Q: What does collateral factor mean?

The collateral factor (sometimes called LTV Max or Max LTV) is the maximum percentage of collateral value you can borrow against it. For ETH at 82.5% collateral factor, if you supply $10,000 worth of ETH, you can borrow up to $8,250 worth of other assets. The remaining ~17.5% is a safety buffer for price volatility before liquidation triggers. Higher collateral factors = more capital efficiency but higher liquidation risk. Different assets have different collateral factors based on their volatility.

Q: Can I use multiple assets as collateral on Aave?

Yes. Aave V3 supports multi-collateral borrowing - you can supply ETH, WBTC, and DAI simultaneously, and borrow USDC against your combined collateral pool. Each asset has its own collateral factor and liquidation threshold. The protocol aggregates all your collateral (weighted by its collateral factor) and divides by your total borrow value to compute your health factor. If one asset drops sharply, only your overall health factor matters - though having a diversified collateral mix reduces single-asset volatility risk.

Q: What is the liquidation threshold vs collateral factor?

The collateral factor is the maximum you can borrow (e.g., 82.5% for ETH). The liquidation threshold (typically slightly higher, e.g., 85%) is the exact collateral value ratio at which your position becomes liquidatable. When your collateral/value ratio falls below the liquidation threshold (i.e., health factor < 1.0), liquidation triggers. The gap between collateral factor and liquidation threshold creates a 'safety zone' - even if you've borrowed up to your max, there's still buffer before liquidation.

Q: How do interest rates work for borrowers on Aave?

Borrowers pay interest that accrues per second. The rate is determined by the pool's utilization ratio (total borrows / total supply) - higher utilization means higher rates. At 80% utilization, borrowers might pay 3-5% APY. At 98% utilization (dangerously high), rates can spike to 20-50% APY. Interest is paid in the borrowed asset: if you borrow USDC, you repay USDC with interest. You can repay at any time to reduce your health factor risk.

Q: What is isolation mode in Aave V3?

Isolation mode restricts certain volatile assets to being used only as collateral paired with a specific borrow currency (usually a stablecoin). If you enable isolation mode for a new asset, you cannot supply other assets as collateral simultaneously, and you cannot borrow other assets besides the designated borrow currency. This protects the protocol from cascading liquidations of correlated assets. Assets in isolation mode have lower risk weights but enable governance to safely add new collateral types with higher volatility profiles.

Q: What happens when Aave's supply cap is reached?

Aave V3 introduced per-asset supply and borrow caps set by governance. When a supply cap is hit, no new suppliers can deposit that asset until someone withdraws or the cap is raised by governance. Borrow caps work similarly - when hit, no new borrows are accepted. Caps are primarily a risk management tool: they prevent any single asset from dominating a pool and ensure that if a depeg or exploit occurs, maximum exposure is bounded. When USDC hit its supply cap during the 2022 bear market, no new USDC could be deposited until the protocol raised the cap.

Question 1

How does supplying assets to Aave work?

Accepted Answer

When you supply DAI to Aave, it enters a shared liquidity pool alongside all other suppliers. You receive aTokens (account tokens) in a 1:1 ratio - for every 1,000 DAI you supply, you receive 1,000 aDai. Your aDai balance never changes, but it accrues value: every second, interest flows from borrowers to suppliers, automatically updating your aDai's exchange rate. You can redeem aDai for DAI + all accrued interest at any time.

Question 2

What is the health factor in Aave?

Accepted Answer

Health Factor (HF) = ? (Collateral Value  Liquidation Threshold) / Total Borrows. It measures the safety of your borrowing position. HF > 1.5: safe - you have a comfortable buffer. HF 1.0-1.5: risky - price volatility could trigger liquidation. HF < 1.0: liquidatable - your collateral is worth less than your debt at current prices. Aave computes health factor per-transaction, so you can see it change in real time as asset prices move.

Question 3

What does collateral factor mean?

Accepted Answer

The collateral factor (sometimes called LTV Max or Max LTV) is the maximum percentage of collateral value you can borrow against it. For ETH at 82.5% collateral factor, if you supply $10,000 worth of ETH, you can borrow up to $8,250 worth of other assets. The remaining ~17.5% is a safety buffer for price volatility before liquidation triggers. Higher collateral factors = more capital efficiency but higher liquidation risk. Different assets have different collateral factors based on their volatility.

Question 4

Can I use multiple assets as collateral on Aave?

Accepted Answer

Yes. Aave V3 supports multi-collateral borrowing - you can supply ETH, WBTC, and DAI simultaneously, and borrow USDC against your combined collateral pool. Each asset has its own collateral factor and liquidation threshold. The protocol aggregates all your collateral (weighted by its collateral factor) and divides by your total borrow value to compute your health factor. If one asset drops sharply, only your overall health factor matters - though having a diversified collateral mix reduces single-asset volatility risk.

Question 5

What is the liquidation threshold vs collateral factor?

Accepted Answer

The collateral factor is the maximum you can borrow (e.g., 82.5% for ETH). The liquidation threshold (typically slightly higher, e.g., 85%) is the exact collateral value ratio at which your position becomes liquidatable. When your collateral/value ratio falls below the liquidation threshold (i.e., health factor < 1.0), liquidation triggers. The gap between collateral factor and liquidation threshold creates a 'safety zone' - even if you've borrowed up to your max, there's still buffer before liquidation.

Question 6

How do interest rates work for borrowers on Aave?

Accepted Answer

Borrowers pay interest that accrues per second. The rate is determined by the pool's utilization ratio (total borrows / total supply) - higher utilization means higher rates. At 80% utilization, borrowers might pay 3-5% APY. At 98% utilization (dangerously high), rates can spike to 20-50% APY. Interest is paid in the borrowed asset: if you borrow USDC, you repay USDC with interest. You can repay at any time to reduce your health factor risk.

Question 7

What is isolation mode in Aave V3?

Accepted Answer

Isolation mode restricts certain volatile assets to being used only as collateral paired with a specific borrow currency (usually a stablecoin). If you enable isolation mode for a new asset, you cannot supply other assets as collateral simultaneously, and you cannot borrow other assets besides the designated borrow currency. This protects the protocol from cascading liquidations of correlated assets. Assets in isolation mode have lower risk weights but enable governance to safely add new collateral types with higher volatility profiles.

Question 8

What happens when Aave's supply cap is reached?

Accepted Answer

Aave V3 introduced per-asset supply and borrow caps set by governance. When a supply cap is hit, no new suppliers can deposit that asset until someone withdraws or the cap is raised by governance. Borrow caps work similarly - when hit, no new borrows are accepted. Caps are primarily a risk management tool: they prevent any single asset from dominating a pool and ensure that if a depeg or exploit occurs, maximum exposure is bounded. When USDC hit its supply cap during the 2022 bear market, no new USDC could be deposited until the protocol raised the cap.

Lending & Borrowing

Configure Your Position

How It Works