Aave is the leading Decentralized Lending & Borrowing platform across multiple blockchain networks. With the use of smart contracts and liquidity pools, Aave allows you to lend your idle capital, borrow funds, and stake your AAVE tokens in a decentralized environment without any intermediary. Aave is also the 7th largest DeFi application running on Ethereum Network with 7.2 billion dollars in Total Value Locked. As of March 2022, AAVE is also the number one DeFi protocol on Avalanche and Polygon networks, with 2.95 and 1.28 billion dollars in total value locked respectively. If you wish to learn more about Aave, visit my previous article. This article is a comprehensive step-by-step guide on how to use Aave.
In addition to Ethereum, Polygon, and Avalanche, Aave recently opened markets on Harmony, Optimism, Arbitrum, and Fantom networks. By the time you read this article, you might be able to use Aave on other blockchain networks. Due to the high fees on Ethereum Network, I will use Avalanche Network in this guide. However, the same steps apply to all networks.
To use Aave, you will have to set up your Metamask wallet on Ethereum, Avalanche, or the corresponding network you intend to use Aave. In addition, you will require to have some tokens of the native currency used on the network. These tokens are needed to pay gas fees for each transaction. For instance, you must have ETH in your wallet for Ethereum, AVAX for Avalanche, MATIC for Polygon, etc.
Metamask is not the only non-custodial wallet you can use. Other non-custodial wallets you can use include Coinbase Wallet, Torus, Frame, and any other wallet that supports WalletConnect. However, for this guide, we use Metamask.
To set up Metamask, you can follow the guides below:
Finally, the other pre-requisite for this guide is to have available the tokens you wish to deposit in the protocol. Funds can be deposited to the protocol for liquidity provision, as collateral, or staking purposes.
How to Lend on Aave
Step 1: Select Network
Use the following link to navigate to Aave dApp: https://app.aave.com/. Click on the upper left of the screen and select the network you want to use.
Step 2: Connect your Wallet
Once you select the network, click on your screen’s upper right corner button to connect your Metamask wallet. If you select a different network in the previous step than the network currently connected to your Metamask, switch. Aave will notify you when you are connected to the wrong network when interacting with the platform.
Step 3: Supply your tokens
Below, at the bottom left of the screen, you will find all tokens available for deposit on the Aave platform, as indicated on the screenshot above. Sometimes, Aave shows you only the ones supported that you also hold in your wallet. If that is the case, click on the “Show assets with 0 balance”.
There are three values visualized on the screen associated with each asset:
- Wallet Balance: Shows you the amount of tokens you have available in your wallet
- APY: APY stands for Anual Percentage yield. It shows the expected return of each pool. For Aave V2 APY includes a per-second compounding rate. In some cases, below the existing APY percentage, you will find extra APY. This one indicates the reward incentives provided either by AAVE platform or the underlying network via AAVE. This is extra reward given to incentivize market participation.
- Can be collateral: It indicates whether this specific asset is supported as collateral (for borrowing)
To deposit your tokens:
- Select the pool you wish to deposit your funds
- Click “Supply”
- A pop-up will come up. Specify the amount you wish to deposit and click “Supply” again.
- Metamask will prompt you to sign the transaction. Sign the transaction.
- Well done, you’ve just provided liquidity on Aave
Step 4: Monitor your funds
Once you deposit your funds, they will appear in the “Your Supplies” section. This step on the screenshot above is indicated with the number 4.
In the “Your Supplies” section you can see:
- Balance: The amount of funds you have deposited in each pool.
- APY: The expected annual percentage yield on each pool.
- Collateral: With the radio button you can select whether you want to use these funds as collateral or not. That’s mainly needed in the case you wish to take out loan from the platform.
How to withdraw your funds from Aave
To withdraw your funds from the platform is straightforward:
- Click on the withdraw button as indicated in the screenshot above with number 1 (in green)
- Specify the amount you wish to withdraw in the pop-up window.
- If it’s the first time you interact with this function of the protocol, you will need to first “Approve to continue”. Sign the following transaction on your non-custodial wallet
- Final step, click “Withdraw”
How to Borrow on Aave
Step 1: Deposit Funds on Aave
First of all, to take out a loan from the platform, you will have to provide collateral. Follow steps 1-3 of the “How to Lend on Aave” section to provide collateral. Then, make sure you allow any deposited funds to be used as collateral. To achieve that, in Step 4 of the previous section, click on the “Collateral” button of your deposited funds.
Step 2: Specify the size of the loan
At the right bottom of the page, you can find all assets available for borrowing under the “Assets to borrow” section on your screen. On the screenshot above, this step is indicated with the number 2. Click on the “Borrow” button on the asset of your choice.
Next, a pop-up will come up where you need to specify the terms of your loan. You need to set the following parameters:
- Amount: The amount of assets you wish to borrow.
- Borrow APY rate: Allows you to switch between variable and stable interest rates. According to Aave, the variable interest rate can increase or decrease depending on the amount of liquidity in the reserve. The stable rate will stay stable for the duration of your loan.
- Transaction Overview: In this section, Aave will show you the Health Factor of your loan. The closer this number is to 1, the more unhealthy is your loan. Once your health factor reaches below 1, then a liquidation event will be triggered. That’s the most important part of your configuration. By achieving a high health factor, you minimize your risk.
Step 3: Borrow funds
Once you configure your loan, click on the “Borrow” button, as shown in the screenshot above (number 3). Metamask will prompt you to sign the transaction. Once the network executes your transaction, your loan will appear in the “Your borrows” section.
Step 4: Monitor your Debt
Once you have a running loan, you can monitor your position in the “Your borrows” section. In this section, you can find the following helpful information:
- Debt: The amount of your Debt per position.
- APY: The interest rate of your loan.
- APY Type: Here you can see whether you have a Stable of Variable rate on your loan. Aave also allows you to change it anytime.
- Borrow Power Used: This indicator shows you how much of debt you have as a percentage of the total amount you can take. The calculation is based on the value of your collateral.
- Repay: You can repay your loan whenever you want. Full amount or partially.
- Borrow: You can take out more loan directly on top of your existing position.
Step 5: Monitor your Portfolio
You can monitor your whole portfolio on the top of your screen – as indicated on the screenshot above with number 5. Three indicators are showing up in this section:
- Net Worth: The total value of the funds you have deposited in Aave. This includes all position such as loans, deposits and collaterals.
- Net APY: That’s the total return on your deposited funds. As above, it includes in the calculation both deposits and loans.
- Health Factor: Shows the overall health factor of your portfolio. If you click on the Risk Details, Aave explains you in detail how the whole risk is calculated. That’s the most important indicator you need to keep an eye on, in order to avoid a liquidation event.
Aave has a straightforward and elegant user interface. It makes it extremely easy for anyone to use. You can deposit funds or take out a loan with very few clicks. If you are interested in using leverage for whatever purpose you have in mind, Aave could be one of your choices. It is one of the most well-known lending platforms across multiple blockchain networks.