Aave is a lending protocol that lets anyone deposit crypto assets to earn interest, or post collateral and borrow against it. The protocol launched as ETHLend in 2017, matching lenders and borrowers individually, and relaunched under the Aave name in January 2020 with the pooled model it still uses. As of 8 September 2026 it held roughly $18 billion in deposits across 22 chains, according to DefiLlama, with about 85 percent of that on Ethereum.
How supplying works
A depositor sends an asset to the pool contract and receives an aToken in return: supply USDC and receive aUSDC, supply ether and receive aWETH. The aToken balance grows as interest accrues, so a holder's claim rises without any further transaction. Redeeming burns the aToken and returns the underlying asset plus accrued interest, subject to the pool having liquidity available.
That last condition matters more than it sounds. Deposits are lent out, so withdrawal depends on the pool not being fully utilized. Aave's USDC market on Ethereum was 93.8 percent utilized on 8 September 2026, leaving roughly $142 million of a $2.3 billion pool immediately withdrawable. A depositor wanting out in size at that moment would have had to wait for repayments or for the rate to rise enough to attract new supply.
How borrowing works
A borrower deposits collateral, marks it as collateral, and borrows a different asset up to a limit set by that collateral's loan-to-value ratio. Every asset carries two published numbers: a maximum LTV governing how much can be borrowed, and a higher liquidation threshold at which the position becomes seizable. The gap between them is the buffer that absorbs price movement.
The health factor collapses this into a single figure. Aave defines it as risk-adjusted collateral value divided by total borrow value, where each collateral asset is weighted by its liquidation threshold. Aave's own worked example: $10,000 of ether collateral at an 80 percent liquidation threshold against $6,000 of borrowed GHO gives a health factor of 1.333. Below 1, liquidators can step in.
| Parameter | What it controls | Consequence of breaching it |
|---|---|---|
| Maximum LTV | How much can be borrowed against a collateral asset | New borrowing is blocked |
| Liquidation threshold | The point at which the position is seizable | Liquidators may repay debt and take collateral |
| Health factor | Risk-adjusted collateral divided by debt | Below 1, liquidation is permitted |
Liquidation is not a protocol action but a market. Third parties monitor positions and race to repay part of an unhealthy borrower's debt in exchange for collateral at a discount, the liquidation bonus. The discount is the incentive that makes someone bother, and it is paid by the borrower.
How interest rates are set
Aave sets borrow rates from utilization using a two-slope curve. Below an optimal utilization point, the rate rises gently as borrowing increases. Above it, the rate rises steeply. The steep segment exists to defend liquidity: when a pool is nearly fully lent, a sharply rising rate simultaneously discourages new borrowing and rewards new deposits, pulling the pool back toward a level where withdrawals can be honored.
On 8 September 2026, Aave's Ethereum USDC market showed a 3.62 percent supply rate against a 4.29 percent borrow rate, and the WETH market 1.41 percent against 2.02 percent, according to DefiLlama. The spread between the two funds the protocol's reserve factor. Rates on Aave are variable and reprice continuously; the stable-rate borrowing option that existed in earlier versions was removed in October 2024.
E-Mode and correlated collateral
E-Mode, short for efficiency mode, raises the maximum LTV when a borrower's collateral and debt are closely correlated. Borrowing one dollar stablecoin against another, or one form of staked ether against ether itself, carries far less price risk than borrowing a volatile asset against a different volatile asset, so the protocol permits a tighter margin. Risk analysis published by LlamaRisk cites an ether-correlated E-Mode LTV of 93 percent on Ethereum mainnet.
High correlated LTVs are what make looping strategies viable, and they concentrate the position's entire risk in one price relationship holding. Aave pairs E-Mode with correlated-asset price oracles that constrain how fast a reported exchange rate may move upward, specifically to limit the damage when that relationship breaks.
GHO and governance
Aave issues its own overcollateralized stablecoin, GHO, minted directly against collateral already deposited in the protocol. GHO's supply stood at roughly 699 million tokens on 8 September 2026. Because GHO's borrow rate is set by governance rather than by a utilization curve, it gives the Aave DAO a lever over its own cost of credit that the pooled markets do not.
The protocol is governed by AAVE token holders, who vote on asset listings, risk parameters, deployments and treasury spending. Governance is where the numbers that determine depositor risk are actually chosen, which makes the proposal record more informative about a market's safety than any headline yield.
V3, V4 and what changed
Aave V4 went live on Ethereum mainnet on 30 March 2026 and on Avalanche on 15 July 2026, following roughly 345 days of cumulative security review across four audit firms and a public contest. The architecture separates a shared liquidity hub, which holds the assets, from spokes that attach to it with their own collateral types, risk parameters and liquidation rules.
The point of the split is to let a new market with unfamiliar collateral draw on deep shared liquidity without forcing every existing depositor to accept that collateral's risk. V3 remains in service across most of Aave's chains, so the two versions run in parallel and a depositor should check which one a given interface is routing to.
That episode is the clearest available illustration of where lending risk actually lives. The code executed as written. The exposure came from a decision about what to accept as collateral and on what terms, which is the same decision the curator guides examine in a different setting.