Aave

How-to articles

Aave borrowing is a position managed from collateral to repayment

Aave borrowing is an overcollateralized position: you supply an approved asset, enable it as collateral, borrow within its loan-to-value limit, and repay principal plus accrued interest before withdrawing freely. Capacity comes from collateral value and market parameters, while the health factor measures how close the position sits to liquidation. Interest starts accruing when borrowed assets reach the wallet. Repayment reduces debt immediately; collateral leaves only when the remaining position still satisfies protocol rules and reserve liquidity is available.

Bottom line: It is an overcollateralized DeFi workflow where collateral LTV sets capacity, pool utilization drives interest.

Health factor 1 is the hard boundary

The Aave health factor reaches its critical boundary at 1. A position below 1 becomes eligible for liquidation because its threshold-adjusted collateral no longer covers its debt. Falling collateral prices, rising debt-asset prices, and accrued interest push the number down. Supplying more collateral or repaying debt pushes it up.

Aave V3 applies specific close-factor rules after that boundary is crossed. Up to 50% of the debt is eligible when the health factor remains above 0.95 and both collateral and debt are worth at least $2,000. Up to 100% becomes eligible at 0.95 or below, or when either side is below $2,000. Partial liquidations must not leave less than $1,000 of collateral or debt.

For context, Aave V4 restores an eligible account toward a governance-defined target health factor instead of relying on V3's normal 50% close factor. It also uses a $1,000 dust threshold. Position management should happen before either engine activates, since a submitted supply or repayment changes the health factor only after onchain execution.

Choose the chain and market before supplying collateral

The chain and Aave market determine the collateral list, borrowable assets, risk parameters, and gas token. A position exists on one deployment; collateral on another network contributes nothing to it. Ethereum uses chain ID 1, Avalanche C-Chain uses 43114, Arbitrum One uses 42161, Base uses 8453, Optimism uses 10, and Polygon PoS uses 137.

For Aave borrowing, identical tickers do not create a shared balance across chains. USDC held on Base cannot support debt on Ethereum until the assets are transferred and supplied there. Availability also differs by market: WETH, wstETH, GHO, and USDC are established assets, yet each deployment applies its own collateral permissions and caps.

Signing authority changes the confirmation workflow. MetaMask commonly controls an externally owned account, Ledger keeps signing keys in hardware, and Safe supports configurable multisignature policies.

These tiers classify transaction authorization. They do not measure collateral volatility or the solvency margin of the position.

Convert supplied assets into borrowing capacity

Realistically, Aave collateral status converts an eligible supplied asset into borrowing capacity. The account's available capacity equals collateral value multiplied by the applicable loan-to-value ratio, less existing debt. An asset assigned 0% LTV adds no new capacity even when it remains supplied and continues participating in the market's supply accounting. For the underlying detail, read Aave checklist.

LTV values are expressed as percentages and implemented with basis-point precision. One basis point equals 0.01%, while 10,000 basis points equal 100%. Governance sets a separate LTV for each reserve or market configuration. Supply caps limit deposits, borrow caps limit debt in one asset, and Isolation Mode debt ceilings cap aggregate borrowing against isolated collateral.

Enabling collateral is therefore only one condition. The debt asset must be borrowable in the selected market, caps must have headroom, and the proposed borrow must leave the account above its liquidation boundary. Aave V4 adds another choice: the Spoke defines collateral rules while its connected Hub supplies the liquidity.

Read LTV, liquidation threshold, and health factor together

For most users, Aave's LTV, liquidation threshold, and health factor answer three different questions. LTV limits how much new debt the account can open. The liquidation threshold marks how much collateral value counts before liquidation eligibility. Health factor combines all collateral thresholds and debt values into one account-level measure.

The formula divides total collateral value multiplied by its weighted average liquidation threshold by total debt value. A health factor of 2 means threshold-adjusted collateral equals twice the debt. A reading of 1.25 means the numerator equals 125% of the debt; it does not promise that every collateral asset can fall exactly 25% before liquidation.

Chainlink price feeds provide reference prices for many established Aave assets. The displayed health factor moves as those oracle prices change and as debt interest accrues. A new borrow, collateral withdrawal, collateral toggle, or partial repayment triggers another solvency calculation before the transaction succeeds.

Confirm the borrow and identify the debt balance

An Aave borrowing transaction transfers the selected asset to the recipient and records debt against the account. The confirmation screen should identify the network, market or Spoke, token, amount, variable rate, and projected health factor. The wallet signature authorizes that exact call; changing networks changes the contracts and account state involved.

During normal operation, Aave V3 routes the action through its Pool contract. The reserve transfers ERC-20 tokens and records variable debt through debt-token accounting. Aave V4 sends the request through a Spoke, which validates collateral and caps before its Hub transfers liquidity and records drawn shares. Both designs update interest-bearing debt rather than creating a fixed installment schedule.

