Getting started on Aave V2

Aave is a great segway into getting started with yield farming.

Today we will cover the common use case of Aave, productive debt borrowed against an asset you think will go up over time.

Connecting to the Aave App

1. Go to Aave & click ‘connect to App’

2. Connect your metamask to the polygon network (an inexpensive network to get started in DeFi)

3. Select Aave market ‘Aave v2’ > ‘Polygon’.

See the image below.

Navigating the Dashboard

1. Select ‘Dashboard’
2. On the LHS is a list of coins you can supply
3. On the RHS there is a list of coins you can borrow against
4. 4. Both sides have an APY% which is the amount of interest you will be paid or will pay over a year for supplying or borrowing over time.

Collateral

The amount you supply defines the maximum amount that you can borrow. Your Supplied amount must always be > than the amount borrowed.

The supplied amount is called collateral

1. Depositing Collateral

Supply coins you will want to hold long term. This will allow your supplied amount to earn interest and form the foundation of your productive debts.

Good examples are:

• Supply WETH
• Borrow WBTC

As an example, let’s deposit $100 worth of WETH. Today, $100 is worth 0.029 WETH.

1. Choose ‘Supply’ WETH
2. Type ‘0.029’ into the Amount
3. Approve the transaction
4. Confirm the transaction
5. Go to ‘Dashboard’ to view the 0.029 of WETH collateral

Borrowing

Now that we have deposited the collateral, we can borrow against that.

Take note: if you borrow too much (>=80%) your position can get liquidated. So in this example, we will borrow a responsible amount.

If we borrow $50 of DAI against our $100 of WETH (collateral). WETH must drop 37% until we become liquidated, which is pretty far.

Borrowing $50 of DAI:

• starts us safely in the green zone
• allows us to borrow at the lowest current cost

1. Borrowing Dai against our collateral

To borrow $50 of Dai in Aave:

1. Choose ‘Borrow’ Dai
2. Type ‘50’ into the Amount
3. View your health factor — are you in the green zone?
4. Approve the transaction
5. Confirm the transaction

Let’s Assess our Position

1. We’re long $100 of WETH
2. We’ve borrowed $50 of DAI
3. We need yield — let’s farm!

Yield Farming

There are multiple strategies to choose from here, but today we’re going to go with the simplest, low return strategy to get you started!

Aave currently pays yields of 8% to supply USDT. Let’s sell our borrowed Dai for USDT to redeposit.

1. Selling borrowed USDC for USDT

• Go onto @1inch
• Swap $50 of Dai for USDT
• Approve AND confirm the transaction

2. Farm this USDT on Aav

• Go back to Aave
• Deposit the $50 USDT
• Approve AND confirm the transaction
• Reap the rewards of 8% on your $50

Let’s Reassess our position

1. Long $100 worth of WETH
2. Borrowed $50 of DAI at about -2%
3. Sold Dai for USDT on 1inch
4. Deposited USDT into Aave at about +8%
5. Total yield per year earned on the debt: 8% — 2% = +6%

This is what we call productive debts

With our productive debt of $50 yielding 6%, our WETH is technically making ($50*6%)/$100 = 3% which is so much better than the <0.01% interest rate on WETH in Aave!

Why go through this effort instead of just depositing USDT into Aave and earn an 8% yield?

What if WETH doubles a month after we sold it?

1. We want to be long WETH — we’re bullish WETH.
2. Here we earn yield without having to sell our WETH!