Aave Borrowing Review 2025: Leading DeFi Protocol

Aave Protocol Overview

Aave is the largest decentralised lending protocol, enabling users to borrow cryptocurrency without intermediaries. Launched in 2020, Aave has become the gold standard for DeFi lending, with a total value locked of over $18B.

Quick Facts

• Launched: 2020 (evolved from ETHLend 2017)
• Type: Decentralized (DeFi)
• TVL: $18+ billion
• Chains: Ethereum, Polygon, Avalanche, Arbitrum, Optimism, Base
• Assets: 30+ cryptocurrencies
• Governance: AAVE token holders

What Makes Aave Unique

• Multi-Chain: Available on 6+ blockchains
• Flash Loans: Borrow millions without collateral (same transaction)
• E-Mode: Up to 97% LTV for correlated assets
• Rate Switching: Toggle between variable and stable rates
• Non-Custodial: You control your private keys

Learn DeFi borrowing basics in our Crypto Borrowing Guide .

Key Borrowing Features

Multi-Chain Deployment

Aave operates on multiple blockchains:

Ethereum (Main)

• TVL: $12B+ (largest)
• Assets: 30+ tokens
• Gas Fees: High ($10-50 per transaction)
• Best For: Large loans, maximum liquidity

Polygon

• TVL: $2B+
• Assets: 20+ tokens
• Gas Fees: Very low ($0.01-0.10)
• Best For: Small loans, frequent transactions

Avalanche, Arbitrum, Optimism

• TVL: $500M-1B each
• Gas Fees: Low to moderate
• Best For: Alternative ecosystems

Variable vs Stable Rates

Variable Rate

• How It Works: Changes based on supply/demand
• Typical Range: 2-9% APR
• Pros: Usually lower, can decrease
• Cons: Unpredictable, can spike
• Best For: Short-term loans, market watching

Stable Rate

• How It Works: Fixed at time of borrowing
• Typical Range: 3-11% APR
• Pros: Predictable payments
• Cons: Usually higher, can be rebalanced
• Best For: Long-term loans, budgeting

E-Mode (Efficiency Mode)

High efficiency for correlated assets:

• Stablecoin E-Mode: Borrow USDC with DAI collateral at 97% LTV
• ETH E-Mode: Borrow ETH with stETH at 90% LTV
• Benefit: Maximum capital efficiency
• Risk: Small price divergence can liquidate

Flash Loans

Unique Aave feature:

• Concept: Borrow without collateral
• Requirement: Repay in same transaction
• Amount: Millions possible
• Fee: 0.09% of borrowed amount
• Use Cases: Arbitrage, collateral swaps, liquidations
• Limitation: Requires programming knowledge

Supported Assets

Major Cryptocurrencies

• Bitcoin (WBTC)
• Ethereum (ETH, stETH, wstETH)
• Stablecoins (USDC, USDT, DAI, FRAX)

DeFi Tokens

• Uniswap (UNI)
• Chainlink (LINK)
• Aave (AAVE)
• Curve (CRV)

Layer 1 Tokens

• Avalanche (AVAX)
• Polygon (MATIC)
• Optimism (OP)

Interest Rates & Fees

Current Borrowing Rates (Variable)

• USDC: 3-8% APR
• USDT: 4-9% APR
• DAI: 4-9% APR
• ETH: 2-6% APR
• WBTC: 2-5% APR

Rate Determination

Rates adjust algorithmically:

• Low Utilization (0-80%): Gradual rate increase
• Optimal Utilization (80-90%): Moderate rates
• High Utilization (90-100%): Steep rate increase

Fee Structure

• Borrowing Fee: None
• Flash Loan Fee: 0.09%
• Liquidation Penalty: 5-10% depending on asset
• Gas Fees: Network dependent (Ethereum high, Polygon low)

Rate Comparison

Aave vs other platforms:

• Aave: 2-9% APR (variable)
• Compound: 3-11% APR
• MakerDAO: 1-4.5% APR (DAI only)
• Nexo (CeFi): 0-6.9% APR

How to Borrow on Aave

Prerequisites

• Crypto Wallet: MetaMask, WalletConnect, Coinbase Wallet
• Collateral: Supported cryptocurrency
• Gas Tokens: ETH, MATIC, AVAX (for transactions)
• No KYC: Anonymous, no identity verification

