How to use Aave for crypto lending? (DeFi borrowing)

Understanding Aave Protocol Mechanics

1. Aave operates as a non-custodial liquidity protocol where users supply assets to earn interest or borrow against deposited collateral.

2. Assets are pooled into reserves, each governed by dynamic interest rate algorithms that adjust based on supply and demand ratios.

3. Borrowers must maintain a health factor above 1.0 to avoid liquidation; this metric reflects the ratio of collateral value to borrowed amount, adjusted for asset-specific liquidation thresholds.

4. Aave supports both stable and variable interest rate loans, allowing borrowers to choose between predictable repayment schedules or exposure to real-time market conditions.

5. Flash loans—unsecured, instant-term borrowings requiring full repayment within a single transaction—are available exclusively on Aave and require custom smart contract logic for execution.

Connecting Wallet and Selecting Network

1. Users must connect a Web3-compatible wallet such as MetaMask, Trust Wallet, or Coinbase Wallet via the official Aave interface at app.aave.com.

2. The protocol runs across multiple EVM-compatible chains including Ethereum, Polygon, Arbitrum, Optimism, and Base; network selection directly impacts gas costs and supported assets.

3. Each chain maintains independent liquidity pools, meaning depositing USDC on Ethereum does not grant access to borrowing rights on Polygon.

4. Users should verify chain-specific token addresses before interacting, especially when bridging assets from external sources.

5. Gas fees fluctuate significantly depending on network congestion; low-fee chains like Polygon often serve as entry points for beginners testing borrowing workflows.

Supplying Collateral and Initiating Borrow

1. To borrow, users must first supply an accepted asset—such as ETH, WBTC, DAI, or USDC—as collateral through the “Supply” function on the dashboard.

2. Upon confirmation, the protocol mints aTokens representing the supplied balance, which accrue interest in real time and can be redeemed at any time.

3. The borrowing power is calculated using the asset’s Loan-to-Value (LTV) ratio; for example, ETH currently has a 80% LTV, meaning $1,000 worth of ETH allows up to $800 in borrowable value.

4. Borrowers select a debt type—stable or variable—and confirm the transaction, after which funds appear instantly in their wallet.

5. Borrowed assets are transferred directly to the user’s wallet address without intermediary custody, preserving full self-sovereign control.

Risk Management and Liquidation Triggers

1. Aave calculates the health factor continuously using real-time oracle price feeds; a drop below 1.0 initiates a liquidation event.

2. Liquidators can repay up to 50% of a borrower’s outstanding debt in exchange for a discounted portion of their collateral, enforced automatically by smart contracts.

3. Reserve configurations include reserve factor percentages—typically 10–20%—which divert a portion of interest income to a safety module rather than suppliers.

4. Users receive on-chain notifications via wallet prompts when health factors approach critical thresholds, though no off-chain alerts are natively provided.

5. Collateral diversification across multiple assets does not inherently improve health factor calculations unless those assets have higher LTV allowances or lower liquidation bonuses.

Frequently Asked Questions

Q: Can I borrow against NFTs on Aave?A: No. Aave v3 does not support NFTs as collateral. Only fungible ERC-20 tokens listed in active reserves qualify.

Q: What happens if I don’t repay a variable-rate loan?A: Interest accrues continuously and compounds every block; unpaid debt increases until liquidation occurs or manual repayment is executed.

Q: Is there a minimum borrow amount on Aave?A: There is no protocol-enforced minimum, but network gas fees and slippage thresholds may effectively impose practical lower limits—often around $10–$20 equivalent in value.

Q: Do I need KYC to use Aave?A: No. Aave is permissionless and fully anonymous; no identity verification or account registration is required to supply, borrow, or repay.