Blog: Aave and interest income in cryptocurrencies

Throughout time, people have sought to accumulate interest income on their wealth. Today, the importance of interest income is further emphasized as rising inflation erodes the value of wealth. By traditional means, such as depositing money in a bank account, it is now impossible to obtain an interest rate return that is higher than inflation. Thus, assets resting in bank accounts are constantly losing value. Fortunately, however, there is a solution, as cryptocurrencies also allow people to accumulate interest income. This text explains how it is possible to gain interest income using cryptocurrencies.

              
Interest income on bank deposits
The most common way to gain interest income has typically been to deposit money in a bank account. However, interest income on deposits has plummeted in recent years. We are currently in a situation where inflation has risen while interest income on deposits has disappeared. As inflation increases, the value of wealth deposited by people in their bank accounts decreases steadily. With rising inflation, people are forced to look for alternative investments for their assets.
Interest income in cryptocurrencies
Cryptocurrencies offer several different opportunities for accruing interest income. These include, for example, staking of cryptocurrencies and various cryptocurrency lending services. The popularity of both has been on the rise recently, and investors have begun to understand the opportunities offered by cryptocurrencies to accumulate interest income.
Staking cryptocurrencies means locking cryptocurrencies to blockchain maintenance work. In return, it is possible to get an interest rate, which can vary significantly between different cryptocurrencies. Today, most cryptocurrencies operate according to the Proof of Stake algorithm, enabling staking. Proof of Stake-based cryptocurrencies do not require similar mining equipment and high energy consumption as traditional Proof of Work cryptocurrencies like Bitcoin. 
In addition to staking cryptocurrencies, another significant way to earn interest income in cryptocurrencies is through various decentralized cryptocurrency peer-to-peer loan services, such as Aave. This text deals in more detail with the accumulation of interest income by utilizing cryptocurrency lending services. First, however, we need to look more closely at an entity called DeFi .
DeFi
At the heart of the interest income made possible by cryptocurrencies is a large entity called DeFi (Decentralized Finance). DeFi is a generic term for various services built primarily on the Ethereum blockchain to form an entirely new financial sector. DeFi is not dependent on traditional banks or any other third parties.
DeFi is one of the hottest trends in the cryptocurrency market, and various DeFi services are entering the market at a rapid pace. Today, DeFi enables several services familiar from the traditional banking world, such as accruing interest income. Numerous different DeFi services allow for an open market for everyone, operating much more efficiently than traditional bank-driven financial markets.
Various DeFi services have grown tremendously in popularity among investors. At the moment, banks do not pay interest income on deposits. Hence, an annual interest rate made possible by DeFi services, at best several tens of percent, is a good option if you do not want steadily rising inflation to affect your assets negatively.
Numerous DeFi services in the cryptocurrency market offer investors an interest rate return in exchange for the liquidity deposited in the service. The liquidity deposited in the service allows investors also to borrow cryptocurrencies from DeFi services. These services utilize smart contracts in their operations, which means that all operations are open and automated.
DeFi is currently developing rapidly, and DeFi services today offer almost the same services as traditional banks. One of the most popular interest-bearing DeFi services is called Aave. More about Aave next.
Aave
Aave is one of the most popular DeFi services in the cryptocurrency market. The Aave allows its users to earn interest income by depositing their funds in the service. In addition to making interest, users can also borrow cryptocurrencies from the service. In practice, Aave is a decentralized peer-to-peer loan service.
In the service provided by the Aave, interest income is paid to investors who provide liquidity to the service by depositing their cryptocurrencies. Aave rewards investors who have deposited in the service with their interest-bearing aTokenes. The Aave's aTokens are created with the liquidity deposit and destroyed when the investor wants to redeem his deposit. After redeeming the deposit, the aTokens will be exchanged back for the originally deposited currency into the service.
Like other major DeFi services, Aave's interest income varies according to supply and demand. Interest rates also vary between different currencies, and in general, the highest interest rates can be achieved with stablecoins. Stablecoins are cryptocurrencies that strive for price stability and are designed to keep their value as close to one dollar as possible.
The Aave enables investors to have one of the widest interest rate selections in the cryptocurrency currency market. It can be considered the market leader in decentralized peer-to-peer lending services, measured by several metrics.
Aave also has its own governance token called AAVE. The owners of AAVE tokens can vote to influence the future development of the service, and thus their activities affect the future direction of the service. If you believe in the growth of the cryptocurrency market and Aave, the easiest way to buy an AAVE token is from Northcrypto.
Summary
Collecting interest income from traditional financial markets has become more challenging than before. However, as inflation continues to rise, receiving interest income is a lifeline if you do not want the value of your assets to fall. Cryptocurrencies today offer several different ways to collect interest income. The popularity of decentralized peer-to-peer services such as Aave has been soaring recently. Aave offers interest income to those who provide liquidity to the service. It is also possible to gain interest income from the so-called stablecoins, which are not affected by strong exchange rate fluctuations in the cryptocurrency market. In addition to the Aave, the cryptocurrency market also offers numerous other options for accumulating interest income. If you are worried about the effects of inflation on your assets, it is worth looking at the opportunities offered by cryptocurrencies.

Mikko Soon
Cryptocurrency specialist
            

Last updated: 10.03.2022 12:28