Aave lets you deposit crypto into a shared pool to earn interest, or post that deposit as collateral and borrow against it. No credit check, no loan officer. The entire relationship is enforced by a health factor: the moment yours drops below 1.0, the protocol lets strangers sell your collateral at a discount.
That single number is where beginners get hurt. This walkthrough covers how the pools work, what liquidation actually costs, and the specific steps of a first borrow-and-lend cycle.
How Aave's lending pools work
Aave runs on smart contracts deployed across several chains. Suppliers deposit assets into a pool; borrowers draw from that same pool after posting collateral worth more than the loan. Rates aren't fixed by anyone. They float with utilization, the share of a pool currently borrowed.
Supplying vs. borrowing
Supply USDC and you receive aUSDC, a receipt token that grows in value as interest accrues. That token is what you redeem later. Borrowing gives you no token, only debt. Your supplied assets become the collateral backing it, which is why most active users end up doing both at once.
Why utilization moves rates
When 90% of a pool's USDC is out on loan, remaining supply is scarce and rates climb. At 20% utilization, rates sit low. Check this number before taking a variable-rate loan, because you're exposed to it moving.
The health factor, without jargon
Your health factor is one number measuring how close you are to liquidation. Above 1.0, you're fine. Below 1.0, any liquidator can repay part of your debt and seize collateral plus a bonus.
A concrete example
Deposit $1,000 of ETH on a market with an 80% loan-to-value ratio. The protocol permits an $800 loan. Take $400 instead. Now ETH has to lose more than half its value before your health factor approaches danger. Take the full $800 and a modest dip puts you on the edge. The difference between those two positions is one decision made at the start.
What liquidation costs you
Liquidators receive a discount on the collateral they seize, commonly in the 5–10% range depending on the asset. That discount comes out of your position. You don't just lose the borrowed amount; you lose the bonus on top, plus any fees that applied.
Step by step: your first borrow and lend cycle
Connect a wallet, switch to your chosen network, and hold enough of the native gas token to cover several transactions. Then:
- Supply an asset you're comfortable holding long-term. Stablecoins are the gentlest starting point.
- Check the collateral toggle. Some assets can be supplied but not used as collateral, and this trips people up.
- Borrow less than the maximum. Half the limit is a reasonable training-wheels setting.
- Watch your health factor for a few days before borrowing more.
- Repay whenever you like. No fixed term, but interest accrues every block.
One detail rarely mentioned upfront: every borrow, repay, and collateral toggle is a separate transaction with its own gas cost. On a congested network, a handful of small adjustments can cost more than the interest you were trying to optimize.
Risks the dashboard won't show you
Oracle and stablecoin risk
Aave prices collateral through oracles. A bad price report, even a brief one, can trigger liquidations. Stablecoin depegs cause the same problem from the other direction: your "safe" collateral isn't worth what the dashboard claims.
Rate spikes on volatile assets
Variable borrow rates on thinly traded assets can climb quickly. A rate that looks trivial today may not be tomorrow. If you're borrowing something exotic, check whether a stable rate option exists, though those carry their own tradeoffs.
| Action | What you get | Main risk |
|---|---|---|
| Supply | Yield-bearing receipt token | Smart contract and oracle risk |
| Borrow | Liquidity without selling | Liquidation if health factor drops |
| Loop (supply + borrow + resupply) | Amplified yield or exposure | Amplified losses, faster liquidation |
Frequently asked questions
Do I need to repay my Aave loan by a certain date?
No. Aave loans have no fixed maturity, so a position can stay open indefinitely as long as your health factor holds above 1.0. Interest accrues the whole time, which means an untouched loan can quietly grow larger than you expect. Partial repayments along the way keep the debt from compounding against you.
What happens if my health factor hits 1.0?
You don't get a warning call. Once the health factor dips below 1.0, liquidators can repay part of your debt and take collateral at a discount. You keep whatever's left, but the position shrinks and the penalty is real money. Set an alert well above 1.0 so you have room to react.
Can I borrow and lend the same asset?
Technically yes, and some people do it to farm incentives, but the economics rarely work in your favor. You'd pay a borrow rate on the same asset you're earning a supply rate on, and the borrow rate is almost always higher. The gap is the protocol's revenue, not yours.
Is looping a good strategy for beginners?
Looping means supplying collateral, borrowing against it, and supplying the borrowed amount again to multiply exposure. It magnifies gains and losses alike, and each cycle pushes your health factor closer to liquidation. Get comfortable with a plain borrow first, then decide whether the extra risk is worth it.
Before you deposit anything, open a position small enough that losing it wouldn't change your week, and set a price alert on your collateral at a level that gives you at least a day to respond.