Aave V3

Aave V3 is a non-custodial liquidity protocol that gives developers secure, composable access to the deepest liquidity markets on Ethereum and other major blockchain networks. Aave is onchain financial infrastructure that enables supply and borrow functionality to be integrated into any application, managed through battle-tested smart contracts and robust SDKs.

With Aave, developers can leverage the React SDK, TypeScript SDK, or GraphQL API to integrate core protocol operations and data directly into their products. This tooling supports a wide range of use cases, from wallets and exchanges to fintech platforms and DeFi-native applications, enabling automation of asset management, creation of new financial primitives, and delivery of advanced user experiences to earn and borrow with composable markets.

Supplying assets to Aave allows users to earn interest and, optionally, use their supplied tokens as collateral for borrowing. When an asset asset is supplied, a corresponding amount of aTokens (e.g., aUSDC, aWETH) are minted to the recipient address, which are interest-bearing ERC-20 tokens representing balance of underlying tokens that increases in balance over time by accruing yield from the borrowing activity in the pool.

Withdrawing is the process of redeeming aTokens for the underlying asset, including any accrued interest. Withdrawals are subject to availability of unborrowed liquidity enforced through over-collateralizaiton and interest rate mechanism, and the collaterization of any active borrow positions.

Borrowing enables users to access liquidity by utlizing supplied assets as collateral. This process is always overcollateralized, meaning the value of the collateral exceeds the borrowed amount. The protocol manages risk through a Health Factor, which determines the safety of a user's position, and liquidation thresholds, which trigger collateral liquidation if the Health Factor drops below parameter threshold. When a user borrows assets, their borrow position balance is represented by variableDebtTokens (e.g., variableDebtUSDC), which are ERC-20 tokens that track the outstanding borrow balance and accrue interest over time.

Repayment of borrowed assets can be done at any time, and borrow positions are indefinite as long as the overcollateralization is maintained. The Health Factor fluctuates based on the value of the supplied collateral and the borrowed assets, which can change with market conditions and accrued interest. Aave utilizes oracles to provide real-time price feeds of the assets, providing inputs to the calculation of the Health Factor and triggering liquidations when necessary to maintain the protocol's over-collateralization.

Aave's smart contracts can be queried and indexed to fetch a wide range of onchain data, which is essential for building custom dashboards or position management tools. Aave's React and Typescript SDKs and Graph QL API enable developers to query:

Aave 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 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 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.