Aave vs Compound: DeFi Lending Comparison

When it comes to crypto lending and borrowing, people often begin by asking themselves one question: do they want to work with a DeFi project, or a CeFi one. DeFi services are decentralized in nature, using blockchain technology to provide solutions, whereas their CeFi counterparts are centralized and operate more like a traditional financial company.

For those who decide to go down the DeFi route, they have a range of options to consider. Two of which that have made a name for themselves in this sector are Aave and Compound. Let’s see what distinguishes these competitors, and what makes them stand out in this space.

If, for any reason, you reach a conclusion that you would much prefer to avoid the hassle and experimentation of DeFi, make sure to check out Ledn, a leading CeFi lending and borrowing service that has built a strong reputation in this industry.

What is Aave and how does it work?

Aave is a decentralized crypto lending platform, running on the Ethereum network. It handles all lending and borrowing activity via blockchains and smart contracts. Aave is a pioneer of the DeFi lending sector, making it highly influential.

What is Compound and How Does it Work?

Compound is a DeFi lending service, much like Aave. It also runs on the Ethereum network, using a unique algorithmic protocol to automate the process of lending and providing interest rates.

Key Differences between Aave and Compound

On the surface, Compound and Aave can seem extremely similar, especially if you are unaccustomed to the DeFi world, and are unsure about what nuances to look out for. So let’s break down what makes them distinct from one another.

Access to Different Assets

Aave and Compound support a different range of assets. While both are similar in the sense that they are DeFi services running on Ethereum, meaning neither cannot handle actual fiat (only stablecoins like USDC or USDT), when it comes to what they do offer, there is a difference.

Among Compound’s supported assets are ETH, USDT, DAI, USDC, Basic Attention Token, Uniswap, ChainLink, Ox, TrueUSD, Maker, Yearn.Finance, SushiToken, Pax Dollar, and Wrapped BTC (which is an Ethereum-based token that is designed to mimic the price of Bitcoin). As you can likely tell, this is a fascinating mix of market leaders, stablecoins, and niche altcoins.

Aave also offers a strong roster of assets. These include ETH, USDT, USDC, ChainLink, DAI, Maker, Balancer, Synthetix, Wrapped BTC, 1inch, and Kyber. For the average crypto fan, neither of these lists might mean much, as they are clearly built with the intention of enticing hardcore cryptocurrency users who look for smaller tokens. If you are somebody like this, then you will want to look at each project’s dashboard to see if the assets you like are included by them.

Both Projects Approach Innovation From Separate Angles

While Aave and Compound are both Ethereum-based DeFi lending projects, they do not share the same philosophies on innovation. Aave tends to excite the market by pushing boundaries with cutting-edge (but arguably experimental) ideas– its best example of this is its invention of flash loans. These are smart contracts that allow users to borrow funds with zero collateral, under the strict rule that those funds are returned to the owner within the space of one single blockchain transaction. This is enforced by the smart contract, which automatically sends the funds back. They are a niche tool used to gain returns on arbitrage opportunities.

Compound, rather, focuses on honing down its craft, and refining its architecture and network. Instead of expanding into outlandish concepts, it tries to fine-tune its standard loans. However, make no mistake, just because Compound is not as adventurous, does not mean it is inherently a safer project. When working with DeFi, there is an inherent risk of technological failures, as the industry has only existed for a short few years.

Perspectives on Governance

A core tenet of DeFi is that a project’s communities have a direct say in how decisions are made and what features are implemented. Both Aave and Compound follow this concept, although they treat it slightly differently.

Aave places significant emphasis on its overarching ecosystem, which is all interconnected with its lending and borrowing functionalities. In the spirit of this, users and stakeholders are encouraged to propose and vote on matters that relate to a range of projects under the Aave umbrella. Compound users are more so encouraged to stick with voting on matters that relate more directly and specifically to its borrowing and lending protocols.

Pros and Cons of Aave

Now that we have established an overview of what Aave and Compound are, and how they differ on a foundational level, let’s delve into their pros and cons– starting with Aave’s positives.

Aave Pros

More Interoperable

Aave is a more interoperable project than Compound. This means it operates with a wider array of blockchain networks than its competitor. While both services are Ethereum-based, Aave also works with various other Ethereum-centric ecosystems, such as Avalanche, Fantom, Optimism, Polygon, Gnosis, and many others. Compound also supports a handful of other ecosystems, but not nearly as many.

More Assets Supported

Aave offers lending and borrowing options for a far greater list of assets than Compound. This is perfect for altcoin holders who want to earn interest, or who want to borrow funds so they can invest them and attempt to maximize profits.

Access to Flash Loans

Aave rose to fame in the crypto space for its innovative flash loans. As mentioned earlier, these are extremely short-term loans that operate on smart contracts, giving users the ability to borrow assets completely with zero collateralization.

