the largest lending protocol in DeFi.
To say that Compound has a corner on the market remains an understatement. When they first introduced the COMP token on June 17th, it launched the crypto community into a veritable frenzy.
Users rushed to deposit their assets to begin earning money. They received COMP for participating in the Compound ecosystem, as either a lender or borrower. Today, these users have more than $600 million invested in this platform.
Things to Know About Compound
How does Compound work? Users deposit cryptocurrency assets as lenders. Or they withdraw cryptos as borrowers.
Instead of direct loan agreements between borrowers and lenders, lenders pool their assets. Then, borrowers draw from these groups' pools.
Every asset type gets a pool, and users may borrow a maximum of 60% of the collateral they've provided to the platform. What's more, the amount they borrow gets determined by the market cap of the collateral and the liquidity.
What's the experience like for lenders? When you lend on the platform, you receive an amount of cTokens corresponding to the amount you've deposited. This cToken usually is much larger than the amount of crypto deposited.
What are Compound's cTokens? They're ERC-20 tokens, representing a small amount of the underlying asset.
How do interest rates work? The greater the demand for an asset, the more interest the user should earn. This rule of thumb applies to both lenders and borrowers.
For this reason, lenders have an extra incentive to add money to the platform. Yet, it also deters borrowers from taking more than they can handle. For this reason, lenders may withdraw their funds question-free at any time.
Aave Versus Compound: A Head-to-Head Comparison
At this point, Aave and Compound likely sound similar. And, on the surface, these platforms are organized around the same concept. Essentially, both could be characterized as overcollateralized cryptocurrency lending platforms.
They rely on the concept of pooling lender assets so that borrowers may draw from them. Each protocol also has a governance token. And they follow the most extensive protocols in DeFi in terms of "assets under management" (AUM).
Now that we've gotten through the similarities, what about the differences? For starters, Compound remains less complicated than Aave. While helpful for beginners, it offers far fewer features than Aave.
The compound doesn't offer stable interest rates, but Aave does. Aave also has an option permitting you to switch between variable and stable interest rates as needed. Aave has pushed the envelope by offering flash loans, which Compound does not.
The compound offers nine assets for borrowing and lending, while Aave boasts 17. What's more, Aave permits borrowers to get a higher percentage on the collateral they post. Aave offers 75%, whereas Compound comes in at 66%.
Which Is Better Aave or Compound?
At this point, it sounds like Aave outperforms Compound by a long shot. But there's more to the picture that we must consider. On a closer comparison, you'll realize that Compound has two major advantages over Aave.
For starters, Compound remains the more streamlined of the two platforms. This reality makes it easier to navigate and use. Yes, you lose some functionality, but you also avoid a massive learning curve that proves off-putting to some users.
Second, when it comes to providing incentives to participate as both a lender and borrower, Compound wins the race. Users of both types receive incremental COMP token fractions every few seconds.
But the differences don't stop there. You'll also find that Compound represents a mature finished product. As for Aave, it has a ways to go. The protocol's still relatively new and still struggling with the establishment of community governance required to act as a DAO.
Compare with AAVE and Compound alternatives
Similar Savings Accounts
| Platform | Interest Rates (APY) | |
|---|---|---|
| Nexo | Up to 7% on BTC Up to 12% on Stablecoins ... 36 more coins | |
| OKX | Up to 5% on BTC Up to 0.08% on Stablecoins ... 196 more coins | |
| YouHodler | Up to 3.05% on BTC Up to 8.33% on Stablecoins ... 56 more coins |
The Takeaway: Aave vs. Compound
While Aave and Compound appear to have many similarities, a closer inspection demonstrates critical differences. Based on an analysis of these differences, most consumers will prefer working with Compound.
In the process, they'll enjoy a streamlined and user-friendly experience. One that's based around a mature lending community and plenty of worthwhile incentives.
As for Aave? We feel this product holds great promise. That said, they've flown under the radar for a while now. Not only would they benefit from greater exposure, but they need to work on expanding and better establishing their lending community.
While they offer a wide variety of options, many users may feel intimidated by the complexity. Compared to Compound and other DeFi lending products, Aave boasts a veritable tool shed of assets, features, and development tools.
That said, just because they can offer all of these resources doesn't necessarily mean that they should.
As for both platforms, they suffer from the same problem that other DeFi lending protocols face. Outside of the crypto-verse, there's little user appeal.
Navigating the Crypto Space
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