Say you hold $10,000 of crypto you plan to keep and need $6,000 in stablecoins for a few months. Selling ends the position, and a loan between two people means finding a lender, agreeing on terms, and trusting each other to pay. Lending protocols take over that matching and enforce the collateral rules in code.
Those protocols come in two main forms: peer-to-peer, where you borrow from one specific lender, and pool-based, where lenders fund a shared pool that borrowers draw from (source: ethereum.org, Decentralized Finance (DeFi)). Aave is the pool-based kind.
In Aave, your loan stays open while its Health Factor, a live safety ratio of collateral to debt, stays above 1. Below 1, part or all of your collateral can be sold to repay the loan (source: Aave, Health Factor and Liquidations).
What is an Aave liquidity pool?
An Aave liquidity pool is the reserve for one listed asset on one Aave market, where suppliers deposit tokens and borrowers take them out against extra collateral. Interest is the cost of borrowing from that reserve, and on most reserves it moves as more of the pool goes out on loan. Smart contracts handle supply, withdrawal, borrowing, repayment, and liquidation.
Each pool belongs to a market instance whose reserve settings and collateral thresholds are approved by governance. The deposits suppliers make become liquidity that borrowers reach through loans backed by extra collateral (source: Aave, Liquidity Pool). That collateral must be worth more than the loan (source: Wikipedia, Aave). Every Aave lending protocol market runs one reserve per listed asset, so everyone who supplies USDC to a market adds to the same USDC balance that borrowers draw from. A borrower who wants USDC supplies a different asset as collateral, takes USDC out of the reserve, and refills it on repayment. If that borrower lets the buffer get too thin, a liquidator can repay part of the loan so the pool stays whole.
Say you supply $150 worth of ETH so it earns interest while it sits as collateral. Then you borrow $100 worth of GHO, Aave's native stablecoin, because the market's loan-to-value (LTV) rule for ETH allows it. You now hold GHO you can spend while you still own the ETH, and the extra $50 is the buffer that protects suppliers if ETH falls. Borrowing $100 of GHO can require about $150 of ETH, with the exact amount set by the LTV for that collateral (source: Aave, Introduction to Aave V3).
| Role | What you send | What you hold | What you watch |
|---|---|---|---|
| supplier | a listed asset into the pool | aTokens that earn interest | available liquidity when you want to withdraw |
| borrower | collateral, then a borrow | the borrowed asset and a debt balance | Health Factor, rates, and oracle prices |
| both | a supply, then a borrow against it | interest on the supply and a loan | the same Health Factor as any borrower |
Why borrow while you keep the collateral? Selling the ETH would end that position, while a loan lets you keep the asset and take another one out. That is also where the risk comes from, because you still hold an asset that can fall in price and you have added a debt that grows as interest accrues.
Liquidity is local to each market and network, so ETH you supply on one deployment does not back a borrow on another. Choose the market and network before you supply on Aave, because that choice decides which borrows your deposit can support and which rates it earns.
What an aToken is
When you supply, the pool mints aTokens to your wallet for that asset, so supplying USDC gives you aUSDC and supplying wrapped ETH gives you aWETH. The balance rises as borrowers pay interest, so there is no separate payout to claim. To withdraw, you burn aTokens and receive the underlying asset together with the interest you earned.
aTokens are interest-bearing tokens that stand for your portion of the pool, with interest building up all the time (source: Aave, Glossary). They are minted on supply and burned on withdrawal. Their value is pegged 1:1 to the asset you supplied (source: Aave, Tokenization). Your wallet balance already includes the yield on the principal, which is why the number grows without a separate payment.
The 1:1 peg is the part of how aTokens work that beginners most often misread. Ten aUSDC is a claim on ten USDC in the pool. The interest arrives as extra aUSDC, so the count of tokens rises over time while each one stays worth one USDC. When a wallet shows aUSDC next to USDC, the aUSDC figure is your supply balance for that market.
