Aave

Core Concepts

• Supply assets to earn interest — deposit, receive aTokens representing position
• Borrow against collateral — must supply first, then borrow up to limit
• aTokens accrue interest — balance grows over time automatically
• Health Factor determines liquidation risk — below 1.0 = liquidation
• Variable and stable rates available — stable costs more but predictable

Health Factor (Critical)

• Health Factor = (Collateral × Liquidation Threshold) / Borrowed
• Above 1.0 is safe — higher is safer
• At 1.0, liquidation begins — partial position closed
• Monitor actively during volatility — prices move, health factor changes
• Add collateral or repay debt to improve — before liquidation happens

Supplying (Lending)

• Deposit supported assets — ETH, stablecoins, various tokens
• Receive aTokens 1:1 — aETH, aUSDC, etc.
• Interest accrues in real-time — aToken balance grows
• Can withdraw anytime if liquidity available — high utilization may block withdrawals
• Enable as collateral to borrow against — optional per asset

Borrowing

• Must have collateral supplied first — can't borrow without
• Borrow up to LTV (Loan-to-Value) ratio — varies by asset, usually 70-85%
• Interest accrues on borrowed amount — must repay more than borrowed
• Variable rate changes with market — stable rate fixed but higher
• Debt tokens represent borrowing — not transferable

Liquidations

• Triggered when Health Factor < 1 — automated, permissionless
• Liquidators repay portion of debt — receive collateral + bonus
• Liquidation penalty 5-10% — you lose this bonus amount
• Up to 50% of debt liquidated at once — may need multiple liquidations
• Prevention: monitor and manage HF actively

Multi-Chain Deployment

• Aave V3 on Ethereum, Polygon, Arbitrum, Optimism, Avalanche, more
• Same interface, different markets — assets and rates differ
• Bridged assets may differ — USDC vs USDC.e
• Portals enable cross-chain — supply on one chain, borrow on another

E-Mode (Efficiency Mode)

• Higher LTV for correlated assets — stablecoins to stablecoins, ETH to stETH
• Up to 97% LTV in E-Mode — vs ~80% normally
• Only borrow assets in same E-Mode category — restricted but efficient
• Higher liquidation risk — narrow margin, monitor closely

GHO Stablecoin

• Aave's native stablecoin — minted by borrowing
• Backed by Aave collateral — overcollateralized
• Interest paid to Aave DAO — different from regular borrowing
• stkAAVE holders get discount — reduced borrow rate

AAVE Token

• Governance token — vote on proposals
• Staking in Safety Module — earn rewards, risk of slashing in shortfall
• stkAAVE for staking — represents staked position
• 10-day cooldown to unstake — plus 2-day unstake window

Risk Management

• Don't max out borrowing — leave buffer for price movements
• Diversify collateral — single asset concentration increases risk
• Use stablecoins for lower volatility — stable collateral = stable HF
• Set alerts for Health Factor — services like DefiSaver
• Consider automation — automatic deleveraging tools

Common Mistakes

• Borrowing at max LTV — immediate liquidation risk
• Ignoring variable rate changes — rates can spike quickly
• Not monitoring during volatility — HF changes fast with price
• Supplying without enabling collateral — can't borrow if not enabled
• Forgetting about interest — debt grows over time

Gas Considerations

• Approvals needed for each new asset — first-time gas cost
• Supply and borrow are separate transactions — plan gas for both
• L2 deployments much cheaper — Arbitrum, Optimism save significantly
• Batch operations where possible — some aggregators help

Integrations

• DefiSaver for automation — auto-repay, auto-leverage
• Instadapp for advanced management — DeFi dashboard
• 1inch, Paraswap for swaps — swap and supply in one transaction
• Flash loans for advanced users — borrow without collateral, repay in same tx