How is AAVE different from an aToken (e.g., aUSDC, aETH)?

AAVE is the protocol’s governance/utility token (including for voting and the Safety Module). aTokens are deposit “receipts”: when you supply an asset, you receive the corresponding aToken; its balance/value reflects the interest accrued on your deposit.

What is the Health Factor and why is it critical for a borrower?

The Health Factor is a safety indicator for a position: it depends on collateral value, outstanding debt, and the asset’s risk parameters. If it drops below 1, the position becomes liquidatable and part of the collateral can be sold with a liquidation bonus.

Why does the Safety Module exist and what is the main risk of staking AAVE?

The Safety Module is the protocol’s “insurance buffer”: in stress events, slashing (partial loss) can be applied to stakers to cover a deficit; in return, incentives/rewards are provided.

Why do Aave rates change, and how does “stable” differ from “variable”?

Rates are set algorithmically by liquidity supply and demand in the pool (utilisation). Variable adjusts continuously; stable aims to be more predictable, but it can still be rebalanced by the protocol under certain market/pool conditions.

How does Aave earn money / monetise if it’s a DeFi protocol?

The economics are built around interest spreads/fees in pools and parameters set by governance (e.g., reserve factor); some revenue can be directed to reserves and/or protocol modules via DAO decisions.

What should you watch for before using Aave on L2/other networks?

Beyond standard smart-contract risks, consider network/bridge risks (if you move assets), differences in risk-management parameters across markets, and the liquidity of a given chain (which impacts slippage and liquidations).

What is Aave (AAVE)

Aave is a non-custodial DeFi money-market protocol: users supply liquidity and borrow against collateral, while AAVE holders participate in protocol governance.

Launch 02.10.2020 Ethereum (ERC-20)

Who created it

Stani Kulechov (founder; the project started as ETHLend and was later rebranded as Aave).

Why it was created

To create an open, algorithmic liquidity market without intermediaries, where users can earn yield on deposits and borrow against collateral under transparent rules and DAO-led governance.

How it’s used

Supply assets to pools and earn interest
Borrow against collateral with a variable or “stable” rate (where available)
Use flash loans for arbitrage/refinancing/DeFi composability (where integrations support it)
Participate in governance (voting on parameters/upgrades)
Stake AAVE in the Safety Module as a protocol backstop/insurance mechanism (with slashing risk if a deficit occurs)

Risks

High volatility and market cycles: AAVE is not a stablecoin; its price depends heavily on the broader crypto market and risk appetite.
“Value capture” risk (weak linkage between token price and protocol revenues): AAVE is primarily a governance token; higher usage does not guarantee that economic value flows directly to the token (it depends on DAO decisions and monetisation design).
Governance risk (DAO decisions can change the rules): votes can alter risk parameters, asset listings, incentives, security modules, etc.; there is also a risk of governance capture by large holders/coalitions.
Liquidation and stress-scenario risk: during sharp market moves, borrower positions can be liquidated; in extreme cases, deficits (bad debt) may arise, affecting protocol robustness and expectations of the backstop.
Slashing risk for participants in protocol protection (Umbrella / Safety Module): if you stake into protection modules, part of the stake can be cut to cover a deficit; conditions and slashing levels are defined by design and governance votes.
Systemic collateral risk (depeg/devaluation/freezing of assets): issues with specific collateral assets (stablecoins, tokens, RWA wrappers) can translate into pool deficits and trigger coverage mechanisms.

FAQ

How is AAVE different from an aToken (e.g., aUSDC, aETH)?: AAVE is the protocol’s governance/utility token (including for voting and the Safety Module). aTokens are deposit “receipts”: when you supply an asset, you receive the corresponding aToken; its balance/value reflects the interest accrued on your deposit.
What is the Health Factor and why is it critical for a borrower?: The Health Factor is a safety indicator for a position: it depends on collateral value, outstanding debt, and the asset’s risk parameters. If it drops below 1, the position becomes liquidatable and part of the collateral can be sold with a liquidation bonus.
Why does the Safety Module exist and what is the main risk of staking AAVE?: The Safety Module is the protocol’s “insurance buffer”: in stress events, slashing (partial loss) can be applied to stakers to cover a deficit; in return, incentives/rewards are provided.
Why do Aave rates change, and how does “stable” differ from “variable”?: Rates are set algorithmically by liquidity supply and demand in the pool (utilisation). Variable adjusts continuously; stable aims to be more predictable, but it can still be rebalanced by the protocol under certain market/pool conditions.
How does Aave earn money / monetise if it’s a DeFi protocol?: The economics are built around interest spreads/fees in pools and parameters set by governance (e.g., reserve factor); some revenue can be directed to reserves and/or protocol modules via DAO decisions.
What should you watch for before using Aave on L2/other networks?: Beyond standard smart-contract risks, consider network/bridge risks (if you move assets), differences in risk-management parameters across markets, and the liquidity of a given chain (which impacts slippage and liquidations).