In the latest DeFi launch, money market protocol Aave will gather off-chain pricing data via the decentralized oracle services of Chainlink. LINK token holders will also be able to earn interest with Aave.
Introducing “Flash Loans”
On Jan. 8, 2020, Aave protocol launched it’s mainnet and announced “the first attempt in DeFi at uncollateralized lending,” according to Aave developer Emilio Frangella.
Users will be allowed to borrow assets from a reserve so long as they can return the same amount, plus a small fee, to the reserve once the transaction is complete. While the service is primarily oriented towards the developer community and requires technical knowledge, the broader DeFi community can benefit as well.
In a brief interview with Crypto Briefing, Aave’s community manager Pablo Candela Andrade said:
“Some opportunities for flash loans would be, for example, arbitrage opportunities, but also rebalancing a loan you have opened in a protocol. [You could] open it back in another [protocol], liquidate a loan or position in some platform, for example a maker Vault, and pay back the flash loan with the margin you got. ”
The loans are denominated in any of the 16 tokens on offer, just so long as there exists the equivalent in Aave’s reserves. Users also have the opportunity to earn interest on any of these tokens. They first need to exchange the underlying asset for Aave’s interest bearing tokens, otherwise known as aTokens, and they can accumulate interest directly in their wallet.
The latest addition to the list of 16 is Chainlink’s LINK token. This is due in part because Aave is leveraging Chainlink’s decentralized oracle services to gather off-chain data, including pricing and lending rates. The importance of running secure oracles became very clear in Jun. 2019 following a mishap on the DeFi application Synthetix.
At that time, an arbitrage bot on the platform took advantage of false external data that was transmitted to Synthetix’s smart contracts. The error resulted in the loss of 37 million synthetic ether (sETH). This sum was later replaced following negotiations with the bot’s owner.
The company’s founder, Kain Warwick said:
“This particular bot was able to take advantage of the mispricing issue immediately, and exploit it repeatedly.”
Warwick and his team responded by implementing Chainlinks’s decentralized, and thus more secure, oracle services. “After reviewing numerous options [Synthetix] decided to implement Chainlink [roughly] six months ago,” he said in a tweet.
An Aave developer, Emilio Frangello, confirmed that the decision to integrate Chainlink from day 1 allowed their protocol “reduce [their] time to market]” and “provide the highest guarantee of data integrity, decentralization, and security.”
Frangello added that the DeFi movement must continue to rely on further interoperability channels to continue improving. This objective will also serve as a productive medium-term goal while Ethereum, where most DeFi activity occurs, begins phasing in Serenity, the blockchain’s scalability solution.