Aave is an open source and non-custodial liquidity protocol that allows lending and borrowing of crypto assets without middlemen.
Users can participate as depositors or borrowers. Depositors provide liquidity to a liquidity pool earning income, while borrowers are able to borrow crypto assets from the liquidity pool in exchange for paying an interest rate and providing other crypto assets as collateral.
Any (crypto asset) deposits are tokenized as Aave interest-bearing aTokens pegged at a 1:1 ratio to the underlying crypto assets. Interest is also paid in aTokens (but converted back to the underlying crypto asset when lenders withdraw their funds).
Aside the aTokens, the Aave token introduced in 2020 to further decentralization of the protocol, is not only the governance token of the Aave protocol but also provides financial incentives to holders when interacting with the Aave protocol (such as cheaper fees).
The Aave team transformed the traditional peer-to-peer lending model into a popular pool-based and decentralized model.