Aave: what the lending protocol is, how it works and who runs it

What Aave is

Aave is a lending protocol: a set of smart contracts on Ethereum and other networks where people supply crypto assets to earn interest and borrow other assets against collateral they lock up. Aave's documentation calls it "a decentralized, non-custodial liquidity protocol". No company stands between lender and borrower. Interest rates, collateral rules and liquidations are all enforced by the contracts.

The name covers several distinct things:

• The Aave Protocol: the lending contracts. Version 3 (v3) runs on many networks. Version 4 (v4) went live on Ethereum on 30 March 2026 and on Avalanche on 15 July 2026, according to Aave's blog.
• The Aave DAO: holders of the AAVE token, who vote on listings, risk parameters, treasury spending and upgrades. The licence on the v3 code names the DAO, "represented by its governance smart contracts", as licensor.
• Aave Labs: the company that builds the aave.com interface, the Aave App and other products, and that serves the DAO as a paid development provider. Its terms of service say Aave Labs "does not own, operate or control the Aave Protocol".
• GHO: a dollar-pegged stablecoin that is minted by borrowing against collateral in Aave.

How Aave works

The basic flow is the same in v3 and v4. A lender deposits an asset such as USDC and receives an aToken (aUSDC), whose balance grows as borrowers pay interest. A borrower deposits collateral, then borrows another asset up to a limit set by that collateral's loan-to-value ratio. Loans are over-collateralized: the collateral must be worth more than the debt. The debt is tracked by a variable-debt token, and the rate floats.

Rates follow utilization, meaning the share of a pool that is lent out. Below a target level, borrow rates rise slowly. Above it they rise sharply, which pulls in new deposits and pushes borrowers to repay. Lenders' interest is funded by borrowers, minus a reserve factor that goes to the DAO treasury. Our guide to how DeFi lending works explains the model in more detail.

Each position has a health factor, which compares the value of the collateral, weighted by its liquidation threshold, with the debt. Below 1.0, the position can be liquidated. A liquidator repays part of the debt and receives collateral worth more than the repayment. Aave's configuration docs state that the liquidation bonus "is always above 100%": a setting of 105% gives the liquidator a 5% bonus, and that bonus is the borrower's loss. In v3, a liquidator may repay up to 50% of a debt at once. All of it can be repaid once the health factor is at or below 0.95, or when the debt or the chosen collateral is worth less than $2,000. In v4, the documentation says the bonus follows a Dutch auction: the lower the health factor, the larger the bonus.

Aave v3 and v4

The documentation describes v4 as an evolution of "Aave V3's market-per-pool design" and still calls v3 the widely used version. Version 3.7, current on the v3 side, removed Isolation Mode and siloed borrowing in favor of isolated E-Mode categories. Some instances may still run v3.6, so the rules on a given market depend on its version.

Aave Horizon, launched on 26 August 2025, is a separate v3-based market for real-world assets. Only qualified institutions approved by each asset's issuer can post tokenized funds as collateral. Anyone can supply GHO, RLUSD or USDC to it.

Fees and what a borrower actually pays

Aave charges no account or subscription fee. What a user pays is set market by market:

• Borrow interest: variable, driven by utilization; part of it goes to the treasury through the reserve factor.
• Liquidation cost: the bonus taken by the liquidator, plus any liquidation protocol fee set by governance in basis points (10,000 equals 100%).
• Flash-loan premium: charged on the amount borrowed within a single transaction and paid entirely to the treasury.
• Gas: paid to the network, not to Aave.

Because all of these are per-reserve parameters that governance can change, the only reliable figures are those on the market itself. Our guide to reading a DeFi lending market shows where to find them before you borrow.

Governance, AAVE and safety backstops

AAVE has a fixed supply of 16,000,000 tokens, per its Ethereum contract. It replaced the older LEND token at 100 LEND per AAVE, the ratio set in the migration contract. Holders of AAVE, staked AAVE and aAAVE vote through proposals called AIPs. On-chain votes have a one-day delay and a three-day voting period, and need at least 320,000 AAVE-equivalent taking part and voting for the winning option. Passed proposals then wait in a timelock: one day for routine changes through the Short Executor, seven days for changes to governance itself through the Long Executor.

Faster, narrower powers sit beside the votes. A 4-of-7 Protocol Emergency Guardian multisig can pause a market. A 5-of-9 Governance Emergency Guardian can cancel malicious proposals. Steward contracts let named parties adjust some risk parameters within set limits. The Risk Steward, for example, can move loan-to-value, liquidation thresholds and bonuses by up to 0.5% at a time, with at least 72 hours between changes. Service providers named in the governance docs include LlamaRisk for risk, Certora for security, TokenLogic for finance and Aave Labs for development.

For bad debt, Aave v3 on Ethereum uses Umbrella, which replaced the old Safety Module. Users stake aTokens (aUSDC, aUSDT and aWETH) or GHO to earn extra rewards. If a pool runs a deficit beyond a first-loss amount the DAO covers, staked funds are burned to fill it. Withdrawing takes a 20-day cooldown, and funds can still be slashed during it.

Code, audits and licence

The aave-v3-origin repository holds 49 audit files dated from November 2021 to March 2026. The reviewers include OpenZeppelin, Trail of Bits, Certora, Sigma Prime, MixBytes, Sherlock and Pashov, and the most recent batch covers v3.7. Audits reduce risk but do not remove it, and a smart contract failure, an oracle fault or a bad parameter change could still cause losses.

The v3.7 code is under a Business Source License 1.1, which the file itself says "is not an Open Source license". It converts to MIT no later than 6 March 2027. Until then, use is allowed only on conditions, among them that the code is not used to move users or funds out of the Aave ecosystem.

Who can use Aave

The protocol has no accounts or identity checks: users connect a self-custody wallet and sign each transaction. Aave Labs' interface terms exclude sanctioned persons and residents of listed jurisdictions, including Russia, Belarus, Iran, North Korea, Cuba, Syria, Venezuela and occupied regions of Ukraine. The terms are governed by Cayman Islands law. Horizon is the exception to open access on the borrowing side, because each real-world-asset issuer runs its own eligibility checks.

Alternatives by function

Several lending protocols share Aave's model of pooled, over-collateralized loans. Spark, for example, runs a fork of Aave v3 code within the Sky ecosystem. The lending ratings compare these protocols on published criteria, and Aave is assessed separately in our Aave review; this page only describes how it works.