Step-by-Step Guide

Step 1: Connect Wallet

• Visit app.aave.com
• Click "Connect Wallet"
• Select your wallet (MetaMask, etc.)
• Approve connection

Step 2: Choose Network

• Select blockchain (Ethereum, Polygon, etc.)
• Consider gas fees vs liquidity
• Ensure you have gas tokens

Step 3: Supply Collateral

• Click "Supply" on the desired asset
• Enter amount to deposit
• Approve token spending (first time)
• Confirm supply transaction
• Wait for blockchain confirmation

Step 4: Enable as Collateral

• Toggle "Use as collateral" switch
• Confirm transaction
• Your borrowing power increases

Step 5: Borrow Assets

• Click "Borrow" on the desired asset
• Choose variable or stable rate
• Enter borrow amount
• Check health factor (keep above 1.5)
• Confirm borrow transaction

Step 6: Monitor Position

• Check health factor daily
• Add collateral if approaching 1.0
• Repay anytime to improve health

Health Factor Management

Critical metric for liquidation risk:

• Above 2.0: Very safe
• 1.5-2.0: Safe
• 1.2-1.5: Caution
• 1.0-1.2: Danger
• Below 1.0: Liquidation

Security Analysis

Smart Contract Audits

• Auditors: Trail of Bits, OpenZeppelin, Consensys, ABDK, Certora
• Frequency: Multiple audits per version
• Public: All audit reports available
• Bug Bounty: Up to $250,000 for critical bugs

Track Record

• Launched: 2020 (5+ years)
• Major Exploits: None
• TVL History: Consistently top 3 DeFi
• Governance: Decentralized, community-driven

Risk Factors

Smart Contract Risk

• Probability: Low (battle-tested code)
• Impact: High (could lose funds)
• Mitigation: Multiple audits, bug bounties

Oracle Risk

• Price Feeds: Chainlink oracles
• Risk: Incorrect prices could trigger liquidations
• Mitigation: Redundant oracle systems

Liquidation Risk

• Trigger: Health factor below 1.0
• Penalty: 5-10% of collateral
• Mitigation: Conservative LTV, monitoring

Insurance Options

• Nexus Mutual: Smart contract coverage
• InsurAce: Protocol insurance
• Cost: 2-5% annually
• Coverage: Smart contract exploits only

Pros and Cons

Advantages

• Largest DeFi Protocol: $18B+ TVL, maximum liquidity
• Non-Custodial: You control your keys
• No KYC: Anonymous borrowing
• Multi-Chain: 6+ blockchains supported
• Transparent: All transactions on-chain
• Flash Loans: Unique advanced features
• E-Mode: Up to 97% LTV efficiency
• Rate Options: Variable and stable rates
• Battle-Tested: 5+ years without major exploits
• Earn on Collateral: Supply interest while borrowing

Disadvantages

• Complexity: Steep learning curve for beginners
• Gas Fees: High on Ethereum ($10-50 per transaction)
• No Support: No customer service
• Smart Contract Risk: Code vulnerabilities possible
• Wallet Required: Must manage private keys
• Liquidation: Automatic, no grace period
• Rate Volatility: Variable rates can spike

Best Use Cases

• Privacy: No KYC required
• Large Loans: Deep liquidity available
• Multi-Chain: Access across ecosystems
• Advanced Users: Flash loans, E-Mode
• Long-Term: Earn on collateral while borrowing

Not Ideal For

• Complete beginners to crypto
• Users wanting customer support
• Those uncomfortable with wallets
• Small loans on Ethereum (gas fees)

Aave vs Competitors

Advanced Aave Features for Power Users

Flash Loans Explained

Aave pioneered flash loans - uncollateralized loans that must be borrowed and repaid within a single transaction block.

Flash Loan Use Cases

• Arbitrage: Exploit price differences across DEXs without capital. Borrow, trade, and repay in one transaction.
• Collateral Swap: Change collateral type without closing position. Flash loan to repay, withdraw old collateral, deposit new, reborrow.
• Self-Liquidation: Liquidate your own position to avoid liquidation penalty. Flash loan to repay debt, withdraw collateral, and keep more value.
• Refinancing: Move position between protocols for better rates without needing capital upfront.

