What is Aave?

The history of Aave

Stani Kulechov founded ETHLend in 2017. It let people lend crypto to each other directly, with crypto as collateral. On 18 September 2018 the company adopted the name Aave, Finnish for "ghost".

• Aave V1 launched on Ethereum on 8 January 2020. Instead of person-to-person loans, everyone deposited into shared pools that borrowers then drew on.
• Aave V2 followed on 3 December 2020, with lower network fees and new features.
• Aave V3 arrived on 16 March 2022, first on networks other than Ethereum. It added caps on deposits and loans and stricter risk settings.
• Aave V4 launched on Ethereum on 30 March 2026. Central pools (liquidity hubs) gather the available money, and individual markets (spokes) draw on them, each with its own risk rules. V4 has since been added on Avalanche, Arc and Base. V3 keeps running alongside it and still holds much of the money.

How do deposits work?

When you deposit crypto in Aave, it goes into a shared pool for that asset. In return you receive a token called an aToken, such as aUSDC for USDC. It tracks the deposited asset one to one, and the balance in your wallet grows steadily as interest builds up.

The supply APYSupply APYThe return you earn for depositing crypto in a DeFi lending service. It comes from the interest borrowers pay and it varies. comes from borrowers. It varies with how much of the pool is lent out, known as the utilisation rateUtilisation rateThe share of the money in a lending pool that is lent out. A high utilisation rate pushes rates up and can delay withdrawals.. If all the money in a pool is lent out, you can't withdraw yours until borrowers repay or new money comes in.

How do loans work?

Aave has no credit check. Instead, the collateral always has to be worth more than the loan. You deposit one asset, such as ether, and can borrow another, such as a stablecoin. Three numbers matter most:

• The loan-to-value ratioLoan-to-value ratio (LTV)The size of a loan as a share of the value of its collateral. The maximum LTV sets how much you can borrow against it. (LTV) sets the most you can borrow relative to the value of your collateral.
• The liquidation threshold is a little higher. If your debt goes above that share of the collateral's value, the position can be liquidatedLiquidationWhen a loan or leveraged position is closed automatically because the collateral or margin no longer covers the debt..
• The borrow APRBorrow APRThe interest you pay on a loan from a DeFi lending service. It is usually variable and depends on supply and demand. varies. It rises slowly with the utilisation rate up to a set level and steeply after that, to attract new money and encourage borrowers to repay.

A loan has no fixed end date, but interest is added to the debt continuously. Many people borrow rather than sell, because that way they keep their crypto and still get cash to use. Others borrow for LeverageLeverageTrading with borrowed money, which multiplies both gains and losses and can wipe out your whole stake in a short time., which magnifies both potential gains and losses.

Health factor

The health factorHealth factorA number that shows how well the collateral covers a DeFi loan. If it falls below 1, part of the collateral can be sold to repay the debt. is the number that shows how safe a position is. Aave calculates it like this:

Health factor = collateral value × liquidation threshold ÷ debt

While the number is above 1, the position can't be liquidated. Once it falls below 1, liquidation can begin.

A worked example

Say ETH costs USD 2,000 and you deposit 5 ETH, worth USD 10,000 in total. We'll use an LTV of 80% and a liquidation threshold of 82.5%. Real settings vary by asset and market. For ETH on Aave V3's main Ethereum market they were 80.5% and 83% in October 2026.

1. Maximum loan. 10,000 × 80% = USD 8,000.
2. You borrow less, 6,000 USDC, to leave a safety margin.
3. Health factor. 10,000 × 0.825 ÷ 6,000 = 1.375.
4. ETH falls 20%, to USD 1,600. Your collateral is now worth USD 8,000, and the health factor becomes 8,000 × 0.825 ÷ 6,000 = 1.10. The position holds.
5. When does liquidation start? When the collateral value times 0.825 equals the debt, which is when the collateral falls to 6,000 ÷ 0.825 ≈ USD 7,273. That corresponds to an ETH price of about USD 1,455, a fall of just over 27%. This is the liquidation priceLiquidation priceThe price of a crypto at which a loan or leveraged position is closed automatically. The closer it is to the current price, the higher the risk. in the example.