Borrowing creates a different balance, the variable debt token, which tracks what you owe as principal and accrued interest (source: Aave, Tokenization). Every supply also carries a "use as collateral" switch in the dashboard. Turning it off stops that asset from backing a borrow (source: Aave, FAQ). The aTokens keep earning interest either way. Turn the switch on, and the same aTokens start counting toward your borrowing power. Efficiency Mode and the limits on riskier collateral change what that setting allows for certain assets, and the aToken itself stays the same in every case.
To leave, you burn aTokens and the pool returns the underlying asset, as long as enough unborrowed liquidity sits in the reserve. If almost everything is lent out, you may wait for repayments or new deposits before you can withdraw in full. Your claim on the pool stays intact during that wait. With a loan still open, the withdrawal must also leave the account above its liquidation threshold, which means a Health Factor above 1 (source: Aave, Liquidity Pool).
Why the borrow rate floats
Most borrow rates on current Aave markets are variable, and they move with utilization, the share of the pool out on loan. The rate curve stays gentle up to an optimal usage point and then steepens so that some liquidity remains for withdrawals. Each reserve's rate model produces two numbers: a supply rate for suppliers and a variable borrow rate.
Utilization is the share of a reserve's total assets that is currently borrowed. When most of the reserve sits idle, borrowing is cheap and supplying earns little, because few borrowers are paying interest. When most of it is lent out, the protocol raises the borrow rate. Expensive borrowing then pulls in repayment and new deposits, which is how available liquidity returns for suppliers who want to withdraw (source: Aave, Introduction to Aave V3). The annual percentage yield (APY) on your screen is the live result of that utilization, including the effect of compounding over a year (source: Aave, Glossary). GHO on the Ethereum Core market is the exception, with a static borrow rate that governance sets (source: BGD Labs, Aave v3.4 features).
The interest-rate strategy is a two-slope model, with one slope running from zero usage up to an optimal usage ratio and a second slope running from that point to 100% utilization. Its rate math gives just two numbers: the supply-side liquidity rate that suppliers earn and the variable rate that borrowers pay (source: Aave, Interest Rate Strategy). Plan any loan around a rate that can change while the loan is open.
A reserve factor sends part of borrower interest to the Aave treasury (source: Aave, Glossary). The rest goes to suppliers. The supply APY sits below the borrow APY for two reasons: only the borrowed share of the reserve pays interest while every supplier earns on the whole reserve, and the reserve factor takes its cut first. Since the v3.4 upgrade, every flash-loan fee goes to the treasury (source: BGD Labs, Aave v3.4 features). Borrower interest is the main source of supplier yield. Governance sets the slopes, the optimal point, and each reserve's supply and borrow caps. You do not need those names to use a pool. You do need to know that the rate on your screen follows how much of the reserve is lent out today, unless governance holds it static, as it does for GHO on Core.
Because each reserve carries its own slopes and optimal point, Aave interest rates can differ widely between two assets on the same market. Check the borrow APY on the exact reserve before you open a loan.
Collateral, loan-to-value, and Health Factor
Each collateral asset has a loan-to-value cap and a higher liquidation threshold. Loan-to-value sets how much you can borrow when you open a loan, while the liquidation threshold marks the point where the position is short of collateral. Health Factor combines those rules into one live number, and once it drops below 1 the position can be liquidated.
With a 75% LTV, every 1 ETH of collateral lets you borrow up to 0.75 ETH worth of another listed asset (source: Aave, Glossary). The liquidation threshold is a separate, usually higher percentage, and it decides when liquidation can start once a loan is open. Keeping the two numbers apart matters, because the gap between them is the room your position has before anything happens.
