What Is Aave? Complete Guide to the Leading DeFi Lending Protocol

LeeMaimai

/Oct 24, 2025

Key Takeaways

• Aave allows users to supply assets and earn yield through liquidity pools.

• The AAVE token governs the protocol and supports the Safety Module for security.

• GHO is Aave's native overcollateralized stablecoin, enhancing the ecosystem's utility.

• Flash loans enable uncollateralized borrowing for arbitrage and position management.

• Users must monitor their Health Factor to avoid liquidation risks.

Aave is one of the most battle‑tested decentralized lending markets in crypto, enabling anyone to supply assets, earn yield, and borrow against on‑chain collateral without intermediaries. Since its launch on Ethereum, Aave has expanded across multiple networks and consistently ranks among the largest DeFi protocols by total value locked (TVL), reflecting deep liquidity and broad user adoption. You can verify Aave’s TVL and market share on DeFiLlama’s protocol dashboard for Aave.

This guide explains how Aave works under the hood, what the AAVE token and Safety Module do, how GHO—the Aave‑native stablecoin—fits in, and what risks and best practices you should consider when using decentralized lending.

Useful starting points:

Official site and docs: Aave and Aave Docs
Governance forum: Aave Governance
TVL and metrics: Aave on DeFiLlama
GHO stablecoin: GHO

How Aave Works

Aave is a non‑custodial money market protocol that pools liquidity for supported assets. Suppliers deposit assets into liquidity pools and receive aTokens, which represent their claim on the pool and accrue interest in real time. Borrowers draw from these pools by posting overcollateralized positions.

Core concepts:

aTokens: When you supply, you receive aTokens (for example, aUSDC) that continuously increase in balance as interest accrues. More in Aave Docs.
Interest rate model: Aave uses utilization‑based curves to set variable interest rates. Some pools may offer “stable” rates that are more predictable but still adjustable via governance.
Collateral and Health Factor: Each asset has a loan‑to‑value (LTV) and liquidation threshold. Your position’s Health Factor (HF) falls as you borrow or if your collateral value drops. If HF goes below 1, part of your collateral may be liquidated. Details in Aave Docs.
E‑Mode and Isolation Mode: Efficiency Mode (E‑Mode) allows higher borrowing power within correlated asset categories; Isolation Mode limits risk exposure for newly listed or higher‑risk assets. See Aave Docs for mechanisms and risk parameters.

Aave relies on decentralized price oracles—primarily Chainlink—for asset pricing across markets. Learn more about Chainlink Price Feeds here and Ethereum‑level oracle guidance on Ethereum.org’s Oracles page.

Flash Loans

Aave pioneered flash loans—uncollateralized loans that must be borrowed and repaid within the same transaction. They power arbitrage, refinancing, and complex position management without upfront capital, as long as the transaction repays plus fee before completion. Developers can get started with the Flash Loans guide in Aave Docs.

Liquidations

If your Health Factor drops below 1 due to price moves, interest accrual, or fee changes, liquidators can repay a portion of your debt and seize a discount on collateral. This mechanism helps keep markets solvent. Users should actively monitor positions and risk parameters in the Aave app.

AAVE Token, Governance, and the Safety Module

Aave is governed by AAVE token holders. Proposals for parameter changes, listings, risk tweaks, facilitator adjustments for GHO, and broader protocol upgrades are discussed and voted in the Aave Governance forum, then executed on‑chain.

The Safety Module (SM) is a backstop mechanism where AAVE holders can stake tokens to secure the protocol. In extreme shortfalls, a portion of staked AAVE can be slashed to recapitalize the system, with stakers earning incentives for bearing this tail risk. For design and policy updates, follow the Governance forum.

Security‑minded users can also review Aave’s ongoing bug bounty program on Immunefi, which incentivizes responsible disclosure of vulnerabilities.

GHO: Aave’s Native Overcollateralized Stablecoin

GHO is a decentralized, overcollateralized stablecoin minted by borrowers against collateral within Aave’s markets. Key points:

Overcollateralized issuance: Users borrow GHO against eligible collateral on Aave, paying an interest rate set via governance.
DAO‑aligned revenue: Interest paid on GHO generally accrues to the Aave DAO Treasury, strengthening the protocol’s sustainability.
Facilitator model: GHO supply can be expanded by approved “facilitators” subject to governance‑controlled parameters.

Explore more at the GHO website and track policy changes via Aave Governance.

Networks and Markets

Aave v3 operates on Ethereum and multiple L2s and sidechains, offering distinct risk parameters and asset menus per network. Users often choose L2s like Arbitrum, Optimism, Polygon, Avalanche, and Base for lower fees and faster settlement. You can view supported networks and markets directly in the Aave App.

When operating across networks:

Always confirm the correct market and risk parameters before supplying or borrowing.
Be mindful of bridge and messaging risks if moving collateral between chains.

What Users Care About in 2025

Risk and resilience: DeFi markets continue to iterate on robust oracle design, conservative listings, and modular risk frameworks. Aave’s transparent risk methodology and parameterization are actively maintained through governance and community‑run risk service providers. See updates and risk discussions on Aave Governance.
Stablecoin utility: On‑chain stablecoins remain core building blocks. GHO’s governance‑driven rate and facilitator model aim to balance peg stability, utility, and DAO revenue. Follow ongoing GHO policy proposals on Aave Governance.
L2 adoption: Activity continues shifting toward L2s as users seek lower transaction costs and faster UX, with Aave v3 markets offering E‑Mode and other capital‑efficiency features where appropriate. Check current TVL and market share on DeFiLlama.

Risks to Understand

Using Aave involves:

Market risk: Volatility in collateral can reduce Health Factor and trigger liquidation.
Interest rate risk: Variable rates change with utilization. “Stable” rates are not fixed and can be rebalanced by the protocol.
Oracle and liquidity risk: Oracle disturbances or thin liquidity can impact pricing and liquidation outcomes.
Smart contract risk: Aave is thoroughly audited and battle‑tested, but no on‑chain system is risk‑free. Review the ongoing Aave bug bounty on Immunefi.

Review risk parameters for each asset and market in the Aave Docs and verify you understand liquidation mechanics before borrowing.

How to Use Aave: A Quick Walkthrough

Choose a network and market in the Aave App.
Connect a wallet and ensure you have gas tokens for the chosen network.
Supply assets to receive interest‑accruing aTokens.
(Optional) Enable assets as collateral to unlock borrowing capacity.
Borrow within your Health Factor comfort zone; consider buffers for volatility.
Monitor your position; set alerts. Repay, add collateral, or adjust exposure as needed.
Withdraw supplied assets (and accrued interest) when done.

Power users:

Consider E‑Mode for correlated assets to improve capital efficiency.
Use flash loans for atomic position management if you understand the risks and costs.

Best Practices for Wallet Security

Aave is non‑custodial—your keys are the only way to move funds. For long‑term capital and active DeFi usage, a hardware wallet can materially reduce key compromise risk by isolating private keys from internet‑connected devices.

If you want a hardware wallet that works smoothly with EVM dApps:

OneKey hardware wallets are open‑source and support secure transaction signing across major networks via integrations with popular on‑chain wallets and connectors. This helps protect private keys while interacting with Aave’s markets and managing positions. Learn more about Aave in the Aave Docs and consider signing critical transactions with a hardware wallet for stronger operational security.

Final Thoughts

Aave remains a cornerstone of DeFi lending: deep liquidity, a flexible risk framework, cross‑chain markets, and a maturing governance process. Whether you are earning passive yield with aTokens, borrowing against blue‑chip collateral, exploring GHO, or building with flash loans, always treat risk management as a feature—not an afterthought.