What is Aave?
Aave (pronounced “ah-veh,” Finnish for ghost) is a decentralised, non-custodial lending protocol. It operates through smart contracts on multiple blockchains.
Here’s the core mechanic:
- Interest rates adjust algorithmically based on supply and demand — when utilisation is high, rates rise to attract more suppliers and discourage borrowing; when utilisation is low, rates fall
No bank. No loan officer. The smart contract handles everything.
Aave’s AAVE token is used for governance (holders vote on protocol changes) and as part of the Safety Module — a staking mechanism that provides a backstop in the event of a shortfall.
Supplying Assets to Earn Interest
Supplying is the simplest way to use Aave. You deposit an asset, Aave makes it available for borrowers, and you earn the supply APY.
What Assets Can You Supply?
Aave supports dozens of assets across its markets. Common ones include:
- ETH and WETH
- WBTC
- USDC, USDT, DAI, GHO
- wstETH (liquid staked ETH)
- LINK, AAVE, and other major tokens
Each asset has its own supply APY that changes in real time based on how much of the asset is being borrowed.
aTokens: How Your Balance Grows
When you supply an asset to Aave, you receive aTokens in return. These are interest-bearing tokens that represent your deposit.
- Deposit 100 USDC → receive 100 aUSDC
- aUSDC balance increases every second as interest accrues
- When you withdraw, you return the aTokens and receive your original deposit plus all earned interest
aTokens are transferable ERC-20 tokens. You can hold them, send them to another address, or use them in other DeFi protocols. The interest continues to accrue regardless of where the aTokens are held.
Borrowing Against Collateral
Aave allows you to borrow assets using your supplied deposits as collateral. This lets you access liquidity without selling your holdings — useful if you want to buy more crypto without triggering a taxable sale, or if you want to use borrowed stablecoins while maintaining exposure to ETH.
How Collateral Works
Not every supplied asset earns collateral — each asset has a loan-to-value (LTV) ratio that determines how much you can borrow against it.
Example: ETH has an LTV of 80% in Aave v3. If you supply $10,000 worth of ETH as collateral, you can borrow up to $8,000 in other assets.
The Health Factor
The health factor is the most important number to watch when you have an active loan on Aave.
Health Factor = (Collateral Value × Liquidation Threshold) / Total Debt Value
When your health factor drops below 1.0, liquidators can repay part of your debt and claim your collateral at a discount (the liquidation penalty, typically 5-10%).
Practical guidance: Never let your health factor drop below 1.5. A health factor of 2.0 or higher gives you significant buffer against price swings. If ETH drops 20% and you borrowed close to your maximum LTV, your health factor can fall quickly.
Aave sends no automatic warnings — you must monitor your position yourself or use a third-party alerting service like DeFi Saver, which can also automate top-ups.
Stable vs Variable Borrow Rates
Aave offers two interest rate modes for borrowers:
Variable Rate
- Changes in real time based on pool utilisation
- Generally lower than the stable rate during normal conditions
- Can spike significantly during periods of high demand
Stable Rate
- Fixed at the time of borrowing (within each rate rebalancing)
- Higher than variable in most conditions
- Not truly fixed forever — Aave can rebalance stable rates under extreme conditions
- Useful when predictability matters more than cost
Most borrowers use variable rates. The stable rate option is less common and not available for all assets.
You can switch between rate modes at any time.
Step-by-Step: Supply ETH on Aave
- Select the network you want to use (Ethereum, Arbitrum, etc.) using the network selector
- Enter the amount of ETH you want to deposit
- Review the transaction details including the current supply APY
- After confirmation, you’ll see aWETH (or aETH) appear in your wallet and your Aave dashboard
Your position is now earning interest. The supply APY compounds continuously — your aToken balance increases every block.
Step-by-Step: Borrow USDC on Aave
This assumes you have already supplied collateral (e.g., ETH) following the steps above.
- Enter the amount of USDC you want to borrow
– Watch the Health Factor indicator — it will update in real time as you enter an amount
– Keep it above 1.5 after borrowing (ideally 2.0+)
- USDC arrives in your wallet after transaction confirmation
The borrowed USDC is yours to use however you like. You owe the principal plus accrued interest. Repay it at any time — there are no fixed repayment schedules.
