Question 1

What is the Aave V3 borrow rate formula?

Accepted Answer

Aave V3 uses a piecewise interest rate model: borrowRate = baseRate + (utilization ? Uoptimal) ? utilization  slope1 / (2  Uoptimal) : baseRate + slope1  Uoptimal / 2 + (utilization ? Uoptimal)  slope2 / (2  (1 ? Uoptimal)). Below optimal utilization, rates rise with the square of utilization. Above optimal, rates spike dramatically with a steeper curve.

Question 2

What does 'baseRate' mean in Aave's model?

Accepted Answer

The base rate is the minimum borrow rate even at 0% utilization - it compensates liquidity providers for capital committed to the pool. Aave's WETH base rate is typically 0%, while stablecoins have a small base rate (e.g., 0.5-1%) to reflect their more predictable demand profile. The base rate ensures depositors earn something even when no one is borrowing.

Question 3

Why does Aave use a 'kinked' interest rate curve?

Accepted Answer

The kink at optimal utilization (typically 80%) is a market stabilizer. Below optimal, modest rate increases encourage borrowing. Above optimal, rates spike sharply to (1) incentivize borrowers to repay, (2) attract new depositors who see higher yields, and (3) ensure the pool never runs out of liquidity. Without the kink, a pool at 99% utilization would have extremely dangerous liquidity risk.

Question 4

How does Aave's supply rate relate to borrow rate?

Accepted Answer

Supply rate = borrow rate  utilization. The pool takes the interest paid by borrowers, multiplies it by the utilization ratio (what % is currently lent out), and distributes that to suppliers. At 80% utilization, 80% of borrower interest flows to depositors and 20% goes to the protocol reserve. The reserve factor (e.g., 10-15%) is subtracted before distribution.

Question 5

What is Aave V3's interest rate algorithm for ETH?

Accepted Answer

ETH on Aave V3 uses these parameters: baseRate=0%, slope1=4%, slope2=75%, Uoptimal=80%. At 65% utilization: rate = 0 + (0.65  0.04) / (2  0.80) = 0.0106 = 1.06%. At 90% utilization: rate = 0 + 0.04  0.80 / 2 + (0.90 ? 0.80)  0.75 / (2  0.20) = 0.016 + 0.01875 = 3.475%. The jump above Uoptimal is dramatic - going from 80% to 90% utilization more than triples the borrow rate.

Question 6

How does Aave governance set interest rate parameters?

Accepted Answer

Aave governance controls rate parameters through AIP proposals. The Aave Arc (institutional whitelist) and Aave DAO vote on changes. Rate changes are gradual - the protocol computes rate per second, updating continuously rather than in steps. Governance typically adjusts rates when market conditions change (e.g., ETH staking yield rises) to keep Aave competitive. Rate changes are on-chain actions with a timelock.

Question 7

What is the difference between slope1 and slope2?

Accepted Answer

Slope1 controls rate sensitivity below optimal utilization (Uoptimal) - it's gentle, encouraging moderate borrowing. Slope2 controls rate sensitivity above Uoptimal - it's steep, punishing over-borrowing. The formula transitions from a gentle quadratic (utilization  slope1) to a very steep quadratic ((utilization ? Uoptimal)  slope2) above the kink. This asymmetry is intentional: it creates a soft landing zone below optimal and a hard wall above it.

Question 8

How do flash loans affect Aave's utilization metrics?

Accepted Answer

Flash loans appear as both a borrow and a repayment in the same transaction, so they temporarily inflate utilization metrics within the block. However, since flash loans are repaid within the same transaction, the net impact on long-term utilization is zero. The protocol's interest rate model handles flash loan capital at 0% cost - the borrow rate applies during the block, but since the loan is repaid instantly, no net interest accrues.

Asset	Base Rate	Slope 1	Slope 2	Uoptimal	Reserve Factor	Current Util.
ETH	0%	4%	75%	80%	15%	62.3%
WBTC	0%	3%	80%	70%	20%	78.1%
USDC	0.5%	4%	80%	80%	10%	45.2%
DAI	0%	4%	75%	80%	10%	88.7%

Interest Rate Model

The Aave V3 Borrow Rate Formula

Rate Curve Parameters

Interest Calculator - How Much Does a Loan Cost?

ETH Market - Rate Parameters (Aave V3 Mainnet)