How to Use Aave
Aave is the largest DeFi lending protocol. Earn interest by depositing crypto, or borrow against your holdings without selling.
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.
Common Use Cases
Earning Yield
- Deposit stablecoins for steady yield
- Lower risk than volatile assets
- Rates vary but typically 2-10% APY
Leverage Trading
- Deposit ETH, borrow stablecoins
- Buy more ETH with borrowed funds
- High risk - can amplify losses
Tax Efficiency
- Need cash but don't want to sell (taxable event)
- Borrow against holdings instead
- Pay interest, but no capital gains tax
Supported Networks
- Ethereum - Main market, highest TVL
- Polygon - Lower fees
- Arbitrum - Lower fees, good liquidity
- Optimism - Similar to Arbitrum
- Avalanche - Fast transactions
Risk Management
- Never borrow max capacity (too close to liquidation)
- Monitor health factor during volatility
- Have repayment plan ready
- Understand that interest compounds
Market Crash Risk
In a market crash, your collateral value drops fast. If you can't add collateral or repay in time, you'll be liquidated at unfavorable prices.