What is Aave?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 6 min
In short
Aave is a lending protocol where you deposit crypto to earn interest and borrow other assets against collateral. It began as ETHLend in 2017 and took its current name in 2018. Smart contracts handle everything automatically — there is no credit check and no intermediary.
Key points
- Built on overcollateralisation: you post collateral worth more than you borrow
- Interest rates adjust automatically with pool utilisation
- Offers flash loans, borrowed and repaid within a single transaction
- If collateral falls below a threshold, third parties liquidate the position automatically
Definition
A smart contract lending protocol that pools deposited assets and lets anyone borrow against overcollateralised positions.
Aave addresses two demands: raising cash without selling your crypto, and earning interest on idle assets. Bank lending depends on assessing a borrower's ability to repay, which is impossible when identities are unknown — so Aave substitutes collateral for underwriting.
Depositors put assets into a pool and receive aTokens as a receipt. An aToken balance grows over time, which is how interest accrues. Borrowers can then draw a proportion of their collateral's value in a different asset. Rates are not fixed; they are computed from utilisation, the share of the pool currently borrowed.
Flash loans are its signature feature: borrow with no collateral at all, provided you repay within the same transaction. If repayment fails, the whole transaction reverts and the lender loses nothing. They are used for arbitrage and collateral swaps — and have also been used to exploit vulnerabilities in other protocols.
If collateral value falls and the loan-to-value ratio crosses a threshold, the position is liquidated. Anyone can perform a liquidation and receives the collateral at a discount, so the market handles it automatically. That threshold check relies on prices supplied by an oracle.
Watch out for
- · A fall in your collateral's price triggers liquidation and the loss of part of it — most likely during sharp market moves
- · If an oracle reports an abnormal price, unfair liquidations or excessive borrowing can occur
- · Deposited assets sit in the protocol's contracts and can be lost if a vulnerability is found
Frequently asked questions
Is there a repayment deadline?
No. You can keep a loan open as long as your collateral ratio stays above the threshold. Interest keeps accruing, and if the ratio deteriorates you are liquidated.