From Flash Loans to Global Bank: The Story of Aave

Aave transformed from its ETHLend roots into DeFi’s leading lending protocol by pioneering liquidity pools, flash loans, and composability.

V3 introduced risk-engineering tools like isolation mode, caps, and cross-chain Portal, turning Aave into cross-chain liquidity infrastructure.

With the launch of GHO stablecoin and the planned Unified Liquidity Layer in V4, Aave aims to evolve from protocol to a global crypto bank.

FROM ETHLEND TO AAVE: REINVENTING ON-CHAIN LENDING

In 2017, most of the crypto world was focused on Bitcoin’s price and the ICO boom on Ethereum. Borrowing barely drew attention. ETHLend tried to connect lenders and borrowers in a peer-to-peer marketplace, but it quickly hit walls: matching was slow, success was uncertain, and loan terms were unattractive.

In 2018, the team rebranded to Aave, the Finnish word for “ghost.” The name change came with a new design. Instead of order books, Aave built liquidity pools. Depositors received aTokens that grew over time, while borrowers gained instant access to liquidity. The pool model turned liquidity itself into a product.

The breakthrough came in early 2020 with Aave V1 and flash loans—borrowing without collateral, provided the funds were repaid within the same transaction. Traders used them for arbitrage, liquidators for fast repayment, and developers for complex strategies. Critics called them risky, but flash loans became a new financial primitive. Aave’s reputation soared: not just as a lending tool, but as a platform for innovation.

WHEN DEFI SUMMER TURNED AAVE INTO A HOUSEHOLD NAME

During the “DeFi Summer” of 2020, almost everyone interacted with Aave. V2 added debt tokens, collateral swaps, and stable rates, making borrowing and lending more flexible. At a time when liquidity was flying across protocols, Aave stood out for its composability. Tokenized assets and debts could plug into other protocols, turning Aave into core infrastructure.

Expansion soon followed. Deployments on Polygon, Avalanche, Arbitrum, and Optimism were like opening branches in new cities. Each branch worked the same way: health factor, rate curves, liquidation rules. Users had the same experience everywhere, and developers had a consistent set of contracts to build around. By 2021, Aave’s total value locked neared $20 billion, overtaking Compound and Maker.

This was also when Aave began courting institutions. With Fireblocks, it launched Aave Arc, a permissioned market for compliant players. Volumes were modest, but the move showed Aave wanted to bridge DeFi and traditional finance.

CRISES, CLEANUPS, AND THE ENGINEERING OF TRUST

Large pools invite stress tests. In late 2022, a whale tried to short CRV on Aave, borrowing heavily and triggering chaos. The position was liquidated, but thin liquidity left over $1 million in bad debt. It was minor compared to billions in TVL, but it was a wake-up call. Risk had to be engineered, not just debated.

V3 delivered that engineering. Isolation mode quarantined risky assets, limiting them to stablecoin borrowing. Supply and borrow caps were hard-coded, ensuring no single asset could drain the pool. Efficiency mode (eMode) boosted capital efficiency for correlated assets, letting stablecoins borrow against each other with ratios near 98%. These features acted like firewalls inside the protocol.

Aave also launched the cross-chain Portal. Users could deposit on Ethereum, borrow on Polygon, and repay on Avalanche. Behind the scenes, aTokens were burned on one chain and minted on another, while bridges later moved the base assets. Aave was no longer just a protocol—it was becoming cross-chain liquidity infrastructure.

BEYOND DEFI: AAVE’S QUEST TO BUILD A GLOBAL CRYPTO BANK

In 2023, Aave introduced its own stablecoin, GHO. For years, interest went into reserves but not directly to protocol revenue. GHO changed that: interest now flows straight into the DAO treasury. It gave Aave a fiscal engine and unified borrowers under one currency. Compared to MakerDAO’s DAI, GHO follows a commercial bank model—issued at the edge of many markets, not just one central vault.

The bigger ambition lies in V4. The Unified Liquidity Layer aims to merge markets across chains into one balance sheet. Rates, risk, and incentives would be managed by a hub, while execution would run on different chains. For users, it would erase the question of which chain to use. For Aave, it would mean operating like a true cross-chain bank.

Competition remains. MakerDAO still anchors the stablecoin market. Compound, with its minimalist design, keeps a reputation for safety. Venus dominates on BNB Chain. Aave’s advantage is not being the simplest or safest, but in engineering complexity and treating multi-chain as strategy. That approach has helped it survive stress tests and keep growing. The question now: can Aave become the “common bank” for institutions and real-world assets? If it succeeds, it won’t stay at the edge of crypto—it could move to the center of global finance.

〈From Flash Loans to Global Bank: The Story of Aave〉這篇文章最早發佈於《CoinRank》。