Health Factor equals total collateral value multiplied by the weighted average liquidation threshold, divided by total borrow value. Work it through with real numbers: collateral is $10,000 of ETH with an 80% liquidation threshold, so the adjusted collateral value is $10,000 × 0.80 = $8,000. Debt is $6,000 of GHO, and $8,000 divided by $6,000 gives a Health Factor of 1.333 (source: Aave, Health Factor and Liquidations). That reading sits above 1, so the position is safe at those prices.
| Rule | What it answers | What a 75 / 80 setup means |
|---|---|---|
| loan-to-value | how much you can borrow at the start | borrow up to 75% of collateral value |
| liquidation threshold | where the position runs short of collateral | liquidation risk starts at 80%, above the 75% cap |
| Health Factor | whether the position is above 1 right now | below 1 can be liquidated |
The prices in that formula come from an oracle, a price feed the protocol reads on chain. A lower oracle price for your collateral can push the Health Factor down even when you have not touched the position. Interest lowers it too, because the debt side of the formula grows as interest accrues.
There is no Health Factor that is safe for everyone. Correlated assets, such as two stablecoins, can run closer to 1 than ETH borrowed against a stablecoin, because their prices usually move together. To raise the number, supply more collateral or repay part of the debt (source: Aave, Health Factor and Liquidations).
The app blocks a borrow that would start above the LTV cap, but it cannot protect you if the market later moves through the buffer. Leaving room between your loan and that cap is the first decision to make when you borrow against collateral on Aave.
What a liquidation does
A liquidation becomes possible once the Health Factor drops below 1, when the protocol sells your collateral to repay debt and the liquidator who buys it earns a bonus (source: Aave, Glossary). Treating it as a late fee is a mistake. One transaction can take collateral worth half the debt plus the bonus, even at a Health Factor of 0.99.
When the Health Factor is still above 0.95 and the collateral and debt are each worth at least $2,000, a liquidation can cover up to half the debt. At 0.95 or lower, or when either side is worth under $2,000, it can cover the whole debt. A partial liquidation must also leave at least $1,000 of collateral and $1,000 of debt, or the position is cleared in full. That rule prevents dust, meaning balances too small to be worth liquidating later (source: Aave, Health Factor and Liquidations).
The bonus is set separately for each collateral asset, for example 5% on ETH and 15% on YFI (source: Aave, FAQ). Check the current figure for your own collateral before you borrow against it.
Run the earlier position through a price drop. Collateral is $10,000 of ETH with an 80% liquidation threshold, and debt is $6,000 of GHO. If ETH falls 26%, the collateral is worth $7,400 and its adjusted value is $7,400 × 0.80 = $5,920. The Health Factor is then $5,920 / $6,000 = 0.987. That is below 1 but above 0.95, and both sides are over $2,000, so a liquidator can repay up to $3,000 of GHO. With a 5% bonus on ETH, the liquidator takes $3,000 × 1.05 = $3,150 of your ETH. You are left with $4,250 of ETH against $3,000 of debt, a Health Factor of $4,250 × 0.80 / $3,000 = 1.133.
| When | How much can be liquidated | What you lose |
|---|---|---|
| Health Factor below 1 and above 0.95, both sides at least $2,000 | up to 50% of the debt | collateral equal to the repaid debt, and the bonus |
| Health Factor at or below 0.95, or either side under $2,000 | up to 100% of the debt | the same, on a larger share |
| a partial liquidation would leave less than $1,000 on either side | the whole position | any small remaining loan |
Anyone on the network can start a liquidation. In practice, liquidators run bots that watch oracle prices and compete to submit the transaction first (source: Aave, Health Factor and Liquidations). The protocol sends no reminder first. In the example above, the $150 bonus the liquidator kept is the cost of sitting too close to 1.
If part of the loan survives, its Health Factor starts again from the new balances. Avoid treating the maximum LTV as a target, because the gap between LTV and the liquidation threshold is the only buffer built into the position. A fast price move can use it up. Keeping that gap wide is the most reliable defense against an Aave liquidation.
Extra tools on the same pool
The same pool carries three extra tools, and governance adds limits on riskier collateral. Efficiency Mode raises borrowing power when collateral and debt usually move together. A flash loan is borrowed and repaid in one transaction. Aave credit delegation lets another wallet borrow against your collateral (source: Aave, Glossary).
