What is Aave and how does it work?

Aave is a decentralized lending protocol where people supply crypto to earn interest and borrow other crypto against it. It runs as open-source smart contracts deployed on several public blockchains, including Ethereum. Aave Labs, the company that builds much of the software, says it does not control or operate the protocol itself.

How does Aave lending work?

Aave works on pools. Suppliers deposit an asset, such as a stablecoin or ether, into a shared pool. In return they receive aTokens, for example aUSDC, which are tokens whose balance grows over time as borrowers pay interest into the pool.

Borrowers take assets out of the same pool. Rates are not fixed by a person. They move with utilization, meaning how much of the pool is already lent out. When utilization passes a set point, borrowing costs rise steeply, which is meant to draw in new supply and discourage more borrowing. Suppliers can withdraw at any time, as long as enough unborrowed funds remain in the pool.

The broader idea is covered in crypto lending and borrowing. Aave also offers flash loans, which must be borrowed and repaid within a single transaction.

What happens if a loan goes wrong?

Every Aave loan is over-collateralized. A borrower might deposit ether worth more than the dollars they borrow. Aave tracks each position with a number called the health factor, which changes as prices, debt and interest move.

If the health factor drops below 1, the position can be liquidated. Outside traders, called liquidators, repay part of the debt and take some of the borrower's collateral at a discount. The borrower keeps the loan but loses that collateral. Sharp price falls can trigger many liquidations at once.

There is no credit check. A contract bug, a bad price feed or a fast market can all cost users money.

What is the AAVE token used for?

AAVE is a governance token. Holders vote on proposals, or delegate their votes, that set which markets exist, which assets are allowed and what risk settings apply. This makes Aave a kind of DAO.

Holders can also stake AAVE in a safety module, where it helps cover the system if loans go bad, in exchange for rewards. Since April 2025 the Aave DAO has run a buyback program, approved in 2024, that uses protocol revenue to buy AAVE on the open market. The annual budget was set at $50 million.

Aave also issues its own stablecoin, GHO.

What is Aave V4?

Aave V4 went live on Ethereum on March 30, 2026, after more than two years of work. It uses a hub-and-spoke design. Hubs hold pooled liquidity. Spokes are separate markets that draw on a hub up to a credit limit and can set their own risk rules.

V4 launched with three hubs aimed at different risk levels. New spokes are approved by DAO governance rather than created freely by anyone, as of launch. As of October 2026, Aave's documentation still covers V3 markets alongside V4.

Aave positions are not bank deposits and carry no deposit insurance. For the wider landscape, see what DeFi is.