What Is Aave?

Aave is a decentralized lending protocol that lets people supply crypto assets to shared pools and borrow against eligible collateral. Smart contracts—programs running on a blockchain—apply the lending rules rather than a bank arranging each loan.

Suppliers can earn interest without taking out a loan. Borrowers receive assets they can use elsewhere, but owe the amount borrowed plus interest and risk losing collateral through liquidation. This guide explains that supply-and-borrow cycle, focusing on Aave V3.

Aave’s Brief History

In 2017, Stani Kulechov quit his law degree and founded a venture called ETHLend. The University of Helsinki graduate was inspired by Ethereum to create a peer-to-peer lending and borrowing platform.

Aave’s first version launched on Ethereum in January 2020. V3 followed in March 2022, with its Ethereum Core market added in January 2023. Aave’s changelog also records V4’s Ethereum launch in March 2026. These are separate deployments: users should check the version, network and market before relying on an asset listing or risk setting.

How Does Aave Work?

Aave pools supplied assets rather than matching each borrower with an individual lender. Users interact with its smart contracts through a wallet on the relevant blockchain network.

Supplying and borrowing are separate actions. A supplier can earn interest without borrowing; an ordinary borrower must first supply eligible collateral worth more than the debt.

Aave’s collateralized lending model relies on the value of supplied assets rather than a borrower’s credit score. That makes monitoring collateral and debt part of managing a loan, not merely a check performed when it opens.

Supplying, Borrowing and Repayment

In Aave V3, suppliers receive aTokens representing their supplied assets. Their aToken balances increase as interest accrues. Withdrawing redeems those tokens for the underlying asset, including accrued interest.

Supplier interest comes from borrowing activity, net of the reserve factor—the portion of interest retained by the protocol. Annual percentage yield, or APY, expresses an annualized compounded rate; a displayed APY is not a promise that the rate will stay unchanged. Asset listings, rates and risk parameters depend on the selected market.

An earning balance is not a guarantee of an immediate withdrawal. Suppliers can redeem only against available, unborrowed liquidity, and withdrawing collateral must also satisfy the position’s collateral requirements. If liquidity is insufficient, repayments or new supply must replenish it. The Defiant’s comparison of Aave and Bitso USDC Prime explains what lenders hold and what limits their exits.

To borrow, users supply an eligible asset, enable it as collateral and request a supported borrow asset. The maximum loan-to-value ratio, or LTV, limits borrowing against the collateral’s value—not against its number of tokens. Available liquidity, borrow caps and other market restrictions can further limit access.

For a hypothetical example, assume one collateral asset worth $2,000, no existing debt and a maximum LTV of 70%. That supports up to $1,400 of borrowing, subject to liquidity and other restrictions. The calculation uses the collateral’s value: one token worth $2,000 is not equivalent to one token worth $1. These are illustrative values and settings, not current market quotations.

The liquidation threshold is separate from maximum LTV. In the same example, an 80% liquidation threshold puts the liquidation boundary at $1,600 of debt if collateral value stays $2,000. Debt above that boundary makes the health factor fall below 1 and the position eligible for liquidation. A liquidator can repay debt in exchange for collateral plus a bonus. Falling collateral prices or growing debt can therefore put a loan at risk even without another borrowing transaction. The Defiant’s guide to zero LTV and existing Aave loans explains why a borrowing restriction is not itself a liquidation trigger.

Ordinary V3 borrowing uses variable interest rates that adjust with utilization—the share of supplied liquidity being borrowed—and governance-set rate parameters. Earlier versions offered a stable-rate option, but V3.2 removed the legacy stable-rate logic in October 2024.

Borrowers can repay part or all of a loan at any time, in the asset borrowed. Closing the debt requires repaying the borrowed amount plus accrued interest. There is no fixed repayment term while the position remains sufficiently collateralized, but interest continues to grow the debt. Repayment improves collateral coverage; fully repaying frees the collateral, with withdrawals still subject to available liquidity. The Defiant’s guide to how variable rates affect an existing Aave loan explains debt accrual without treating the latest annual rate as a retroactive charge.

A flash loan is different from an ongoing variable-rate loan. In the repay-in-one-transaction form, a smart contract borrows without posting collateral and must return the amount plus the applicable premium before that same transaction ends; otherwise the transaction reverts. Certain V3 flash-loan operations can instead open a separately collateral-backed or delegated variable-rate debt position. That exception does not make a repaid flash loan an annual-interest loan.

Flash-loan premiums are transaction fees, separate from annualized borrowing interest. Their amount and any permitted waiver depend on the selected Pool’s configuration and operation; governance can change the premium. Network gas fees are another cost of submitting transactions, not a universal Aave liquidity fee. Arbitrage and liquidations are among the uses described in Aave’s flash-loan documentation.

Aave Token and Staking

AAVE is the protocol’s governance token. Holders can vote on proposals or delegate voting power, including on protocol deployments and parameter changes. Holding AAVE is different from holding an aToken receipt for supplied assets.

AAVE holders can also stake in the Safety Module to earn rewards for providing an insolvency backstop. This is separate from supplying assets for borrowers to use: a backstop addresses losses, rather than guaranteeing that every supplier can withdraw immediately.

Staking Risks

Aave’s newer Umbrella system provides asset-specific bad-debt coverage for V3 pools. Participants stake supported aTokens or GHO and earn rewards while accepting slashing risk: staked assets can be used to offset a deficit in the corresponding asset and network. Reward rates and loss exposure should be checked for the selected staking product, rather than inferred from a historical APR.

Aave’s documentation describes Umbrella as a gradual replacement for the legacy Safety Module. Staking products and their withdrawal rules are distinct from ordinary lending-pool supply positions.

AAVE can be supplied as collateral in supported Aave markets. Its eligibility, borrowing limit and yield depend on the market’s configuration; a historical LTV or zero-yield quotation is not a permanent token property. Borrowing against AAVE still creates a debt obligation that must be repaid with accrued interest.

Series Disclaimer:

This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.

Correction (2026-11-01): Corrected LTV to use collateral value rather than token units, distinguished liquidation thresholds and flash-loan fees from borrowing limits and annual interest, and updated repayment, withdrawal and version context.