Efficiency Mode, often shortened to E-Mode, gives borrowers more borrowing power when the collateral and the debt are correlated assets such as stablecoins (source: Aave, Glossary). Supplying one stablecoin to borrow another is the typical case, as is supplying a staked-ETH token to borrow ETH, because those prices usually track each other. E-Mode is opt-in, and the Aave E-Mode setting applies to your whole account once you turn it on.
Riskier collateral gets the opposite treatment. Aave V3 used to limit it with Isolation Mode, where an account using an asset marked as isolated could borrow only certain stablecoins (source: Aave, Glossary). The v3.7 upgrade, whose second part executed on May 28, 2026, removed isolated collateral and borrowing in isolation. Before the upgrade, its payload reset every non-zero debt ceiling to zero (source: Aave Governance, Upgrade Aave instances to v3.7 Part 2). Siloed Borrowing went out in the same upgrade. Governance now limits a risky asset through E-Mode categories, an LTV of 0 that keeps it from backing a borrow, plus supply and borrow caps on each asset (source: Aave DAO, Aave v3.7: Isolation Mode & Siloed Borrowing Removal).
Flash loans are loans with no collateral that start and finish inside one transaction. The fee is initialized at 0.05% and can be changed by governance (source: Aave, Flash Loans). The Aave app uses Aave flash loans behind the scenes for collateral swaps and for repaying a loan with collateral (source: Aave, FAQ).
| Tool | What it changes | What stays the same |
|---|---|---|
| Efficiency Mode | higher borrowing power for correlated assets | liquidation below a Health Factor of 1 |
| caps and LTV 0 | whether a risky asset can back a borrow, and how much of it the pool holds | the need to stay overcollateralized |
| flash loan | a same-transaction borrow with no collateral, for a fee | full repayment inside that transaction |
| credit delegation | who can borrow against your collateral | you carry the risk of a loan someone else controls |
None of those tools buys you the AAVE token, because using the protocol ends at the pool. If you want to trade the AAVE token itself, BloFin lists AAVE/USDT Spot for buying and selling the coin and the AAVEUSDT Perpetual, a USDT-settled contract that tracks the token's price.
Before you size a trade on either market, check the maker and taker fees for your account tier on the BloFin fee schedule. Keep that trade separate in your planning from any loan you hold on Aave.
Protocol use and the AAVE token
Using Aave is a wallet transaction against a pool, while holding or trading AAVE is a trade in a token. The two are easy to confuse in a search box, so decide which one you mean before you act. You can use the protocol, trade the token, do both, or do neither, because neither activity requires the other.
aTokens are the usual source of that confusion. aUSDC tracks your USDC supply balance and grows with interest. AAVE is the governance token used for voting (source: Aave, Glossary). Ten aUSDC is not ten AAVE. To supply or borrow, you need the asset the market lists, a wallet that can sign, and enough of the network's gas token to pay for the transaction. AAVE is not on that list. Governance is optional, and the pool never checks whether you voted.
| Action | Where it happens | What you hold after |
|---|---|---|
| supply on Aave | the Aave app or another interface, from your wallet | aTokens for that asset |
| borrow on Aave | the same protocol, against collateral | the borrowed asset and variable debt |
| spot trade of AAVE | an exchange's spot market | AAVE tokens you can withdraw |
| perpetual on AAVE | an exchange's perpetual futures market | a position on the token's price |
A filled spot order on BloFin credits AAVE to your account balance, and a filled perpetual order opens a USDT-margined position on the price. Neither one mints aTokens or creates an Aave Health Factor, so AAVE/USDT Spot and the AAVEUSDT Perpetual stay separate from any pool deposit you make.
Looking to trade AAVE tokens on BloFin? To get started, you'll need to first create a BloFin account, fund your account with cryptocurrency, then open the AAVE/USDT Spot trading page or the AAVEUSDT Perpetual page.
