Aave v3

Aave v3 is a non-custodial liquidity protocol on Ethereum and other major networks. It provides onchain infrastructure to integrate supply and borrow into applications via battle-tested smart contracts and AaveKit.

Developers can use AaveKit React, AaveKit TypeScript, or AaveKit API to integrate core protocol operations and data for wallets, exchanges, fintech platforms, and DeFi-native products.

Supplying assets to Aave lets users earn interest and, optionally, use supplied tokens as collateral for borrowing. When an asset is supplied, aTokens (e.g., aUSDC, aWETH) are minted as interest-bearing ERC-20 tokens whose balance increases over time from borrowing activity in the pool.

Withdrawing redeems aTokens for the underlying asset, including accrued interest, subject to available unborrowed liquidity and the collateralization of any active borrow positions.

Borrowing lets users access liquidity by posting supplied assets as collateral. Positions are always over-collateralized, meaning the collateral value must exceed the borrowed amount. Risk is tracked with a Health Factor and per-reserve liquidation thresholds; when the Health Factor drops below the threshold, collateral can be liquidated. When a user borrows, their debt is represented by variableDebtTokens (e.g., variableDebtUSDC), ERC-20 tokens that track the outstanding borrow balance and accrue interest over time.

Borrowers can repay at any time, and positions remain open as long as over-collateralization is maintained. The Health Factor moves with collateral and debt values (prices from oracles and accrued interest). When it falls below 1, the position becomes eligible for liquidation and external liquidators can repay part of the debt in exchange for collateral.

Interest rates adjust with utilization. v3 uses an interest rate model based on two slopes with an optimal utilization point: below the optimal point, borrow rates rise with the first slope; above it, they rise faster with the second slope.

Supplier yields are funded by borrower interest net of the reserve factor.

Positions become eligible for liquidation when a position's Health Factor falls below 1. A liquidator repays part of the debt and receives collateral at a discount (liquidation bonus). Liquidation threshold and bonus are defined per reserve and surfaced via onchain views.

Aave Earn Vaults are ERC-4626 compliant yield-bearing vaults that enable Aave supply positions to be managed with customizable ownership and fee structure. By depositing supported tokens, users receive vault shares that represent their proportional claim on the underlying assets and any yield earned. Shares can be withdrawn at any time for the underlying assets plus accrued yield subject to available liquidity, providing a simple and efficient way to grow holdings.

For vault managers, Aave Earn Vaults offer a customizable framework to deploy and manage yield strategies while earning fees on the yield generated by user deposits. The standardized ERC-4626 interface provides compatibility with a wide range of DeFi protocols and applications, making it easy to integrate vaults into broader strategies or platforms. This structure benefits both users seeking passive income and managers looking to build scalable, revenue-generating products on Aave. See the Vaults Overview for guides to deploy and manage instances of Aave Earn Vaults.

Aave v3 introduces significant enhancements over previous protocol iterations, focusing on improving capital efficiency, mitigating risk, and establishing Aave as a leading liquidity protocol across 14+ blockchain networks.

Efficiency Mode maximizes capital efficiency for correlated assets. When a user supplies and borrows assets within the same E-Mode category (e.g., USD-pegged stablecoins), they benefit from a higher loan-to-value (LTV) ratio. This enables low-slippage, high-leverage strategies like yield farming with staked ETH derivatives or efficient forex trading.

Isolation Mode allows for the secure listing of new or more volatile assets without introducing systemic risk to the entire protocol. When an asset is listed in Isolation Mode, it can be used as collateral to borrow only a specific basket of assets (typically stablecoins), up to a designated debt ceiling. This contains risk while expanding the number of supported assets.

Siloed Borrowing allows certain assets to be treated as isolated within the protocol. Borrowers using these assets as collateral can only borrow stablecoins configured for siloed assets, with strict borrowing limits defined by the Aave governance. This structure reduces the systemic risk for assets that are highly volatile or less liquid by limiting their borrowing capacities and containing the exposure to siloed assets.