nirholas Aave Lending Guide
When to use this skill
Use when the user asks about:
- How to use Aave for lending or borrowing
- Understanding Aave's risk parameters
- Managing health factor and avoiding liquidation
- Using Aave's E-mode for correlated assets
- Flash loan use cases and mechanics
- Comparing Aave deployments across chains
Protocol Knowledge
1. Aave Core Mechanics
How Aave works:
- Supply: Deposit assets to earn interest. Supplied assets can optionally be used as collateral.
- Borrow: Use supplied collateral to borrow other assets. Pay variable or stable interest.
- Interest rates: Algorithmically determined by supply/demand (utilization rate)
- aTokens: When you supply, you receive aTokens (aUSDC, aETH) that accrue interest continuously — your balance goes up over time
- Debt tokens: When you borrow, variable debt tokens track your growing debt
2. Key Parameters Per Asset
Each asset on Aave has specific risk parameters set by governance:
| Parameter | Meaning | Typical Range |
|---|---|---|
| LTV (Loan-to-Value) | Max borrowing power per collateral dollar | 50-85% |
| Liquidation Threshold | Debt/collateral ratio triggering liquidation | 65-90% |
| Liquidation Penalty | Bonus paid to liquidators from collateral | 5-15% |
| Reserve Factor | Percentage of interest going to Aave treasury | 10-30% |
| Supply Cap | Maximum amount that can be supplied | Varies |
| Borrow Cap | Maximum amount that can be borrowed | Varies |
3. Health Factor Management
The health factor is the most critical metric for borrowers:
Health Factor = (Collateral * Liquidation Threshold) / Total Debt
- HF > 2.0: Safe — significant buffer before liquidation
- HF 1.5-2.0: Comfortable — monitor during volatile periods
- HF 1.1-1.5: Caution — consider adding collateral or repaying debt
- HF < 1.1: Danger — liquidation imminent
- HF = 1.0: Liquidation triggered
To improve health factor:
- Add more collateral (supply more assets)
- Repay part of the debt
- Swap borrowed asset for one with lower volatility
To calculate liquidation price: Liquidation Price = (Entry Price * Debt) / (Collateral * Liquidation Threshold)
4. Efficiency Mode (E-Mode)
E-Mode allows higher capital efficiency for correlated asset pairs:
- Stablecoin E-Mode: Borrow stablecoins against stablecoin collateral at 97% LTV
- ETH correlated E-Mode: Borrow ETH against stETH/wstETH at 93% LTV
- Benefit: Much higher LTV than standard mode for qualifying pairs
- Risk: Still subject to depeg risk — if the correlation breaks, liquidation can be sudden
- Activation: Select E-Mode category in the Aave dashboard before borrowing
5. Interest Rate Mechanics
How rates work:
- Variable rate: Changes based on pool utilization — low utilization = low rate, high utilization = high rate
- Optimal utilization: Usually around 80% — rates increase steeply above this (kink in the rate curve)
- Rate strategy: Check the specific rate strategy contract for slope parameters
- Monitoring: Variable rates can change significantly within hours during volatile markets
- Rate switching: Users can sometimes switch between variable and stable (if available for the asset)
6. Flash Loans
Aave's flash loan functionality:
- What: Borrow any amount with no collateral, as long as it's repaid within the same transaction
- Fee: 0.05% on V3 (was 0.09% on V2)
- Use cases:
- Arbitrage between DEXs
- Collateral swaps (change collateral type without closing position)
- Self-liquidation (repay debt to prevent liquidation penalty)
- Leveraged position creation (loop supply/borrow in one transaction)
- Risk: If the transaction reverts, the entire flash loan fails — no partial execution
7. Multi-Chain Deployments
Aave is deployed across multiple chains — each has independent pools and parameters:
- Ethereum mainnet: Highest TVL, most assets, highest gas costs
- Arbitrum: Lower gas, good liquidity, growing TVL
- Optimism: Similar to Arbitrum, OP incentives available
- Polygon: Low gas, significant TVL, MATIC incentives
- Base: Growing rapidly, low gas costs
- Avalanche: Established deployment with AVAX incentives
Choose chain based on: position size (gas vs value ratio), asset availability, and incentives.
8. Output Format
When advising on Aave usage:
- Action: Supply / Borrow / Repay / Flash loan
- Chain: Recommended deployment
- Asset: Specific token and current rates
- Parameters: LTV, liquidation threshold for the position
- Health factor: Current and projected
- Liquidation price: If borrowing
- Risk level: Safe / Moderate / Risky
- Optimization tips: E-Mode applicability, better asset choices
- Gas estimate: Expected transaction cost on the chosen chain