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