Frequently asked questions
Can you transfer aTokens to another wallet?
Yes, standard aTokens support normal token transfers and approvals, so you can send aUSDC to another wallet or trade it, and the balance that arrives still includes the interest already earned. Variable debt tokens work the opposite way, because transfers and approvals are disabled for them, so a loan stays with the wallet that opened it. The exception on the supply side is the Aave Horizon market for real-world assets, where aTokens cannot be moved between users by default to meet legal rules for those assets (source: Aave, Tokenization).
Can you lock today's Aave borrow rate for the life of the loan?
Most current Aave markets price a new borrow at a variable rate, and even the static GHO rate on the Ethereum Core market can be changed by governance, so the cost of an open loan can rise while you hold it. Aave V2 and V3 once offered a stable-rate mode. A critical bug in it was reported on November 4, 2023. Its fix halted new stable borrows. In January 2024, BGD Labs proposed moving every remaining stable position to variable (source: Aave Governance Forum, BGD Full Deprecation of Stable Rate). Borrow well below the maximum and keep a wider Health Factor buffer.
Can you repay an Aave loan with aTokens?
Yes, as long as the aTokens share the underlying asset of the debt, so aUSDC can repay a USDC borrow on the same market. Repaying this way uses part of your supply balance to clear the loan, with no need to withdraw first. Helper contracts also let you repay with other tokens, including other collateral assets, without swapping them by hand first. Once the debt is smaller, you can safely withdraw part of the collateral that was backing it (source: Aave, Liquidity Pool).
Which Aave version should you use when an app shows both V3 and V4?
Use the version whose market lists your asset at terms you accept, and leave an open V3 loan where it is. Aave V3 is still in production (source: Aave, Introduction to Aave V3). Aave Labs has said V3 will keep running "for as long as the DAO decides it should" and that "there will be no forced migration" (source: Aave Governance Forum, Aave Will Win Framework). V4 went live on Ethereum on March 30, 2026, with a Liquidity Hub and Spokes that set their own collateral, risk, and liquidation rules (source: Aave Labs, Aave V4 is Live on Ethereum).
What changes when you turn on Efficiency Mode?
Turning on E-Mode puts your account into one asset category, and that category sets its own loan-to-value, liquidation threshold, liquidation bonus, and list of assets you may borrow. While it is active you can borrow only assets inside the chosen category, and some assets now belong to more than one category, so compare the parameters before you pick (source: Aave, Efficiency Mode (E-mode)). The higher loan-to-value leaves less room before a liquidation, which is why a small depeg between two stablecoins can liquidate a position opened near the cap.
Is there a single liquidation price for an Aave loan?
A loan's liquidation point is a curve of price combinations, because every collateral and borrow token in the account feeds the Health Factor through its balance and its oracle price. Stablecoins count too, so a USDC price of $0.95 changes the reading the same way any other price move does. By default, a repayment raises the Health Factor more than a new supply. A reading above 2 gives a wider margin before liquidation (source: Aave, FAQ).
Researched and written by the BloFin Academy editorial team with AI-assisted drafting. Primary sources include Aave V3 documentation on the liquidity pool, glossary, tokenization, interest-rate strategy, and flash loans, the Aave v3.7 upgrade proposal and removal notes, Aave help pages on the protocol introduction, Health Factor and liquidations, and Efficiency Mode, the Aave FAQ, the Aave Labs V4 Ethereum launch post, the BGD Labs governance proposal on stable-rate deprecation, the Aave Labs governance reply on V3 after V4, the ethereum.org DeFi page, and the Wikipedia entry on Aave. All facts independently verified against cited documentation current as of October 2026.
This article is for informational and educational purposes only. It is not financial, investment, trading, or legal advice. Cryptocurrency can lose value. Borrowing on Aave can lead to liquidation if the health factor drops below 1. Spot AAVE/USDT buys the token. An AAVEUSDT Perpetual is a contract on the price. Do your own research. Consider your circumstances before using any protocol or trading any asset.