Aave, previously called ETHLend, is one of the long-standing lending protocols in DeFi. It was funded through an ICO in 2017 but launched as Aave (Finnish for ‘ghost’) in 2020. Its founder Stani Kulechov is an early blockchain adopter, active in the space even before ETHLend and the DeFi days.
Aave works by pooling liquidity and matching lenders and borrowers, akin to a bank, but in a decentralized setting with the help of smart contracts. To incentivize lenders to contribute liquidity, the contract adjusts the annual percentage yield by increasing it if a pool’s liquidity is low. The lenders are required to provide collateral to loan out another asset, and if they fail to repay it, it will be liquidated.
Like in other decentralized protocols, to make sure it develops as the community consensus dictates, the governance uses voting with the governance tokens — AAVE. There is an AAVE pool to lend to and borrow from, too.