Aave connects supplied crypto assets with borrowing backed by collateral

Credit for an ongoing position or a single transaction

Borrowing against supplied assets provides spendable tokens while the collateral remains committed to the protocol. Other credit mechanisms serve different purposes and impose different repayment conditions.

Borrowing against your own collateral

An ordinary borrow position requires eligible collateral worth more than the debt it supports. Borrowed tokens move to the recipient's wallet, while the protocol records the obligation against the collateralized account. This preserves exposure to the supplied asset, but interest and changing token values affect the position throughout its life.

Delegated borrowing power

V3 credit delegation lets an account authorize another address to use part of its borrowing capacity. The delegator supplies the collateral and carries the protocol debt. Separate agreements can govern repayment between the participants, so granting credit introduces a repayment relationship beyond the smart contract's collateral checks.

Flash liquidity

A flash loan without ongoing debt must return the borrowed amount and applicable fee within the same transaction. Otherwise, the transaction reverts. V3 also supports a flash-loan path that opens authorized, collateral-backed debt where permitted. These developer operations require contract logic. Only the debt-opening path leaves a loan to repay after the transaction.

The selected market determines the available credit

A position belongs to a particular deployment and market. Supported assets, available liquidity and risk settings can differ across deployments, even when the interface displays the same token name. Assets held elsewhere don't automatically contribute collateral to that position.

V3 organizes lending around pools and their asset reserves. V4 uses Liquidity Hubs that hold assets and connected Spokes that apply borrowing rules. Liquidity can serve multiple Spokes connected to a Hub, while their collateral requirements differ. This makes both the liquidity source and the borrowing rules relevant to market selection.

The practical prerequisites are an accepted asset, the correct network and enough capacity for the intended operation. A listed asset can reach a supply or borrow cap. An available balance in a wallet therefore doesn't establish that the market will accept the transaction.

Authorization and the account record

Token approval gives a specified contract permission to transfer tokens up to an allowance. It doesn't itself create a supply position or repay debt. Where supported, a signed permit can provide that authorization without a separate approval transaction.

The authorization must match the intended asset, spender and amount. Supply and repayment operations then change the protocol's balances through their own contract execution. A wallet confirmation prompt describes a proposed action; a successful transaction receipt records its execution. The account record identifies the resulting supply or debt balance.

For V3, aTokens represent supplied assets and accrued supply interest. Debt tokens account for borrowing separately. These records explain why a wallet's ordinary token balance alone can't describe its lending position. A token approval, an aToken balance and an outstanding debt each mean something different.

Supply income and collateral eligibility

Supplying makes accepted tokens available to the lending system and creates a claim on the supplied balance. Eligible supplied assets can also support borrowing while continuing to accrue supply interest. A supply-only position doesn't require the owner to open a loan.

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Collateral use adds another condition: the market must accept that asset as backing, and the account must enable it where required. An asset can be available for supply without contributing borrowing power. Its eligibility can also depend on the account's selected mode and other collateral.

Once debt exists, collateral settings affect what the account can remove or disable. Turning off collateral reduces the backing that the protocol recognizes. The contract checks the remaining position before allowing changes that could leave the debt inadequately supported.

Interest follows borrowing demand and market settings

Supply and variable borrowing rates respond to market conditions and configured interest-rate rules. Utilization measures how much of the available pool funding borrowers have drawn. As borrowing demand rises relative to liquidity, the rate model can raise the cost of further borrowing.

Suppliers receive the return allocated to their position, while borrowers accrue interest on outstanding debt. These percentages apply to different balances. Subtracting the displayed supply rate from the borrow rate doesn't establish a position's net income. The calculation also needs each balance, elapsed time and changes in asset value.

V4 borrowing can include a collateral-related risk premium. Network transaction fees add another cost when supplying, adjusting or closing a position. Incentive rewards, when available, have separate terms and can change independently of lending interest. None of these inputs makes a displayed annualized return a fixed payout.

Health factor connects collateral value with debt

The health factor measures collateral backing after applying the relevant liquidation thresholds. For a V3 position, it equals total collateral value multiplied by the weighted average liquidation threshold, divided by total debt value. The calculation uses protocol valuations and includes accrued debt.