Aave Cons

Can Get Expensive During Bull Markets

Aave has a tendency to get quite pricey during bull markets. These costs are incurred at the transaction stage, where people have to pay fees to get their actions added to the blockchain. This is not exactly an issue with Aave, but more so with Ethereum, as it is architecturally unsuitable for periods of high activity.

No Access to BTC

Aave does not work with Bitcoin. This is no doubt disappointing to many crypto fans, as BTC reigns supreme as the flagship mainstream cryptocurrency on the market. Sadly, it is simply incompatible with the service. The same is true for other Ethereum-based lending services. Aave does, however, offer an alternative by the name of Wrapped BTC, which is a token that is meant to represent the value of BTC. Although many people prefer not to work with Wrapped BTC because it involves an additional layer of complexity and potential trust issues.

High Liquidation Risk

As Aave is aimed at crypto users who enjoy working with altcoins, there is a higher chance of liquidation occurring due to the volatility of certain tokens. While the crypto market is overall known to be temperamental, the altcoin space is even more so. As Aave places a large focus on these types of users, their community is more at risk of liquidation than people who prefer to work with top crypto assets like BTC or ETH. If a loan gets liquidated, there is a penalty that must be paid, which Aave uses an algorithm to dynamically calculate.

Pros and Cons of Compound

Let’s now take a Look at Compound’s pros and cons, to help further contextualize our discussion.

Compounds Pros

Decent LTV ratios

Compound has relatively competitive loan-to-value ratios for its borrowers. For instance, its ETH ratio is 82.5%, and its DAI ratio is 83.5%.

Dynamic Interest Rates

Compound dynamically sets its interest rates based on the supply and demand of the market. This is handled with the help of blockchain oracles provided by ChainLink. To avoid getting too technical, this means that it uses services to monitor the market and feed that data back to its network, where it then uses an algorithm to alter its rates. The idea is that this will provide competitive interest rates that are meant to be fair to their user base.

Users are Rewarded With COMP Tokens

When users perform certain actions on Compound, such as borrowing or withdrawing, they are rewarded with some of the network’s own assets, named COMP. This is an altcoin used to govern the project. It is designed to incentivize users to keep working with the network, and perhaps even partake in voting on features and changes.

Compound Cons

Can Get Expensive During Bull Markets

Like Aave, Compound is also known to get expensive during bull markets. This, too, is due to it running on the Ethereum blockchain, which is prone to high transaction fees when people flock to the crypto space.

Not Regularly Audited

Compound has had fewer audits than Aave. This means that it has been checked in-depth less frequently. In an age where lending giants like Celsius and BlockFi have harmed the reputation of the entire industry, it is necessary for any crypto lending and borrowing service to get regularly audited. This is why Ledn takes a transparency-first approach by publishing its proof-of-reserve data and monthly open-book reports that allow its userbase to readily check the company’s health periodically.

No Access to BTC

Just like Aave, Compound does not work with BTC. Instead, it offers Wrapped BTC. For some Bitcoin fans, this is enough to ignore the project altogether.

Which Platform is Best: Aave or Compound

It is hard to say outrightly what makes one of these platforms better or worse than the other. Both of these have a strong reputation in the space, and are known to be important in the DeFi lending sector. They are also relatively similar in nature, with their main differences being more nuanced and architectural than anything else. In truth, your decision between the two will likely come down to your own personal preference.

Conclusion

If Aave or Compound sound of interest, it is worth looking further into DeFi and seeing what you make of the sector overall. Some people love it due to its decentralized and global nature, whereas others find it to be limited due to the lack of fiat, lack of BTC, and minimal customer service.

If you’ve taken a look at these two projects and have concluded that you do not want the hassle of using them, or that they do not suit your purposes, then Ledn is definitely worth checking out. This is a CeFi lending and borrowing service that works with fiat, and supports only the most liquid of cryptocurrencies (including BTC and ETH, unlike Aave or Compound). It has a proven track record, with no client losses or paused withdrawals, and an exemplary Trustpilot score to illustrate this. 

Ledn provides custodied loans, where the collateral you use to back them is posted by Ledn to an institutional USD funding partner, being a bank and/or credit fund, and such collateral is held in custody with qualified custodians and banks.  Neither Ledn nor the institutional funding partner have the right to lent out collateral to institutions to generate interest. Ledn also offers its innovative B2X service, which allows you to gain a BTC-backed loan, whilst also purchasing an equal amount of BTC. When you repay your loan, you are repaid both the collateral, and the new BTC together, making it a powerful growth tool.

These are two major elements that make Ledn stand out from the crowd. And on top of this, the company is simpler to use than the average DeFi protocol. With straightforward steps to get started and a stellar customer service team, it has a tremendously low barrier of entry. Be sure to take a look at it when deciding which lending service is ideal for you.

Sponsored by 21 Technologies Inc. and its affiliates (“Ledn”). All reviews and opinions expressed are based on my personal views.