Quick answer
Aave is a decentralised lending protocol where you can deposit crypto to earn interest, or borrow against your crypto as collateral. To earn yield: connect MetaMask to app.aave.com, choose a network (Arbitrum for low fees), select an asset to supply (e.g. USDC), approve and confirm the deposit transaction. Your deposited balance grows automatically every block as borrowers pay interest.
What is Aave and how does it work?
Aave is a decentralised liquidity protocol — a system of smart contracts that allows two groups of users to interact without an intermediary: suppliers (who deposit crypto and earn interest) and borrowers (who lock up collateral and take out loans).
Aave launched on Ethereum mainnet in January 2020 and has since expanded to over a dozen networks. As of 2026, Aave V3 manages tens of billions of dollars in supplied assets and has processed trillions in cumulative lending volume, making it consistently one of the largest DeFi protocols by Total Value Locked (TVL).
The mechanics are elegantly simple: suppliers deposit assets into lending pools. Borrowers draw from those pools by providing over-collateralised loans (they must deposit more value as collateral than they borrow). The interest paid by borrowers flows to suppliers. Interest rates adjust automatically based on how much of each pool is currently being borrowed — called the utilisation rate.
How are Aave interest rates determined?
Aave uses an algorithmic interest rate model that adjusts in real time based on supply and demand for each asset. There is no board meeting, no human decision — the rate is a function of how much of the deposited supply is currently being borrowed.
- Utilisation rate
- The percentage of a pool's total deposited assets that are currently borrowed. If £100M of USDC is deposited and £75M is borrowed, utilisation is 75%. Higher utilisation means higher rates for both borrowers and suppliers.
- Optimal utilisation point
- The target utilisation rate set in Aave's risk parameters — typically 80-90% for stablecoins. Below this point, rates rise gradually. Above it, rates increase steeply to incentivise more deposits and discourage borrowing, preventing the pool from being fully depleted.
- Supply APY
- The annualised interest rate suppliers earn on their deposits. Calculated as: borrowing rate × utilisation rate. If borrowers pay 8% and utilisation is 70%, suppliers earn approximately 5.6%. Rates change continuously.
- Variable vs stable borrow rate
- Aave offers variable borrowing rates (change with utilisation) and previously offered stable rates (locked in at origination but occasionally reset). Most borrowers use variable rates.
Step-by-step: how to supply assets on Aave V3
- 01
Prepare your wallet and funds
You need a non-custodial wallet (MetaMask recommended) loaded with the asset you want to supply, plus some ETH (or the native token of your chosen network) for gas fees. If using Arbitrum, you need ETH on Arbitrum for gas.
- 02
Navigate to app.aave.com
Always type the URL directly or use a saved bookmark. Do not click links to Aave from emails, social media, or Discord messages — phishing sites impersonating Aave are common. Verify the URL is exactly app.aave.com.
- 03
Connect your wallet
Click 'Connect wallet' in the top right. Select MetaMask (or your wallet). Approve the connection. You will see your balances appear in the Aave interface.
- 04
Select your network
In the top navigation, select the network you want to use. Arbitrum typically offers the lowest gas fees for Aave interactions. Ensure your MetaMask is set to the same network.
- 05
Find the asset you want to supply
In the 'Assets to supply' section, you will see your wallet balances alongside current supply APY for each asset. Common choices: USDC for stablecoin yield, ETH to earn interest on ETH holdings, WBTC for Bitcoin-denominated yield.
- 06
Click 'Supply' on your chosen asset
Enter the amount you want to supply. You will see an estimate of annual earnings based on the current APY. Note: this rate changes constantly.
- 07
Approve the token (first time only)
If this is your first time supplying this specific token on Aave, you must first approve Aave's smart contract to access that token in your wallet. This is a separate transaction that costs gas. You only do this once per token per network.
- 08
Confirm the supply transaction
After approval, click 'Supply'. MetaMask shows the transaction. Review it and confirm. Funds are now supplied.
- 09
Receive aTokens
In exchange for your deposit, Aave gives you an equivalent amount of aTokens (e.g. aUSDC for USDC, aWETH for ETH). These tokens represent your deposit plus accrued interest. Your aToken balance grows automatically, reflecting accumulated interest, without you doing anything.
- 10
Withdraw anytime
To reclaim your funds plus interest, click 'Withdraw' next to your supplied asset. Enter the amount, confirm the transaction. You return your aTokens and receive your original asset plus all earned interest.
Interest accrues continuously — every Ethereum block (approximately every 12 seconds) adds a tiny amount of interest to your aToken balance. You do not need to claim or compound anything manually. Your balance simply grows.
