Introduction

Aave is a decentralized, open-source DeFi protocol (decentralized finance) that primarily operates on the Ethereum blockchain but has expanded to many other platforms. It enables cryptocurrency lending and borrowing without traditional intermediaries, with smart contracts automatically handling the loan process.

Aave is a Finnish-origin project – founder Stani Kulechov is from Finland – and the word "Aave" means "ghost" in Finnish, reflecting the protocol's goal of operating as a transparent but "invisible" background financial service.

Today, Aave is one of the largest DeFi protocols: as of June 2025, Aave had approximately $24.4 billion worth of assets locked, making it the world's largest crypto lending platform. This represented over a fifth of the entire DeFi sector's liquidity at the time.

Background and History

Aave's story begins in 2017 when Stani Kulechov launched the ETHLend project with the goal of creating a decentralized peer-to-peer crypto lending service. ETHLend raised about $16 million in ICO crowdfunding and was one of the world's first DeFi services.

In 2018, the project was rebranded as Aave, and at the same time switched to the current liquidity pool model, where lenders deposit funds into shared pools from which borrowers can draw loans.

In January 2020, Aave Protocol V1 was released on Ethereum mainnet. The old LEND token was converted to a new AAVE token (at a 100:1 ratio) and Aave's governance token system launched.

Since then, Aave has expanded to numerous blockchains (including Polygon, Avalanche, Arbitrum, Optimism) and rapidly risen to the top of the DeFi sector. Aave V3 was released in 2022, bringing improvements such as more efficient risk parameters.

Technology and Operation

Lending Pools

Aave operates as an algorithmic money market with separate liquidity pools for each supported cryptocurrency. Lenders (investors) deposit their assets into these pools, and in return receive aTokens (e.g., depositing DAI gives you aDAI tokens), which represent deposited principal and automatically accrue interest.

Overcollateralized Loans

Aave specializes in overcollateralized loans, meaning the collateral value must be greater than the borrowed amount. Typically, Aave allows about 50-80% loan-to-value ratio depending on the asset. This conservative collateral ratio is due to cryptocurrency volatility: if collateral value drops too much, the protocol can automatically liquidate part of the collateral.

Interest Rates

Aave's interest rates are determined algorithmically based on supply and demand. Borrowers can choose between two rate models: variable rate (adjusts in real-time with market conditions) or stable rate (remains relatively fixed in the short term, providing cost predictability).

Flash Loans

Aave was the first DeFi protocol to enable flash loans – uncollateralized loans that are both taken and repaid within the same blockchain transaction. The flash loan concept allows users (usually via smart contracts) to borrow unlimited amounts without collateral, as long as the entire sum (plus a small fee) is repaid at the end of the same transaction.

This unique mechanism enables experienced users to execute complex DeFi strategies: exploiting arbitrage opportunities between exchanges, or rearranging collateral and switching loans to another protocol instantly.

AAVE Token

Aave protocol has its own ERC-20 token called AAVE, which is central to the Aave ecosystem. AAVE functions as a governance token, meaning holders can vote on proposals regarding protocol development, such as new features, risk parameter changes, or supported collateral and loan assets.

AAVE holders can also stake their tokens in the Safety Module to help secure the protocol in exchange for staking rewards. If the protocol ever faced a significant shortfall event, staked AAVE could be slashed to cover losses – but this mechanism helps ensure overall protocol solvency.

Common Use Cases

Risks and Warnings

• Smart Contract Risk: While Aave has operated without issues so far, no smart contract code is completely risk-free. Decentralized services can fail if there's a serious bug in the smart contract code or if the service gets hacked.
• Liquidation Risk: If collateral value drops below the required threshold, your position can be automatically liquidated, resulting in loss of assets.
• Interest Rate Volatility: Variable rates can change rapidly, making borrowing costs unpredictable during high-demand periods.
• Regulatory Uncertainty: DeFi regulation is evolving, and future rules could impact protocol operation or token value.

How to Buy AAVE

AAVE tokens can be purchased from most major cryptocurrency exchanges. Here are some recommended platforms:

Summary