// GLOSSARY -- DEFI

What is Aave?

1 min read Updated

Aave is the largest decentralized lending and borrowing protocol, enabling users to deposit assets to earn interest and borrow against collateral — operating across Ethereum and multiple L2 networks.

WHY IT MATTERS

Aave is DeFi's bank — but without the bank. Users deposit crypto to earn interest (as aTokens that accrue value), and borrowers access those deposits by posting overcollateralized positions. Interest rates adjust algorithmically based on utilization.

Key innovations: flash loans (uncollateralized same-transaction loans), credit delegation (allow others to borrow against your collateral), and rate switching (toggle between stable and variable rates). Aave V3 added efficiency mode for correlated asset pairs and cross-chain portals.

With billions in TVL across multiple chains, Aave has become essential DeFi infrastructure — the interest rate benchmark that other protocols reference.

FREQUENTLY ASKED QUESTIONS

How does Aave earn revenue?
A percentage of borrower interest goes to the protocol treasury (reserve factor). This ranges from 10-50% depending on the asset. AAVE token stakers provide a safety backstop.
What is the Safety Module?
AAVE token staking pool that acts as insurance. If the protocol suffers bad debt, staked AAVE can be slashed to cover it. Stakers earn rewards for providing this backstop.
Is Aave safe?
Aave is one of the most battle-tested DeFi protocols with multiple audits and years of operation. Risk is non-zero (smart contract risk, oracle risk, governance risk) but lower than most alternatives.

FURTHER READING

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