Borrowed tokens remain ordinary wallet assets after settlement. Moving, swapping, or supplying them elsewhere does not alter the original debt. WETH debt remains denominated in WETH, while USDC debt remains denominated in USDC. The obligation changes only through repayment, interest accrual, or liquidation.

Interest accrual follows utilization and risk pricing

That said, Aave interest accrual begins when the debt is created and continues without a fixed maturity date. In V3, reserve utilization moves the variable borrow rate along a two-segment curve around an optimal utilization point. Governance configures the base rate, optimal point, and two slopes for each interest-rate strategy.

Crucially, Aave V4 separates the cost into a Hub base rate and a Spoke-level risk premium. Hub utilization prices the shared liquidity, while collateral composition determines the premium attached to the borrower. Adding or removing collateral can therefore change V4 pricing even when the borrowed asset and principal remain unchanged.

At a protocol level, Aave V3 expresses percentages with 10,000 basis points equal to 100%, uses 10^18-unit wad precision for many values, and uses 10^27-unit ray precision for rates and indexes. Network gas is separate from protocol interest. On Ethereum, EIP-1559 fees combine gas usage with a base fee and optional priority fee, so that transaction cost remains live rather than fixed.

Repay without leaving a residual balance

Before any of that matters, Aave repayment reduces principal and stops future interest on the amount cleared. The payer needs the correct debt asset on the same chain, plus the network's gas token. An ERC-20 approval authorizes the relevant Pool or Spoke to transfer repayment funds before the repayment call executes.

Token precision matters near a full close. USDC uses 6 decimals, so one USDC contains 1,000,000 base units. WETH and GHO use 18 decimals, making one whole token equal to 10^18 base units. Because debt grows between quote and settlement, manually entering the displayed balance can leave a small remainder.

A full-repayment option accounts for accrued debt at execution and clears the recorded balance when sufficient tokens are available. A partial repayment lowers debt and raises health factor without releasing collateral automatically. In V3, variable debt tokens are reduced or burned; in V4, the corresponding debt shares are reduced.

Withdraw only what the remaining account supports

More broadly, Aave withdrawal is constrained by account solvency and available reserve liquidity. With active debt, the protocol calculates the health factor after the proposed withdrawal. The call reverts if removing collateral would leave the account below the required boundary, even when the dashboard shows a large supplied balance.

Available liquidity creates a second limit. Supplied assets that other accounts have borrowed are not immediately present in the reserve or Hub for withdrawal. Repayments and new supplies restore liquidity. The maximum withdrawable amount is therefore the smallest of the supplied balance, the unused collateral margin, and the liquidity available for transfer.

Disabling an asset as collateral follows the same solvency rule. After full repayment, confirm that debt reads zero before toggling collateral status or withdrawing. Wrapped assets can require a gateway when the requested output is a network base asset such as ETH rather than WETH.

Isolation Mode and eMode rewrite the position rules

Equally, Aave V3 Isolation Mode and eMode change which collateral and debt combinations the account accepts. Isolation Mode permits one isolated asset to serve as collateral and restricts borrowing to governance-approved assets, commonly selected stablecoins. Its debt ceiling applies across all borrowing backed by that isolated collateral, not only to one wallet.

V3 eMode applies category-specific LTV, liquidation threshold, bonus, and borrowing permissions to correlated assets. The contract design supports up to 255 categories, although each deployment exposes only configured categories. Liquid eModes allow an asset to belong to multiple categories. Selecting a category still confines borrowing to its permitted set.

Siloed borrowing imposes another boundary: a siloed debt asset must be the account's only borrowed asset. Aave V4 expresses comparable segmentation through dedicated Spokes, including correlated-asset Spokes. Correlation supports tighter parameters; it does not make two assets identical or prevent their market prices from separating.

V3 pools and V4 Hubs change the dependency map

Under normal conditions, Aave V3 and Aave V4 expose the same position lifecycle through different architectures. V3 keeps liquidity, reserve parameters, and account operations within a market's Pool system. V4 places shared liquidity in Hubs while Spokes enforce collateral eligibility, health-factor rules, caps, risk premiums, and liquidation settings.

V4 launched with three Liquidity Hubs on Ethereum. Its Avalanche deployment launched with one Core Hub serving a Main market, an AVAX Correlated market, and a Forex market. V3 remains relevant across networks including Arbitrum One, Base, Optimism, Polygon PoS, and other governed deployments, so version and market selection remain part of every position.

After the first pass, Aave V4 received approximately 345 cumulative days of security review, involving four audit firms, four independent researchers, and a six-week public contest with more than 900 verified participants. Review depth does not change the borrower's arithmetic. The durable workflow remains collateral first, measured debt second, continuous health monitoring, full repayment, and a final withdrawal after the debt record reaches zero.

Aave borrowing: reader questions

Posted: 2026-08-05