Had you borrowed the maximum, USD 8,000, the health factor would start at just 1.03. A fall of about 3% in the price of ETH would then be enough to trigger liquidation. Interest also adds to the debt over time, so the health factor slowly drops even if prices stay flat.

What happens in a liquidation?

Once the health factor drops below 1, anyone can repay part of your debt. In return, they receive the same value from your collateral, plus a bonus.

In the example, someone could repay half the debt, 3,000 USDC, and receive ETH worth USD 3,150 from your collateral. The bonus, 5% here, is USD 150, and you lose it. If the position is in very bad shape, or the amounts are small, the whole debt can be settled at once.

Flash loans, GHO and the AAVE token

Flash loans. Flash loansFlash loanA loan with no collateral that is borrowed and repaid within a single blockchain transaction. If it isn't repaid, the whole transaction is undone. were available from Aave's very first version. A flash loan lets you borrow a large sum with no collateral, as long as it is repaid, plus a small fee, within the same transaction. Otherwise the whole transaction is reversed. It is a tool for developers, for example to profit from price differences between exchanges or to refinance loans.

GHO. In July 2023 Aave launched its own StablecoinStablecoinA cryptocurrency designed to keep a steady price, usually by tracking the US dollar or another currency., GHO, designed to hold a value of one US dollar. GHO is created when people borrow against collateral on Aave, and the interest on those loans goes to the Aave DAO's treasury.

The AAVE token. AAVE holders make up the Aave DAODAOAn organisation run by rules in smart contracts, where token holders vote on decisions instead of a board or chief executive. and vote on interest rates, LTVs, new assets and new networks. AAVE replaced the older LEND token in 2020, at one AAVE for every 100 LEND, and the total supply is 16 million.

Backstops. Holders can stake AAVE in the Safety Module, a reserve that can be drawn on if loans go bad. In June 2025 Aave began rolling out a new system, Umbrella, which is gradually taking over. People stake aTokens or GHO in return for rewards, and if loans in a given asset go bad, stakes in that asset are automatically used up to cover the loss. According to Aave, the old Safety Module has never had to be used.

What are the risks?

• Liquidation in a sharp fall. Crypto prices can drop by tens of per cent within hours. A position that looked safe can be liquidated before you have time to react.
• Smart contracts and oracles. Independent firms have audited Aave's code and there is a reward for reporting bugs, but no audit rules out bugs. Aave also relies on oraclesOracleA service that brings outside information, such as prices or weather data, into smart contracts on a blockchain. for prices, and a wrong price can cause an unjustified liquidation.
• Collateral risk. On 18 April 2026 a bridge for rsETH, a token representing staked ether, released 116,500 rsETH with nothing behind them. The attacker deposited 89,567 of them as collateral on Aave and borrowed 82,650 ETH. Aave's code worked as designed, but lenders faced possible losses. Utilisation of USDC and USDT on the main market hit 100%, so some lenders could not reach their money straight away. In May 2026 full backing for rsETH was restored.
• Stablecoins. If a stablecoin you have borrowed or posted as collateral moves away from one dollar, your health factor changes, even if nothing else does.
• Governance risk. AAVE holders can change interest rates, LTVs and other rules. Voting power follows token holdings, so large holders carry a lot of weight, and a decision that suits the whole may not suit you.
• No protection. Aave is a DeFi service. It holds no licence under MiCAMiCAThe EU regulation on markets in crypto-assets, in force in Iceland since 1 January 2026, which sets the same rules for crypto services across the EEA., no deposit guarantee covers your money and no supervisor takes complaints. Fully decentralised services fall outside MiCA, and the regulation does not cover crypto lending. A subsidiary of Aave Labs does hold a licence in Ireland, but it covers only exchanging euros for stablecoins and back, not deposits and loans on Aave.

Closing thoughts

Aave shows how lending can work without a bank: open rules, collateral instead of credit checks, and interest rates set by supply and demand. Many people use it to earn interest on crypto or to get cash without selling.

The flip side is that the responsibility is entirely yours. A sharp price fall can cost you part of your collateral, and nobody makes good the loss if something fails. Read more about DeFi in general and the risks of crypto.