Aave

Aave is a decentralized liquidity protocol. Users can supply assets to liquidity markets or borrow assets by providing collateral. It is an important project for understanding DeFi lending, but it is not a simple savings account.

What It Does

Aave allows users to interact with lending markets through smart contracts. Suppliers provide liquidity. Borrowers use collateral to access liquidity. Interest rates, collateral requirements, and risk parameters can change over time.

Who It Is For

Aave is better suited for users who already understand wallets, gas, token approvals, and basic DeFi risk. Beginners should study the docs and learn terms like collateral, liquidation threshold, and health factor before using real funds.

Key Risk

Borrowing against volatile collateral can lead to liquidation. Smart contract risk, market risk, oracle risk, and liquidity conditions all matter. High yields or available borrowing capacity should not be treated as low-risk income.

How Supplying and Borrowing Fit Together

Supplying an asset puts it into a shared pool that other users borrow from, and the interest they pay is what you earn. Borrowing works the other way, and it is always over-collateralised: to borrow, you must already have supplied more value than you take out. That sounds backwards until you see the use case — people borrow against holdings they do not want to sell, rather than borrowing because they lack funds. Each asset has its own loan-to-value ceiling, so supplying a volatile token lets you borrow less against it than a stablecoin would.

The Health Factor, Concretely

The health factor is a single number summarising how much room your position has before it can be liquidated. Above one, the position is safe; at one, it is eligible for liquidation. It moves for two reasons that have nothing to do with you: the price of what you supplied falling, or the price of what you borrowed rising. A position opened at a comfortable margin can drift toward the threshold overnight without any action on your part, which is why leaving a borrow position unattended is the mistake that costs people money most often.

What Liquidation Actually Does

Liquidation is not a margin call with a warning phase. When the threshold is crossed, a third party repays part of your debt and takes a corresponding portion of your collateral, plus a bonus that is the incentive for doing it. You keep the borrowed funds and lose more collateral value than the debt that was cleared. Nobody contacts you, and the process is automatic and permissionless. The practical defence is to borrow well below the maximum and to watch the health factor rather than the price.

Rates Move, and That Changes the Position

Borrow rates on Aave are not fixed. They respond to utilisation — how much of a pool is currently lent out — so a rate that looked affordable when you opened the position can rise sharply when demand for that asset increases. Supply rates move for the same reason, in the opposite direction. Any calculation of whether a borrow is worth it needs to survive the rate changing, not just today's number. Checking the current rate on the official interface before acting is worth more than any figure quoted in an article, including this one.

Official Links

• Aave: https://aave.com/
• Documentation: https://aave.com/docs
• Aave V3 overview: https://aave.com/docs/aave-v3/overview