Aave vs Compound
When we talk about crypto lending and borrowing, Aave and Compound are the protocols that come to the forefront, and due to this, they’re often compared. If you’ve stumbled across this page, it’s likely that you’re interested in decentralized finance (DeFi) and looking to learn about crypto loans or compare the tokens.
At Minke, we want to make DeFi accessible to everyone, globally. There’s plenty of information online about crypto lending, but we see the same barriers as we see when it comes to the ability for the average person to use the lending protocols themselves – they’re written from a technical perspective and the reader needs a good level of DeFi knowledge to begin with.
Outline
- How do crypto loans work
- Aave vs Compound Statistics
- Saving and Borrowing on Aave and Compound
- Comparing Aave and Compound Liquidation
- Comparing Aave and Compound Tokens
We’re here to make the process simple, and explain what you need to know, without any jargon. So before we get into any comparison, we’ll first quickly introduce how crypto loans work
How do crypto loans work?
With traditional bank accounts, savers deposit money into a savings account and earn interest on their deposit. Once that money is in the bank, it’s dormant money and the saver is not able to use it for other things until it is withdrawn. DeFi introduces the ability to earn interest on savings, whilst simultaneously borrowing against them – which enables you to put your money to work in other ways whilst earning interest and retaining ownership of your crypto assets. These loans can be taken out and repaid at any time, making them much more flexible than loans obtained via traditional finance.
Crypto loans work a little differently to a loan you’d take from your bank. Firstly, it’s permissionless. You don’t need to go through an application process or prove your identity or credit worthiness to any centralized company. Instead, loans are available from various blockchain protocols such as Aave and Compound. With these protocols, you don’t borrow from a company, you interact with smart contracts that are able to perform automated transactions if certain criteria are met.
Aave and Compound both utilise what are known as lending (or liquidity) pools. Users are able to deposit into and lend from these pools directly. You’ll deposit the crypto you want to keep ownership of and lend another crypto token or stablecoin which you can then use how you wish. Lending is over collateralized, which means you need to deposit more than you lend. For example, you might deposit 10 ETH and borrow up to 75% of that value in another token.
The interest rates are based on supply and demand – so if there are less assets in the pool you want to contribute to, it’s likely you’ll earn more interest. So by way of an example, if there were a large number of savers depositing USDC into the pool but not as many borrowing from that pool, interest rates would reduce as there is more supply than demand. Rates are updated each mined block – which is approximately every 15 seconds on the Ethereum network.
As you still retain ownership of your deposited asset, if the price increases whilst it is in the lending pool you will still benefit from that increase when you repay your crypto loan. You’ll need to keep in mind that this works both ways – if the value of your deposited token decreases then this will impact the loan to debt ratio which could lead to liquidation (more on this later) so it’s important to pay attention to the current status of your loan.
Aave vs Compound Statistics
| Protocol | Total Value Locked | Users | Assets supported | Lending / Collateral % | Decentralized Governance | Flash Loans | Chains Supported |
| Aave | $8.89b | 88,514 | 32 | 75% | Yes | Yes | Ethereum PolygonAvalanche |
| Compound | $6.93b | 337,053 | 17 | 66% | Yes | No | Ethereum |
*statistics as of 04.02.22
Prior to 2021, Compound was the bigger lending protocol – and still is, if you judge based on the number of users. However, Aave has moved to the forefront in terms of total value locked within the protocol and innovation, with the introduction of flash loans and the integration of other blockchains such as Polygon and Avalanche. This is great news in terms of accessibility, as it allows DeFi users to pay much lower transaction fees than when using Ethereum. Overall, we find Aave to be the preferred protocol for most users due to lower transaction fees and an easier user interface. At Minke, we chose to integrate Aave into our app which lets our users deposit and earn great interest rates with a few clicks.
Saving and Borrowing on Aave and Compound
How much can you borrow?
The amount you can lend using a crypto loan depends on which protocol you use and which asset you want to deposit. Often, the amount you are allowed to borrow is based on the quality of the asset you are depositing. So for example, if you are depositing ETH and the protocol has set the borrowing limit (also known as collateral factor) for ETH at 75%, you can borrow up to 75% of the value of your deposited ETH in another token that Aave supports, e.g. USDC. Just like borrowing money from your bank, you’ll need to pay interest on the money you borrow. However, one key difference is that you’ll also be earning interest on the asset you deposited and you’re still able to benefit from any value increase that asset sees during the time it is deposited.
How can you earn interest as a saver?
Whilst both Aave and Compound are lending protocols, you’re also able to use them to earn interest on your savings. Simply deposit funds into the pool you want to use depending on which crypto asset you hold, and you’ll start to earn interest right away. You can earn interest on a wide range of crypto assets via both Aave and Compound, including Ethereum and stablecoins such as USDC, USDT and Dai.
Comparing Aave and Compound Liquidation
What is liquidation?
Liquidation occurs when the collateral value deposited does not properly cover the agreed loan to debt ratio. This might happen when the collateral decreases in value (so if you deposited ETH, the value of that ETH has reduced) or the borrowed asset increases in value.
Aave liquidation process
When using Aave, users are given a health factor. When the health factor drops below 1, they are eligible for liquidation. In a liquidation, up to 50% of a borrower’s debt is repaid and that value + liquidation fee is taken from the collateral available, so after a liquidation that amount liquidated from your debt is repaid. To avoid liquidation you can raise your health factor by depositing more collateral assets or repaying part of your loan.
You can read more about the Aave liquidation process here.
Compound liquidation process
The Compound borrow limit is indicated by a meter displayed on the Compound dashboard. If this meter reaches ≥100%, your account will be partially liquidated. If your account is in liquidation, a member of the community can repay up to 50% of your outstanding borrowed assets; the liquidating user receives a proportionate amount of your collateral, at a 8.0% discount, as a reward.
You can read more about the Compound liquidation process here.
When using crypto lending protocols, it’s important to keep a close eye on the health of your loan to debt ratio as you may need to reduce lending or deposit more collateral over time should the value of your assets change.
Comparing Aave and Compound Tokens
What is Aave crypto token?
Aave (which means ‘ghost’ in Finnish) began as ETHLend, founded by Stani Kulechov in 2017. Aave issues two different tokens, aTokens and AAVE tokens. The AAVE token is the native token of the Aave ecosystem and functions as both a governance and exchange token that offers users discounts on fees when using the protocol. aTokens are tokens that are given to lenders so they can receive interest on their deposits. As of the 4th March 2022, Aave is the #54th largest cryptocurrency by market capitalization.
One of the benefits of the AAVE token is that you can stake it within the safety module which provides a backstop incase of a shortfall event. In return you earn incentives earned through protocol fees. You can read more about crypto staking here.
What is Compound crypto token?
Compound was founded by Robert Leshner in 2017. COMP is the governance token of the Compound protocol, and is the #94th biggest cryptocurrency by market capitalization. COMP is distributed to all lenders and borrowers using the Compound protocol every time a new Ethereum block is mined in an amount proportional to the interest accrued by each asset. As COMP is a governance token, token holders are able to take part in the governance of the protocol itself, by proposing and voting on changes.
Conclusion
If you’re looking for the easiest way to save using Aave you can download our app Minke. You can top up easily with Apple Pay on Polygon and start saving with low-fees and rates up to 8%. We’re rolling out early access now.