Aave (AAVE)

Aave (AAVE) is the governance token of Aave, a decentralized finance protocol that lets people lend and borrow crypto assets without a bank or broker. Holders of AAVE vote on how the protocol is run, and they can lock their tokens in a reserve that backs the system against losses. Aave is among the largest lending protocols in crypto by the value of deposits it holds.

AAVE is the token, and the protocol is the set of smart contracts that does the lending. Users can deposit and borrow on Aave without ever owning AAVE; the token matters for control and risk, not for access. Aave runs mainly on the Ethereum Blockchain and several other networks, and it is best known for popularising the flash loan.

Think of Aave as a pawnshop run by software. You hand over something valuable, such as some ether, and the shop lets you borrow a smaller amount of something else, such as digital dollars, against it. If the value of what you handed over falls too far, the shop sells part of it to make sure the loan is repaid. Nobody checks your credit score, because the deposit does that job.

The people who supply the money to lend earn interest, paid by the borrowers. The AAVE token is like a membership card for the owners' club: members vote on which items the shop accepts, how much it lends against each, and what it charges. Members who put their cards in a shared safe earn rewards, but agree that the safe can be used to cover the shop's losses if something goes badly wrong.

The project began in 2017 as ETHLend, a peer-to-peer lending platform founded by Stani Kulechov, and raised money through an initial coin offering of its LEND token. It was renamed Aave in 2018 and switched to a pooled lending model, launching on Ethereum in January 2020. In October 2020 holders began swapping LEND for the new AAVE token at 100 LEND per AAVE, which cut the supply from about 1.3 billion LEND to 16 million AAVE, with 3 million set aside in an ecosystem reserve run by token holders.

Aave V2 followed in late 2020 and Aave V3 in March 2022, adding features such as isolated markets for riskier assets and support for layer 2 networks. In July 2023 the protocol launched GHO, its own dollar stablecoin, which borrowers mint against their deposits. Aave V4 went live on Ethereum on 30 March 2026, with a "hub and spoke" design in which shared pools of liquidity feed separate markets, each with its own collateral rules.

Lenders deposit assets into a liquidity pool and earn interest; borrowers draw from the pool after posting more collateral than they borrow, making every loan an over-collateralized loan. Interest rates move automatically with demand: the more of a pool that is lent out, the higher the rate. Prices come from oracle networks such as Chainlink. The safety of each position is tracked with a health factor:

• $\text{Collateral value}$ is the current market value of the assets deposited.
• $\text{Liquidation threshold}$ is the share of that value the protocol counts towards the loan, set by governance for each asset.
• $\text{Borrowed value}$ is the current value of the debt, including interest.

A health factor below 1 allows other users to repay part of the debt and buy the collateral at a discount. For example, a borrower who deposits $10{,}000$ dollars of ETH with an 80\% threshold and borrows $6{,}000$ dollars has $\text{HF} = 10{,}000 \times 0.8 \div 6{,}000 \approx 1.33$. If ETH falls by 25 percent, the collateral is worth $7{,}500$, the health factor drops to exactly 1, and the position can be liquidated.

• Governance. AAVE holders propose and vote on changes, from new assets and interest rate settings to treasury spending, through the Aave DAO; see governance.
• Backstop. Holders can stake AAVE in a safety reserve that earns rewards but can be partly used to cover bad debt if liquidations fail.
• Fee share. Part of the interest paid by borrowers flows to the DAO treasury, which token holders control.
• Market asset. AAVE trades on major exchanges and can itself be used as collateral on the protocol.

Aave's design depends on accurate prices and fast liquidations. A sudden market crash, a faulty oracle or a thin market for a collateral asset can leave loans that are worth more than the collateral behind them, and the token holders' reserve is the last line of defence. Smart-contract flaws are a constant risk across DeFi, where hacks have cost users billions, although Aave's main markets have not suffered a large exploit of their own. Critics also note that voting power is concentrated among a small number of large holders, and that the legal status of governance tokens and of lending without identity checks remains unsettled in many countries.

• Aave
• Aave documentation
• Faisal Khan: What is Aave (AAVE)?