Repaying a Loan
- Go to your Aave dashboard and find your active borrow
- Enter the amount to repay (or select “Max” to repay in full)
- If repaying with the borrowed asset, approve the token spend and confirm
- After repayment, your health factor rises and collateral becomes available to withdraw
GHO: Aave’s Native Stablecoin
GHO is a decentralised stablecoin native to the Aave ecosystem, soft-pegged to the US dollar.
Unlike borrowing USDC (where you borrow existing USDC from other suppliers), when you borrow GHO, you mint new GHO directly. GHO borrowing requires collateral just like any other Aave borrow.
Key GHO mechanics:
- Borrowing rate is set by Aave governance
- AAVE token stakers get a discount on the GHO borrow rate
- GHO can be used in DeFi like any other stablecoin — swapped, added to liquidity pools, or bridged to other chains
GHO adds a new use case for AAVE staking: stake AAVE in the Safety Module, receive stkAAVE, and borrow GHO at a reduced rate.
Aave Across Different Chains
| Chain | Notes |
|---|---|
| Ethereum | Largest market, deepest liquidity, highest gas fees |
| Arbitrum | Very popular; Ethereum security with low gas; most assets supported |
| Polygon | Established market; low fees; slightly lower liquidity than Arbitrum |
| Avalanche | Active market; good for AVAX ecosystem users |
| Base | Growing rapidly; good for Coinbase users |
| Optimism | Smaller market but active |
For most users, Arbitrum offers the best combination of liquidity, asset selection, and low transaction costs. The Aave interface lets you switch between chains — your collateral and borrows on each chain are independent.
Security and Risk
Audits and Track Record
Aave is one of the most battle-tested DeFi protocols in existence. The protocol has been audited by multiple leading security firms including Trail of Bits, OpenZeppelin, and Certora. Aave v1 launched in 2020, and the protocol has operated without a critical exploit of its core contracts since then.
The Safety Module
Aave’s Safety Module is a staking system where users can stake AAVE tokens and earn rewards. In the event of a serious protocol shortfall (a hack or insolvency), up to 30% of staked AAVE can be slashed to cover the deficit.
This means staking AAVE in the Safety Module carries risk — you could lose up to 30% of staked tokens in a worst-case scenario. In return, stakers earn stkAAVE rewards and discounts on GHO borrowing.
Risks to Understand
Frequently Asked Questions
How much interest can I earn by supplying to Aave?
Supply APYs vary by asset and market conditions. Stablecoin APYs (USDC, USDT) typically range from 2-10% annually on Ethereum, and can be higher on Layer 2 networks with incentive programs. ETH supply APY is usually lower (0.5-3%). Check the current rates on app.aave.com.
Can I lose my deposited funds on Aave?
If you only supply (no borrowing), your main risks are smart contract bugs and a protocol shortfall event. You cannot be liquidated if you have no borrow. That said, smart contract risk is real — only supply what you’re comfortable with given that risk.
What happens if I don’t repay my loan?
Aave has no fixed repayment schedule. Your loan stays open indefinitely as long as your health factor remains above 1.0. If your health factor drops below 1.0 due to price movements or accruing interest, liquidators will partially close your position. You don’t get a phone call — it’s automatic.
Can I use Aave without ETH for gas?
On Ethereum mainnet, you need ETH for gas. On Arbitrum, you need ETH (for Arbitrum gas). On Polygon, you need MATIC/POL. On Avalanche, you need AVAX. Always hold a small balance of the native gas token for whichever chain you’re using.
What is the maximum I can borrow on Aave?
Your borrowing limit is determined by your collateral’s LTV ratio. For ETH at 80% LTV, you can borrow 80% of your collateral value. However, never borrow close to your maximum — leave plenty of health factor buffer for price fluctuations.
Is Aave safe for large amounts?
Aave is one of the safest DeFi protocols available, with years of operation and billions in TVL. That said, no DeFi protocol should be considered completely risk-free. Many experienced DeFi users hold significant positions in Aave, but always diversify across protocols and chains rather than concentrating in a single smart contract.
What is the difference between Aave v2 and v3?
Aave v3 (the current version) introduced efficiency mode (eMode) for higher LTV on correlated assets, portals for cross-chain liquidity, isolation mode for new assets, and gas optimisations. v3 is the recommended version on all supported chains.
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What is DeFi? The Complete Guide to Decentralised Finance
DeFi Risks Explained: What Can Go Wrong and How to Stay Safe
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