Aave is a decentralized liquidity protocol: users supply digital assets to shared markets, and borrowers draw from that liquidity by pledging eligible collateral. Borrowing is overcollateralized, not based on a credit score, and a position can be liquidated if its health factor falls below 1. Before supplying or borrowing, check the selected market’s current asset support, risk parameters, rates, and available liquidity.
How Aave borrowing and lending works
Aave uses smart contracts to coordinate shared liquidity rather than acting like a conventional lender that approves borrowers through credit scores. A supplier deposits an asset into a market’s pool. A borrower can then borrow an available asset by supplying eligible collateral, subject to that reserve’s settings and the market’s liquidity.
Borrowers pay interest on outstanding debt. Suppliers’ returns are funded by borrower interest after the reserve factor, which is the portion allocated to the protocol reserve. Rates respond to pool utilization and reserve-specific parameters; they are not fixed promises. Aave’s V3 overview and Pool documentation describe these mechanics.
Aave is deployed across markets and networks, and supported assets and settings can differ. There is no single rate, collateral rule, or liquidity figure that applies to every Aave market. Use the live data for the precise market and asset you intend to use.
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Use Aave’s official Borrow Tokens guidance alongside the market interface. The labels and available assets can vary by deployment, but the decision sequence is consistent:
- Connect a self-custodial wallet. Confirm that the wallet is on the network for the Aave market you intend to use. You control the wallet and are responsible for transaction approvals and network fees.
- Select the market and collateral asset. Review the asset’s loan-to-value (LTV), liquidation threshold, supply and borrow rates, available liquidity, and any caps or restrictions. Aave’s borrowing help page advises reviewing LTV, liquidation threshold, and health factor before confirming.
- Supply collateral. Deposit an eligible asset. If the interface requires it, enable the supplied asset as collateral. Supplying an asset does not mean every market will allow it to secure every borrow.
- Choose the borrow asset and amount. Check the live borrow rate and available liquidity, then choose an amount that leaves meaningful room before liquidation. The maximum shown by an interface is a limit, not a prudent target.
- Review the resulting health factor. Check the projected value before confirming, then verify the transaction details in your wallet. A higher health factor generally means more room before liquidation, but no particular value is universally safe.
- Monitor and manage the position. Recheck collateral prices, debt, rates, and health factor as conditions change. Repaying debt or supplying additional eligible collateral can improve the health factor, but transactions may be delayed by network conditions.
LTV, liquidation threshold, and health factor
LTV and liquidation threshold are related but distinct reserve parameters. LTV helps determine how much a user can borrow against collateral when initiating or increasing a borrow. The liquidation threshold is the collateral valuation level used to assess whether an existing position has become eligible for liquidation. Both are specific to the asset and market; do not infer one from the other.
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Aave defines health factor as:
Health factor = (total collateral value × weighted average liquidation threshold) ÷ total borrow value
The value combines collateral and debt valuations with the weighted liquidation threshold of the collateral. Aave states that a position with a health factor below 1 is eligible for liquidation. Prices can move, and interest accrued on debt can change the denominator, so a health factor is a changing measure rather than a guarantee. See Aave’s Health Factor & Liquidations guide.
When a position becomes eligible, a liquidator can repay part of the debt and receive collateral, including the applicable liquidation bonus. The amount that may be liquidated and the bonus depend on reserve rules; there is no universal percentage. To manage exposure, avoid borrowing right up to a displayed maximum, account for volatile or correlated collateral, and consider how quickly you could add collateral or repay if prices move sharply.
Interest, supplying, and withdrawing
Borrow and supply rates change with utilization—the share of a pool’s available liquidity that is being borrowed—and with reserve parameters. In Aave V3’s model, borrowing rates rise more sharply after utilization passes an optimal point. Supplier returns are tied to borrower interest net of the reserve factor. These rates can change as pool conditions and governance-set parameters change, so check the selected reserve’s live figures rather than relying on an old quote. Aave explains the model in its interest-rate strategy documentation.
Suppliers can withdraw their supplied assets and accrued interest only when enough unborrowed liquidity is available. If supplied assets also secure an active borrow, withdrawing them can reduce the health factor; a withdrawal may be unavailable or may leave the position at greater liquidation risk. Review the effect on the position before confirming.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Risks to understand before using Aave
- Collateral and liquidity risk: Collateral prices or market liquidity can fall, making a position harder to manage or leaving it undercollateralized. An asset may not be easy to sell or withdraw when needed.
- Liquidation risk: A health factor below 1 makes a position eligible for liquidation. Liquidation can reduce collateral and include a bonus paid to the liquidator.
- Oracle risk: Aave relies on price data to value assets. Incorrect, unavailable, or compromised price data can affect valuations and position management.
- Network and bridge risk: Congestion, censorship, network failures, or vulnerabilities in bridges can interfere with access or transactions, especially when a position needs prompt attention.
- Changing rates and parameters: Utilization and governance-set reserve rules affect rates and borrowing conditions. The figures and rules applicable to one asset or market may not apply elsewhere.
- Wallet and transaction risk: Aave’s non-custodial model means users interact through their own wallets and smart-contract transactions. Mistaken approvals, incorrect networks, or lost wallet access can create losses independent of a loan’s interest rate.
Aave’s V3 overview also describes features such as E-Mode for certain correlated assets, Isolation Mode for specified assets with borrowing restrictions and a debt ceiling, and siloed borrowing restrictions for certain reserves. These features apply only where enabled and are not blanket guarantees of safety or higher returns. For a market-specific decision, check supported collateral and borrow assets, LTV and liquidation threshold, current rates, liquidity, caps and restrictions, network or bridge dependencies, and transaction costs.
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