Flash Loan Risks

• Technical Complexity: Requires smart contract development skills
• Gas Costs: Failed transactions still cost gas fees
• MEV Attacks: Miners can front-run profitable flash loan transactions
• Smart Contract Risk: Bugs in your code can lose funds

Aave Governance Participation

AAVE Token Utility

• Voting Rights: Propose and vote on protocol changes
• Safety Module: Stake AAVE to earn rewards and provide insurance
• Fee Discounts: Reduced borrowing fees for AAVE holders (future feature)
• Governance Rewards: Earn AAVE for active participation

Why Participate in Governance

• Influence Protocol: Vote on interest rate models, new assets, risk parameters
• Earn Rewards: Safety module staking provides 5-8% APY on AAVE
• Community Benefits: Help shape the future of DeFi lending
• Risk Mitigation: Vote for conservative risk parameters to protect your positions

Multi-Chain Strategy with Aave

Chain Selection Guide

• Ethereum: Highest liquidity, most assets, but expensive gas fees ($50-200 per transaction)
• Polygon: Low fees ($0.01-0.10), good for smaller positions, slightly lower liquidity
• Arbitrum: L2 scaling, moderate fees ($1-5), growing ecosystem
• Optimism: Similar to Arbitrum, good for medium positions
• Avalanche: Fast finality, moderate fees, smaller but growing
• Base: Newest deployment, lowest fees, limited assets currently

Optimal Chain by Position Size

• Under $5,000: Use Polygon or Base for minimal fees
• $5,000-$50,000: Arbitrum or Optimism for balance of fees and liquidity
• Over $50,000: Ethereum mainnet for maximum security and liquidity

Frequently Asked Questions

Is Aave safe for crypto borrowing?

Yes, Aave is one of the safest DeFi protocols with 5+ years of operation, multiple security audits by top firms, $18B+ TVL, and no major exploits. However, smart contract risk exists in all DeFi. Consider insurance for large positions.

What are Aave borrowing rates?

Aave variable rates range from 2% to 9% APR, depending on the asset and utilisation. Stable rates are typically 1-2% higher. Rates adjust algorithmically in response to changes in supply and demand. Check app.aave.com for current rates.

Do I need KYC to use Aave?

No, Aave is permissionless and requires no identity verification. You only need a cryptocurrency wallet, such as MetaMask. This provides privacy, but it also means there is no customer support available if issues arise.

What is the health factor on Aave?

Health factor measures your loan safety. Above 1.0 is safe, below 1.0 triggers liquidation. Formula: (Collateral Value × Liquidation Threshold) / Loan Value. Maintain above 1.5 for safety, ideally 2.0 or higher.

Can I switch between variable and stable rates?

Yes, you can switch rate types anytime by clicking "APR Type" in your dashboard and confirming the transaction. This flexibility helps optimise costs based on market conditions.

What are flash loans on Aave?

Flash loans let you borrow millions without collateral, but you must repay in the same transaction (10-15 seconds). Used for arbitrage, collateral swaps, and liquidations. Requires programming knowledge. Fee is 0.09%.

Which chain should I use on Aave?

Ethereum for large loans and maximum liquidity (high gas fees). Polygon for small loans and frequent transactions (very low fees). Arbitrum/Optimism for balance. Choose based on loan size and transaction frequency.

How do I avoid liquidation on Aave?

Keep health factor above 1.5, use conservative LTV (30-40%), monitor daily, set price alerts, maintain emergency collateral funds, and add collateral or repay when health factor drops below 1.8.

Start Borrowing on Aave

Sources & References

• Aave. (2025). "Aave Developer Docs". Technical documentation and borrowing mechanics.
• DeFi Llama. (2025). "Aave Analytics". TVL, usage statistics, and protocol metrics.

Related Crypto Borrowing Guides

• Complete Guide to Borrowing Crypto Securely
• Best Crypto Borrowing Platforms 2025
• Nexo Borrowing Review
• Nexo vs Aave Comparison
• CeFi vs DeFi Borrowing
• Crypto Borrowing Risks
• Liquidation Protection Strategies