Overview of Uniswap, Aave, and Compound: How They Work

DeFi protocols have revolutionized the way we trade, lend, and borrow cryptocurrencies. Among the most popular platforms are Uniswap, Aave, and Compound—each serving different functions in the ecosystem. Understanding their differences helps you choose the right platform for your goals.

Uniswap – Decentralized Exchange (DEX)

• Purpose: Facilitates peer-to-peer token swaps without intermediaries.
• Automated Market Maker (AMM): Users trade against liquidity pools rather than order books.
• Liquidity Providers: Anyone can supply tokens to pools and earn a share of trading fees.
• Token Support: Wide variety of ERC-20 tokens on Ethereum.

Pros

• No KYC required; fully decentralized.
• Easy access to new tokens.
• Continuous trading without traditional order books.

Cons

• Impermanent loss risk for liquidity providers.
• Gas fees can be high on Ethereum.

Aave – Lending and Borrowing Protocol

• Purpose: Allows users to lend assets to earn interest and borrow against collateral.
• Interest Rates: Variable and stable rates depending on supply and demand.
• Flash Loans: Borrow instantly without collateral if the loan is repaid within the same transaction.
• Collateral Management: Supports a wide range of tokens as collateral.

Pros

• Earn passive income by lending.
• Advanced features like flash loans.
• Supports multiple assets and networks.

Cons

• Liquidation risk if collateral value drops.
• Complex for beginners unfamiliar with borrowing mechanics.

Compound – Lending and Borrowing Protocol

• Purpose: Similar to Aave, Compound allows lending and borrowing with interest.
• cTokens: Lending generates cTokens, which accrue interest over time.
• Algorithmic Interest Rates: Rates adjust automatically based on market demand.
• Governance Token (COMP): Users can participate in protocol governance.

Pros

• Simple interface for lending and borrowing.
• Algorithmic rate adjustments make it flexible.
• Opportunity to earn governance tokens.

Cons

• Risk of liquidation if collateral value falls.
• Less advanced features compared to Aave (no flash loans).

Comparison Table: Uniswap vs Aave vs Compound