How to Use Aave

Intermediate 21 minutes

Aave holds $11.2B in TVL (January 2026), the largest DeFi lending protocol. Launched January 2020, current stablecoin lending rates: 3-8% APY. Compare to Anchor's 19.5% before Terra's $40B collapse May 2022.

What is Aave?

Lending protocol - Earn interest on deposits
Borrowing - Take loans using crypto as collateral
Non-custodial - You maintain control
Algorithmic rates - Interest based on supply/demand

How Lending Works

Deposit supported tokens (ETH, USDC, DAI, etc.)
Receive aTokens (aETH, aUSDC) representing deposit
aTokens automatically accumulate interest
Withdraw anytime by returning aTokens

aTokens Are Magic

Your aToken balance increases every second as interest accrues. 100 aUSDC today might be 105 aUSDC next year, redeemable 1:1 for USDC.

How to Supply (Lend)

Step 1: Connect to Aave

Go to app.aave.com
Connect your wallet
Select network (Ethereum, Polygon, etc.)

Step 2: Choose Asset

View available markets
Check supply APY for each asset
Click "Supply" on your chosen asset

Step 3: Deposit

Enter amount to supply
Approve token (first time only)
Confirm supply transaction
Receive aTokens automatically

How Borrowing Works

Your deposits act as collateral
Borrow up to a percentage of collateral value
Pay variable or stable interest rate
Repay anytime (no fixed term)

Liquidation Risk

If your collateral value drops too low, you get liquidated. Your collateral is sold to repay the loan, plus a penalty. Monitor your health factor!

Key Concepts

Term	Meaning
Health Factor	Ratio of collateral to debt. Below 1 = liquidation
LTV (Loan-to-Value)	Max borrow amount vs collateral (e.g., 80%)
Liquidation Threshold	LTV level that triggers liquidation
Supply APY	Interest rate earned on deposits
Borrow APY	Interest rate paid on loans

How to Borrow

Step 1: Supply Collateral First

You must have deposits before borrowing
Enable "use as collateral" for your deposits

Step 2: Initiate Borrow

Click "Borrow" on asset you want
Enter borrow amount
Choose stable or variable rate
Review health factor impact
Confirm transaction

Safe Health Factor

Keep health factor above 1.5 for safety buffer. Above 2 is conservative. The higher, the safer from liquidation.

Real Aave Rates (January 2026)

Asset	Supply APY	Borrow APY (Variable)	Max LTV	Liquidation Threshold
USDC	3.8%	5.2%	80%	85%
DAI	4.1%	5.8%	75%	80%
USDT	3.5%	4.9%	75%	80%
ETH	1.2%	2.8%	80%	82.5%
wBTC	0.8%	3.4%	70%	75%

Why Borrow APY > Supply APY?

The spread between supply and borrow rates is how Aave generates protocol revenue. Example:
- Lenders earn 3.8% APY on USDC
- Borrowers pay 5.2% APY
- Difference (1.4%) goes to protocol reserves and treasury

Rates adjust automatically based on utilization. High demand to borrow = higher rates for everyone.

Real Use Cases With Numbers

Case 1: Conservative Stablecoin Earning

Low-Risk Passive Income

Deposit: $10,000 USDC on Aave
Current APY: 3.8%
Annual earnings: $380
Quarterly: $95
Monthly: $31.67

Risks: Smart contract exploit, USDC de-peg
Compare to: Traditional savings (0.5% - see Investopedia), Anchor pre-collapse (19.5%)

Withdrawal: Anytime, ~$2-10 in gas

Case 2: ETH Collateral for Cash

Borrow Without Selling

You own: 5 ETH ($15,000 at $3,000/ETH)
Deposit all 5 ETH as collateral
Max borrow (80% LTV): $12,000
Conservative borrow: $7,500 USDC (50% LTV)
Health factor: 2.2 (safe)

Borrow rate: 2.8% variable
Annual interest: $210
Monthly cost: $17.50

Benefits:
- Keep ETH exposure (if price rises)
- Access cash without taxable sale
- Repay anytime

Risks:
- ETH drops 40%+ → liquidation
- Interest compounds if not paid

Case 3: Use Trading (High Risk)

Can Multiply Gains AND Losses

You have: $10,000 worth of ETH
Step 1: Deposit 5 ETH ($15,000)
Step 2: Borrow $7,500 USDC (50% LTV)
Step 3: Buy 2.5 more ETH with USDC
Step 4: Deposit new ETH as more collateral
Step 5: Repeat if desired