A V3 borrow position becomes eligible for liquidation when its health factor falls below 1. Loan-to-value limits govern borrowing capacity, while liquidation thresholds govern when existing debt loses sufficient backing. Those parameters serve different purposes and shouldn't be treated as interchangeable percentages.

A falling collateral price, a rising borrowed-asset price or accumulating interest can reduce account health. Liquidators can repay eligible debt and receive collateral with a liquidation bonus. The amount they can repay depends on the applicable version and configuration. A healthy reading also doesn't measure smart contract or bridge risk.

Repayment and added collateral change different balances

Repayment reduces the debt side of the position. Supplying additional eligible assets increases its recognized backing only when those assets are enabled as collateral. Either can improve health, although their effects differ: repayment reduces future interest on the repaid debt, while additional collateral leaves that obligation outstanding.

A partial repayment leaves an active loan. Interest continues accruing on the remaining debt.

Closing a debt requires covering its outstanding balance, including accrued interest. Standard repayment uses the borrowed asset. Supported integrations may convert another asset during repayment, introducing conversion costs and execution conditions. V3 also supports repayment with matching aTokens from the same pool through its dedicated contract operation.

Full repayment removes that borrowing obligation but doesn't automatically withdraw the supplied assets. The supply position can remain open and accrue interest. If the account has other debts, they continue to affect collateral availability. A zero balance for one borrowed asset therefore differs from an account with no debt.

Withdrawals depend on liquidity and remaining backing

Withdrawing returns underlying assets and reduces the recorded supply position. The amount available depends on both the account's collateral obligations and the liquidity that the market can release. Clearing debt removes a collateral constraint; it doesn't create additional pool liquidity.

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A V3 withdrawal requires sufficient unborrowed liquidity in the relevant reserve. A large supplied balance or a high supply rate doesn't establish immediate withdrawal capacity. Heavy utilization can increase rates while leaving less liquidity available to withdraw.

Debt doesn't necessarily prevent every withdrawal. A partial withdrawal can succeed when the remaining position satisfies the applicable collateral checks. Removing more backing reduces the account's margin, so the permitted amount changes with prices and debt. For V3, withdrawal burns the corresponding aTokens as the underlying assets leave the pool.

Specialized modes alter collateral use

V3's specialized modes change which combinations of assets can support borrowing. Their restrictions apply alongside account health and market capacity, so an otherwise supported token may be unavailable in a particular configuration.

Efficiency Mode

Efficiency Mode, or E-mode, applies category-specific collateral parameters to eligible combinations. It can permit greater borrowing power where the configured assets have related price behavior. The category's collateral and borrowing permissions determine its actual scope. Higher permitted borrowing still leaves exposure to changes in the relationship between asset prices.

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Legacy Isolation Mode

On V3 deployments that retain legacy Isolation Mode, it restricts borrowing against designated collateral to approved debt assets and applies a debt ceiling. It also limits combining that collateral with other collateral assets. Supplying an isolated asset doesn't necessarily activate these restrictions; its use as collateral determines their relevance. V3.7 removes legacy Isolation Mode and introduces a separate isolated E-mode setting that limits which collateral contributes borrowing power.

Governance and asset risk remain part of the position

Governance can change market parameters and approve protocol upgrades. Borrowing capacity, collateral rules and rate settings therefore remain properties of the deployed configuration. AAVE is the governance token; owning it is a separate activity from maintaining a supply or borrow position.

Suppliers retain exposure to the supplied asset and the lending system's ability to return it. Smart contract faults, incorrect oracle valuations and collateral shortfalls can cause losses. Network disruption can also delay adjustments. Bridged assets add dependence on the mechanism that backs their representation on another network.

Protocol backstops address defined shortfalls under their own conditions. They don't turn every lending position into universally insured funds. The distinctions extend to asset mechanics: GHO, the protocol's dollar-targeting stablecoin, uses governance-approved facilitators with minting limits. Borrowing newly minted GHO through such a facilitator differs from drawing a token out of an existing reserve.