What is borrowing on Aave and how does it work?
Beyond supplying, Aave also allows you to borrow assets against your deposited collateral. This is useful for accessing liquidity without selling your crypto — for example, depositing ETH and borrowing USDC stablecoins to use elsewhere, while maintaining your ETH exposure.
All borrowing on Aave is over-collateralised. If you deposit £1,000 of ETH, you can only borrow up to £700-800 worth of USDC (the exact percentage depends on the asset's Loan-to-Value ratio, set by Aave's risk parameters). This over-collateralisation is what makes the system self-sustaining without traditional credit checks.
- Health Factor
- A number that represents how safe your borrowing position is. A health factor above 1.0 is safe. If it falls to 1.0 (because your collateral value drops or your borrowed asset value rises), liquidation is triggered.
- Liquidation
- If your health factor falls to 1.0, liquidators (bots that monitor Aave) will repay part of your debt and seize a portion of your collateral at a discount. This protects the protocol but results in you losing part of your collateral. Maintaining a healthy buffer (health factor of 1.5 or higher) reduces liquidation risk.
- Loan-to-Value (LTV)
- The maximum percentage of your collateral value you can borrow. ETH has an LTV of approximately 80% — meaning if you deposit £1,000 ETH, you can borrow up to £800 worth of other assets.
Borrowing against volatile collateral like ETH or BTC carries significant liquidation risk. If the price of your collateral falls sharply, your health factor can drop quickly, triggering forced liquidation at a loss. Only borrow against collateral you are comfortable holding through volatility, and maintain a substantial health factor buffer (1.5+ recommended).
What are the risks of supplying to Aave?
Aave has operated continuously since January 2020 and has never suffered a catastrophic loss of supplier funds from a smart contract exploit in its core contracts. However, this track record does not eliminate risk — it simply means the known risks have not materialised yet.
- Smart contract risk — code bugs could theoretically allow funds to be drained, despite extensive audits
- Oracle risk — Aave relies on Chainlink price feeds; a compromised oracle could trigger incorrect liquidations
- Governance risk — Aave is governed by AAVE token holders who can change risk parameters
- Liquidity risk — during extreme stress, if utilisation approaches 100%, you may not be able to withdraw immediately
- Stablecoin depeg risk — supplying USDC or USDT means your principal value relies on those stablecoins maintaining their peg
- Network risk — bridges and cross-chain deployments carry additional risks vs. Ethereum mainnet
Supplying established stablecoins (USDC, USDT) to Aave's core Ethereum or Arbitrum deployments represents one of the more conservative yield strategies in DeFi — you are primarily exposed to smart contract risk rather than crypto price volatility. This is why DeFi veterans often use Aave for 'safer' yield on stablecoin holdings.
Frequently asked questions
What interest rates can I expect on Aave?
Interest rates fluctuate constantly based on utilisation. Historically, USDC and USDT supply rates on Aave have ranged from 1% to 15%+ APY, with higher rates during periods of high DeFi borrowing demand and lower rates during quiet periods. ETH supply rates are typically lower (2-5%). Always check current rates at app.aave.com — they change in real time.
Is there a minimum deposit on Aave?
There is no minimum deposit set by the protocol. However, gas fees make very small deposits uneconomical on Ethereum mainnet. A £50 deposit at 5% APY earns £2.50 per year but one gas transaction might cost £10-20. On Arbitrum or other Layer 2 networks with minimal gas fees, small deposits become much more practical.
Can I lose my deposited funds on Aave?
Yes, in theory, though this has not happened to core Aave V2/V3 deposits. Risks include: smart contract exploits, oracle failures, governance attacks, and in extreme cases, bank-run scenarios where borrower defaults exceed protocol reserves. Aave maintains a Safety Module — a reserve funded by staked AAVE tokens — which can be used to cover shortfalls up to 30% of funds. Above that, depositors could face losses.
What is the difference between Aave on Ethereum vs. Aave on Arbitrum?
Both use the same Aave V3 protocol code. The main differences are gas fees (Arbitrum is far cheaper), available assets (slightly different across networks), and interest rates (different supply/demand dynamics per network). Ethereum mainnet is the most liquid; Arbitrum offers lower costs for the same protocol security.
Do I need to actively manage my Aave position?
If you are only supplying (not borrowing), no active management is needed — interest accrues automatically. If you are borrowing, you must monitor your health factor regularly and add more collateral or repay debt if it approaches 1.0, particularly during volatile markets. Many DeFi users set price alerts for their collateral assets to avoid being caught off-guard.