Aave is a decentralized finance (DeFi) protocol that lets people supply supported cryptoassets to liquidity pools and lets others borrow from those pools by putting up eligible collateral. It is not a bank account or an unsecured loan: rates change, collateral can be liquidated, and smart-contract and market risks remain.
What Aave is—and what it is not
Aave is a non-custodial liquidity protocol made up of smart contracts on public blockchains. Suppliers contribute supported tokens to a market’s pools; borrowers draw tokens from available liquidity, generally against collateral worth more than the amount they borrow. Aave’s V3 overview stated that the protocol was deployed on 14+ blockchain networks when checked on October 8, 2026. That footprint can change, so check the current network and market before interacting.
Unlike a bank deposit, supplying crypto does not create a conventional insured deposit or a guaranteed interest payment. Unlike an unsecured personal loan, borrowing on Aave generally requires collateral, and each market and asset has its own risk controls and borrowing conditions. Users interact with protocol contracts through self-custodial wallets: they authorize transactions themselves rather than handing custody of their assets to Aave.
How supplying crypto to Aave works
- Choose a network and market. Confirm that the network, asset, and market are supported and that the pool has the liquidity you need. Network support, available assets, liquidity, and market settings can change.
- Connect a wallet and select an asset. Aave access is through a self-custodial wallet. A hardware wallet is an optional way to manage wallet keys, not a requirement or protection from protocol or market losses.
- Review the transaction and approve the token if needed. Depending on the token and wallet, you may need to authorize its transfer to the protocol before submitting the supply transaction. Network fees may apply.
- Supply the tokens. Once the transaction confirms, the asset becomes part of the liquidity pool and may be borrowed by other participants. A supplied balance accrues interest according to the market’s current supply rate.
- Decide whether to enable the asset as collateral. Some supplied assets can be used as collateral, subject to the asset’s settings and your account configuration. Collateral use can expose the supplied asset to liquidation if your position no longer meets the market’s requirements.
The displayed supply APY is a variable market rate, not a promised or fixed return. It can move as pool utilization, supply, borrowing, repayments, liquidity, and governance-set parameters change. A quoted rate at one moment does not establish what you will earn over a later period. Transactions confirmed onchain are generally irreversible, so verify the asset, network, and transaction details before signing.
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How borrowing and liquidation work
Borrowing against collateral
To borrow, a user supplies eligible collateral, chooses an available borrow asset, reviews the market’s loan-to-value (LTV) and liquidation parameters, and confirms the transaction. LTV limits how much a user may initially borrow against collateral; the liquidation threshold is the point at which a position can become eligible for liquidation. These parameters differ by asset and market. Borrow interest starts accruing after borrowing, and the borrow rate can change with utilization and governance parameters.
Before borrowing, check the current collateral value, debt value, available liquidity, rate, LTV, liquidation threshold, and any market-specific caps or restrictions. A market’s existence does not mean every asset can be borrowed or used as collateral under the same terms.
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What the health factor means
Aave’s health factor summarizes collateral value relative to debt, adjusted for the liquidation threshold. The FAQ gives the formula as:
Health factor = total collateral value × weighted average liquidation threshold ÷ total borrow value
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If the health factor falls below 1, the position is eligible for permissionless liquidation. An external liquidator may repay eligible debt and receive collateral plus an asset-specific bonus. The portion of debt that can be repaid and the bonus depend on the applicable market rules and parameters.
How a position can become vulnerable
A health factor can decline if collateral loses value, the debt becomes more valuable relative to collateral, or interest accrues. Oracle problems or liquidity disruptions can also affect how a position is valued or managed. The Bank of Canada’s April 2026 staff paper describes the trade-off involved in setting liquidation thresholds: tighter settings can reduce some lending exposure but make positions more vulnerable to price movements. A borrower can seek to improve a declining health factor by adding eligible collateral or repaying debt, but those actions require timely transactions and may incur network fees.
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What AAVE does in governance
AAVE is the governance token associated with the protocol. Aave’s documentation describes governance participation for AAVE, stkAAVE, and aAAVE holders on Ethereum mainnet, subject to the documented process and voting arrangements. Token ownership is not equity in a company, a claim on protocol income, or a guarantee that a holder’s preferred proposal will pass or be implemented.
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- Forum discussion: participants discuss a proposal and its possible effects.
- Temperature check: a nonbinding check gauges community interest.
- Request for final comments: the proposal is refined before formal voting.
- Aave Improvement Proposal: a formal proposal is submitted onchain.
- Voting and execution: the proposal proceeds to voting and, if applicable requirements are met, execution.
Aave’s token documentation also describes staking and cross-chain token availability. Cross-chain use depends on the relevant network bridge, bringing separate availability and security considerations. Token utilities, participation arrangements, and programs may change; consult current official Aave documentation before relying on a specific feature.
Risks to understand before using Aave
- Smart-contract vulnerabilities: errors or exploits in protocol contracts can cause losses even when users retain custody of their wallets.
- Oracle failures or incorrect data: price feeds help inform protocol decisions; inaccurate or unavailable data can affect collateral valuation and risk management.
- Collateral volatility and external liquidity: a sharp price move or thin market liquidity can make collateral less effective or harder to sell when needed.
- Liquidation: a position below a health factor of 1 is eligible for liquidation under the applicable rules, potentially costing the borrower collateral and a liquidation bonus.
- Variable rates and pool liquidity: supply and borrow rates can change, and available liquidity can affect whether an asset can be borrowed or withdrawn when desired.
- Networks and bridges: congestion, censorship, security vulnerabilities, or bridge problems can disrupt access or cross-chain activity.
- Wallet and transaction mistakes: compromised keys, signing an unintended transaction, or choosing the wrong network can result in loss. Self-custody does not make a protocol interaction reversible.
Aave’s risk controls, including asset-specific limits and governance review, may mitigate exposure but cannot eliminate these risks. Aave’s FAQ puts the general point plainly: “No protocol can be considered entirely risk free, but extensive steps have been taken to minimize these risks as much as possible.”
What to check before supplying or borrowing
Because rates, parameters, supported assets, and liquidity are market-specific and change over time, compare the particular market and asset you intend to use rather than relying on a general description of Aave.
- Confirm the exact blockchain network and token contract or asset listing.
- Check current supply and borrow rates, pool utilization, and available liquidity.
- For borrowing, review LTV, liquidation threshold, the health factor implications, and the asset’s liquidation rules.
- Check supply or borrow caps, isolation restrictions, and whether an asset can be used as collateral.
- Consider the collateral’s price and oracle characteristics, as well as external market liquidity.
- Account for transaction fees, network congestion, and any constraints on borrowing or withdrawing.
- Review the transaction in your wallet before signing and keep access to the wallet secured.
These checks are not a way to make a position risk-free; they help identify the specific conditions and failure modes that apply to the market you are considering.
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