# Aave Protocol Risks

The Aave Protocol offers decentralized access to liquidity but is not without risks. Risk management measures, including smart contract audits and governance frameworks, are in place to help mitigate risks. Below is an overview of key risks and mitigation efforts.

## Smart Contract Risk

Smart contracts can contain software bugs or other vulnerabilities within the protocol code and the underlying reserve tokens. To mitigate these risks, Aave’s code is publicly available for audit and has undergone multiple external third-party professional audits. Any proposed changes to the protocol code are reviewed and approved prior to implementation by the Aave community. Additionally, the protocol runs a continuous bug bounty program to incentivize external developers to identify and report any issues they may find so they can be fixed.

## Oracle Risk

Aave relies on third-party oracles for price feeds and external data, such as redemption ratios for liquid staking tokens. This reliance introduces potential risks such as incorrect valuations if an oracle fails or is compromised. To reduce this risk, Aave uses decentralized oracles like Chainlink, which provide tamper-resistant data feeds, greater reliability, and security measures.

## Collateral Risk

The value and liquidity of assets used as collateral can fluctuate, leading to the risk of undercollateralization or bad debt. Aave mitigates these risks by setting key risk parameters such as _loan-to-value (LTV)_ ratios and liquidation thresholds. Risk service providers engaged by the Aave DAO continuously monitor these parameters, and Aave Governance can adjust them to respond to market conditions.

## Liquidity Risk

Suppliers can withdraw only liquidity that is not currently borrowed. When a reserve’s utilization rate reaches 100%, withdrawals of that asset are blocked until borrowers repay or new supply arrives. The interest rate model raises borrow rates sharply above the optimal utilization to restore liquidity.

## Liquidation Risk

If a borrower’s Health Factor drops below 1, for example because collateral value falls or debt grows, liquidators can repay part of the debt and receive collateral plus a liquidation bonus. Borrowers reduce this risk by keeping their Health Factor well above 1, repaying debt, or supplying more collateral.

## Network and Bridge Risk

Aave operates across multiple blockchain networks and bridges, each with potential risks such as congestion, censorship, or security vulnerabilities. To address these types of risks, Aave Governance has a network onboarding framework that vets new networks and bridges before they are integrated into the protocol. Community oversight during the governance process is an important step to validate adoption of secure and reliable systems, minimizing risk.

For additional information on Aave Protocol risk management, see [Security & Audits](https://aave.com/security).