👻 Aave Internals

How Aave works in 90 seconds

Aave is an Ethereum-native pool-based money market. Suppliers deposit an asset into a per-reserve LendingPool contract and receive an aToken — a rebasing ERC-20 whose balance grows block-by-block as borrowers pay interest. Borrowers post collateral, pick a reserve to draw from, and immediately receive the underlying asset. Every account's solvency is summarized in a single health-factor number that the protocol recomputes on every state-changing call.

Rates are not negotiated. Each reserve runs a deterministic two-slope kink curve where utilization — the ratio of borrows to supplies — drives the borrow APR. Below the kink (typically 80–90%) the rate climbs gently; above the kink it accelerates sharply, pushing borrowers to repay and suppliers to deposit. Because the curve is on-chain, borrow APRs change every second a new transaction touches the reserve.

Aave V3 layers in three execution modes that the V1/V2 markets did not have. Isolation Mode caps the debt that risky long-tail collateral can mint and restricts borrowable assets to a stablecoin allow-list. Efficiency Mode lets correlated baskets — ETH derivatives, USD stablecoins — borrow against each other at LTVs north of 90%. The portal abstraction lets governance route liquidity between V3 deployments on Arbitrum, Optimism, Base, Polygon, Avalanche, BNB, Scroll, Metis, Gnosis, and zkSync without redeploying the underlying contracts.

Key concepts

aToken

The interest-bearing receipt minted 1:1 when you deposit. Its balanceOf increases continuously because the index it scales by grows with each borrower interest payment, so depositors never need to claim — yield arrives by simply holding the token. aTokens are transferable, so positions can be moved between wallets without unwinding.

Health factor

The single risk number Aave tracks for every wallet, equal to the sum of each collateral's USD value times its liquidation threshold, divided by total borrows in USD. As soon as this ratio falls below 1.0 the position becomes liquidatable; a buffer of 1.5–2.0 is the practical safe zone for volatile collateral like ETH.

Liquidation bonus and close factor

When a position drops under HF 1.0, liquidators may seize up to 50% of the outstanding debt — the close factor — and claim collateral worth that debt plus an asset-specific liquidation bonus, typically 5–10%. The bonus is what compensates keepers for racing to clear bad debt before the price moves further.

Isolation Mode

An isolation-listed asset can only be supplied as collateral against a governance-approved stablecoin allow-list, and the debt it can mint is capped by a per-asset USD ceiling. This lets Aave list long-tail collateral such as new LSTs or RWAs without exposing the rest of the pool to their tail risk.

E-Mode

Efficiency Mode declares that all of a wallet's collateral and debt belong to a correlated category. Inside an E-Mode category, Aave applies category-specific liquidation thresholds and LTVs that exceed 90% — for example wstETH-against-WETH or USDC-against-DAI — making leveraged staking and stable-on-stable loops capital efficient.

Safety Module

Holders stake AAVE or AAVE/ETH Balancer LP and receive stkAAVE. The stake earns emissions but is slashable for up to 30% to cover protocol shortfalls. The Safety Module is the insurance backstop: oracle failures, sudden depegs, or liquidation backlogs that leave bad debt are absorbed by slashing stkAAVE before any other Aave creditor takes a loss.

Why Aave matters

As of April 2026, Aave V3 holds roughly $22B in deposits across its eleven live deployments, making it the largest non-custodial credit market in crypto and one of the deepest sources of on-chain stablecoin liquidity. Treasuries, market makers, and hedge funds use Aave as a base-rate reference: when the variable USDC borrow APR spikes above the kink on Aave Ethereum, it ripples through Morpho, Spark, and most other lending venues that price their own rates against Aave's curve.

Aave also pioneered the flash loan, charging a flat 0.05% fee on V3 for atomic, uncollateralized borrows that have to be repaid before the transaction ends. That single primitive turned migrations, collateral swaps, and DEX arbitrage into one-click operations and is now copied by every major lending protocol. Combined with the Safety Module's slashable insurance and the GHO stablecoin's governance-set borrow rate, Aave is less a single product than a stack of credit primitives that other DeFi apps build on top of.

Frequently asked questions

What is Aave's health factor and when does liquidation trigger?

Health factor equals the sum of collateral × liquidation-threshold divided by total borrows, all denominated in USD. When the value drops below 1.0, anyone may call liquidationCall on the LendingPool to seize up to 50% of the debt (the close factor) and claim the matching collateral plus a per-asset liquidation bonus that ranges from about 5% to 10%.

How are Aave borrow rates calculated?

Each reserve uses a two-slope kink model. Below the optimal utilization point — typically 80% to 90% depending on the asset — the rate climbs gently along slope1. Above the kink, slope2 activates and rates can spike toward triple digits within a few percentage points of utilization, which forces borrowers to repay or suppliers to deposit until utilization eases.

What does an Aave flash loan actually cost?

On Aave V3 the protocol charges a 0.05% premium on the borrowed principal, with the entire principal plus premium repaid inside the same transaction. If the contract executing the loan cannot return the funds before the call ends, the EVM reverts the entire bundle, so the protocol cannot become undercollateralized through a failed flash-loan strategy.

How is GHO different from DAI or USDC?

GHO is Aave-native, overcollateralized, and minted only by facilitators that receive bucket-shaped credit limits from governance. Unlike DAI's variable stability fee, GHO's borrow rate is set directly by Aave governance and stkAAVE stakers receive a discount, which lets the DAO target a peg using rate policy rather than market-driven curves.

What is E-Mode and why does it raise borrowing power?

Efficiency Mode lets a wallet declare that all of its collateral and all of its debt belong to the same correlated category, such as ETH-denominated assets or USD stablecoins. Inside an E-Mode category Aave applies tighter parameters that raise the loan-to-value ceiling above 90%, enabling capital-efficient looping strategies like wstETH-against-WETH leveraged staking.

Which chains run Aave V3 today?

As of April 2026, Aave V3 is deployed across Ethereum mainnet, Arbitrum, Optimism, Base, Polygon PoS, Avalanche, BNB Chain, Scroll, Metis, Gnosis, and zkSync, with each market having its own risk parameters governed by the Aave DAO. Users bridge collateral to the chain they want to use; markets do not share liquidity across networks.

What is the Safety Module and what does it backstop?

Stakers lock AAVE or AAVE-ETH Balancer LP into the Safety Module and receive stkAAVE, which earns emissions but is slashable up to 30% in the event of a shortfall. The slashed funds cover protocol bad debt, giving Aave a self-insurance layer that absorbs losses from oracle failures, market crashes, or liquidation backlogs.

Related reading

• Lending and borrowing on Aave — walk through how aTokens, debt tokens, and reserve indices interact when you supply or draw from a pool.
• Liquidation mechanics — see exactly how the health-factor formula and 50% close factor produce the keeper auctions that protect Aave's solvency.
• Flash loans — step through a real flashLoan call and the 0.05% fee path that makes uncollateralized atomic borrows safe for the protocol.
• Two-slope rate model — interactive view of slope1, slope2, and the kink that decides every Aave reserve's borrow APR each block.
• GHO stablecoin — learn how facilitator buckets and stkAAVE discounts let Aave govern a stablecoin without an algorithmic peg.