Aave is a Liquidity Protocol for Lending and Collateralized Borrowing

Health factor decides when collateral becomes liquidatable

The health factor is the decisive risk metric for a collateralized loan: below 1, the borrow position becomes eligible for liquidation. A borrow position's factor equals its collateral value multiplied by its weighted liquidation threshold, divided by total debt value. Chainlink price feeds, accrued interest, collateral balances, and governance-set thresholds therefore feed the calculation. Falling collateral prices or additional debt lower the factor; repayment and added collateral raise it.

V3 permits liquidation of up to 50% of total debt when the factor exceeds 0.95 and both collateral and debt are worth at least $2,000; it permits up to 100% at or below 0.95, or when either side is below $2,000. V4 replaces that fixed close-factor structure with a calculated repayment toward a target health factor and applies a hard-coded $1,000 dust threshold. The exact collateral bonus remains a market parameter rather than a universal percentage.

How do Hubs, Spokes, and V3 pools move liquidity?

The V4 liquidity architecture stores pooled assets in Hubs while Spokes define where those assets are supplied, borrowed, priced, and liquidated. Aave V4 became active on Ethereum on March 30, 2026, launching with three Liquidity Hubs: Core, Prime, and Plus. A Spoke sends supplied assets into its connected Hub, and another authorized Spoke draws from that shared inventory within its own caps and risk rules. V4 subsequently expanded to Avalanche.

V3 remains active across deployments including Ethereum, Polygon, Avalanche C-Chain, Arbitrum, Optimism, Base, BNB Chain, Gnosis, and Aptos. Each V3 market holds independent reserves, so USDC liquidity on Ethereum Core does not become USDC liquidity on Base. Pooling removes the need to match one named lender with one borrower, while reserve separation and Spoke-level limits contain distinct collateral policies.

What does a supplier receive after depositing?

Supplier accounting records a redeemable claim on deposited assets plus accrued interest, rather than a fixed-term loan to one counterparty. In V3, aTokens are transferable ERC-20 claims that maintain a 1:1 redemption relationship with the underlying asset while their displayed balances grow through the liquidity index. Supplying USDC therefore produces an interest-bearing USDC claim; it does not convert the deposit into AAVE or GHO.

V4 represents deposits through Hub supply shares, whose share price is constrained by a protocol invariant not to decrease. Interest comes principally from borrower payments, after the protocol's configured revenue share. Redemption still requires available underlying liquidity: heavy utilization can delay a full withdrawal until borrowers repay or new supply arrives. Collateral status is separate, so a deposit may earn without being enabled to back debt.

Utilization and collateral risk set the borrowing cost

Borrowing cost is variable and rises as utilization consumes a larger share of available liquidity. V3 applies a reserve-specific curve with an optimal utilization point, a base rate, and slopes on either side of that point. V4 separates debt interest into 2 concurrent streams: a Hub-level drawn rate tied to utilization and a risk premium derived from the borrower's enabled collateral. Stronger collateral composition therefore receives different pricing from a riskier mix within the same Spoke.

Protocol accounting uses 27-decimal RAY precision for rate calculations, while a common annualized display converts per-second values across 31,536,000 seconds, or a 365-day year. Neither figure fixes the live annual percentage yield; reserve utilization, the configured curve, and V4 collateral risk determine that output. Network gas remains separate from interest, and supply or borrow caps can stop a transaction even when wallet collateral appears sufficient.

Flash loans compress borrowing into one transaction

A protocol flash loan needs no upfront collateral because principal and premium must return within 1 atomic blockchain transaction. If the receiver contract cannot complete every operation and repay the required amount, the entire transaction reverts. The flashLoanSimple entry point handles 1 reserve, while flashLoan supports multiple reserves, making the mechanism useful for collateral swaps, refinancing sequences, arbitrage, and liquidation execution.

The Ethereum V4 activation configuration set the flash-loan premium at 5 basis points, or 0.05%, allocating 4 basis points to the protocol and 1 basis point to suppliers. Governance controls that parameter, so transaction builders read the configured value before execution. Atomicity removes unsecured credit exposure after settlement, yet writing the receiver logic, accounting for swap output, and reserving enough gas make flash loans a developer-oriented feature rather than an ordinary borrowing shortcut.

From wallet connection to an open position

The entry path requires a network-compatible self-custody wallet, supported assets on the chosen deployment, and enough native currency for transaction fees. MetaMask and Rabby serve EVM networks, while WalletConnect links many compatible wallet applications. Aave Pro presents V4 Hubs and Spokes; the V3 interface presents separate markets. Selecting the correct chain matters because identical tickers on different networks represent separate balances and contract addresses.

A standard token supply flow has 4 stages: connect, select an asset, authorize its transfer, and submit the supply transaction. Approval may use an onchain allowance or a supported signature flow. Token precision is exact at contract level - USDC uses 6 decimals, whereas WETH uses 18 - although interfaces format those integers for readers. Enabling collateral and borrowing are additional state changes. A full exit repays all accrued debt before withdrawing every collateral balance.

Governance, price feeds, and the AAVE token

Protocol governance manages reserve listings, rate curves, caps, collateral factors, Spokes, and emergency controls through onchain processes. The Aave DAO uses the ERC-20 AAVE token for proposal voting and delegation, while designated service providers and Risk Stewards operate only within approved scopes. Chainlink feeds supply core price data, and isolation settings, debt ceilings, borrow caps, and supply caps limit how individual reserves affect a market.

V4 stores dynamic risk-configuration identifiers in a 32-bit field, allowing up to 2^32 keys so revised parameters can coexist with earlier position snapshots. The V4 launch program reported approximately 345 cumulative review days, 4 audit firms, 4 independent researchers, and a 6-week public contest with more than 900 verified participants. The token's 2020 migration established 100 LEND per 1 AAVE and a total supply of 16 million AAVE. These controls reduce particular exposures without eliminating smart-contract, oracle, liquidity, or governance risk.

Aave, Compound III, Morpho Blue, or SparkLend?

The choice among Aave, Compound III, Morpho Blue, and SparkLend turns on liquidity layout and how much market selection the borrower wants. Broad governance-curated pools support multi-asset positions, whereas isolated market designs narrow each market's dependencies and place more responsibility on the user to inspect its oracle, collateral, and rate model.

Compound III organizes each Comet market around 1 base asset that borrowers receive, with approved assets serving as collateral. Morpho Blue identifies each market through 5 immutable inputs: loan token, collateral token, oracle, interest-rate model, and liquidation loan-to-value ratio. SparkLend uses a V3-derived architecture but follows parameters set within the Spark and Sky ecosystem, giving it a distinct governance and asset-selection context.

Broad multi-asset borrowing through established markets favors Aave, while a fixed base-asset structure points toward Compound III. Morpho Blue rewards precise market-level selection, and SparkLend aligns closely with Sky ecosystem liquidity. Across all four, available liquidity, collateral eligibility, oracle design, and liquidation parameters matter more than a temporary displayed yield.