Final position: 7.5 ETH exposure with $10k capital
= 1.5x use

If ETH +20%: You gain 30%
If ETH -20%: You lose 30%
If ETH -35%: LIQUIDATED

This is how people lose everything in market crashes

Case 4: Tax-Efficient Liquidity

Own ETH bought at $500, now worth $3,000
Need $20k cash but don't want capital gains tax
Deposit 8 ETH ($24k value) on Aave
Borrow $20k USDC against it
Pay 2.8% interest ($560/year)
No taxable event - loan, not sale
If ETH keeps rising, great. If crashes, might get liquidated

Supported Networks

Ethereum - Main market, highest TVL
Polygon - Lower fees
Arbitrum - Lower fees, good liquidity
Optimism - Similar to Arbitrum
Avalanche - Fast transactions

Liquidation Deep Dive: Real Examples

How Liquidation Works on Aave

Your health factor drops below 1.0
Liquidators can repay up to 50% of your loan
They receive your collateral at 5-10% discount
You lose collateral + liquidation penalty
Process happens in minutes during volatile markets

Real Liquidation Example #1: May 2021 Crash

ETH Drops 45% in 24 Hours

Starting position:
Collateral: 10 ETH at $4,000 = $40,000
Borrowed: $25,000 USDC (62.5% LTV)
Health factor: 1.32

After ETH drops to $2,200:
Collateral value: $22,000
Borrowed: Still $25,000 (+ $150 interest)
Health factor: 0.85 ← LIQUIDATION

Liquidation process:
Liquidator repays $12,500 of debt
Receives 6.25 ETH ($13,750 worth)
Liquidation bonus: $1,250

Your loss:
Started with $15,000 equity ($40k - $25k)
Now have 3.75 ETH ($8,250) with $12,500 debt
Net value: -$4,250
Total loss: $19,250 (negative equity!)

Real Liquidation Example #2: Cascade Effect

When Liquidations Snowball

March 2020 "Black Thursday":
- $9M in liquidations on Aave
- ETH dropped from $195 to $85 in hours
- Gas fees spiked to 200+ gwei
- Some liquidators couldn't compete
- Positions went underwater
- Protocol took on bad debt

Many borrowers who were "safe" at 60% LTV got liquidated because they couldn't add collateral fast enough due to gas wars.

Health Factor Mathematics

Health Factor	Status	Action Required
Above 3.0	Very Safe	None - sleep well
2.0 - 3.0	Safe	Monitor weekly
1.5 - 2.0	Moderate Risk	Monitor daily
1.2 - 1.5	High Risk	Add collateral or repay
1.0 - 1.2	Critical	Immediate action needed
Below 1.0	LIQUIDATED	Too late

Health Factor Formula

HF = (Collateral × Liquidation Threshold) ÷ Total Borrows

Example: $20,000 collateral (80% threshold), $10,000 borrowed

HF = ($20,000 × 0.80) ÷ $10,000 = 1.6

Advanced Risk Management

Setting Price Alerts

Calculate your liquidation price
Set alerts at 20% above that price
Have plan to add collateral or repay
Keep emergency funds available

Liquidation Price Calculator

Calculate Your Danger Zone

Collateral: 5 ETH at $3,000 = $15,000
Borrowed: $9,000 USDC
Liquidation threshold: 82.5%

Liquidation happens when:
(5 ETH × Price × 0.825) = $9,000
Price = $9,000 ÷ (5 × 0.825)
Liquidation price: $2,182 per ETH

Current ETH: $3,000
Buffer: 27% drop before liquidation
Set alert at: $2,400 (10% safety margin)

Black Swan Events

March 2020: $9M liquidated in hours
May 2021: ETH -45% in 24h, mass liquidations
June 2022: stETH de-peg caused cascading liquidations
November 2022: FTX collapse triggered market-wide dump

Aave-Specific Risks

Smart Contract Risk

Aave audited by multiple firms
$11.2B TVL = big target for hackers
No exploits to date, but risk exists
Bug bounty program up to $1M

Oracle Failures

Aave uses Chainlink price feeds
If oracle reports wrong price = bad liquidations
Redundancy built in but not perfect
Historical oracle issues on other protocols

Governance Risk

AAVE token holders vote on protocol changes
Could change parameters unfavorably
Could add risky collateral types
Generally conservative governance

Aave vs Competitors

Protocol	TVL	USDC Supply APY	Networks	Notable Feature
Aave	$11.2B	3.8%	7+	Flash loans, isolation mode
Compound	$2.1B	3.2%	Ethereum	Original lending protocol
MakerDAO	$8.4B	5.0% (DSR)	Ethereum	DAI minting

When NOT to Use Aave

Small amounts on mainnet: Gas costs eat profits (use Polygon/Arbitrum)
Chasing highest APY: Unsustainable rates = red flag
Don't understand risks: Liquidations are brutal
Can't monitor position: Health factor needs watching
Using use without experience: Recipe for disaster