Decentralized Finance (DeFi) continues to reshape how individuals interact with financial services, and at the forefront of this revolution stands Aave, one of the most influential and widely adopted decentralized lending platforms. In this second part of our detailed guide, we dive into the role of the AAVE token, explore its governance mechanics, and walk you through a step-by-step real-world demonstration of using Aave for deposits, borrowing, and claiming rewards.
Whether you're new to DeFi or expanding your crypto strategy, understanding Aave’s ecosystem is essential. Let’s unlock how you can leverage this powerful protocol while managing risks effectively.
👉 Discover how to maximize your DeFi returns with secure, innovative tools
Understanding the AAVE Token and Governance
Aave operates as a decentralized autonomous organization (DAO), meaning it's community-governed rather than controlled by a central authority. The AAVE token serves as the governance token, empowering holders to propose and vote on changes to the protocol — such as risk parameters, new asset listings, and fee structures.
But what makes AAVE truly unique isn't just governance — it's the dual incentive model that rewards users not only for supplying assets but also for borrowing them.
How AAVE Rewards Work
When you interact with Aave — whether depositing or borrowing — you earn AAVE token rewards distributed over time. This means:
- Deposit rewards: You earn interest on your supplied assets plus AAVE incentives.
- Borrowing rewards: Even when you take out a loan, you may receive AAVE tokens — sometimes enough to offset or even exceed the borrowing cost.
Yes, there are scenarios where Aave effectively pays you to borrow.
For example, during promotional periods or market incentives, the yield from AAVE rewards might surpass the variable interest rate on a loan like WBTC or ETH. However, these opportunities are often short-lived due to dynamic rate adjustments that occur with every blockchain block.
⚠️ Important: While high reward rates can make borrowing look profitable, always calculate net returns after accounting for token price volatility. Since AAVE’s market value fluctuates like any cryptocurrency, your final yield could vary significantly.
Step-by-Step Guide: Using Aave in Practice
Let’s walk through the actual process of using Aave — from connecting your wallet to depositing assets, borrowing funds, and claiming rewards.
Step 1: Access the Platform
Go to the official Aave website at aave.com and click "Enter App". You’ll be prompted to connect your Web3 wallet — commonly MetaMask or WalletConnect.
Once connected, you’ll land on the Markets dashboard.
Step 2: Explore the Markets Dashboard
The Markets page displays all available cryptocurrencies on Aave, including:
- Deposit APY (Annual Percentage Yield)
- Borrow APY
- AAVE reward rates
- Total supply and borrow volume
Key Metrics to Watch:
- Deposit APY: Your total return from interest + AAVE rewards.
- Borrow APY: The interest you pay (top) and the AAVE rewards you earn (bottom).
- Stable Rate Option: Some assets allow you to lock in a fixed interest rate, which offers predictability despite typically being higher than variable rates.
👉 Start earning yield on your crypto assets today — explore DeFi opportunities
Depositing Assets (Collateralization)
To borrow funds on Aave, you must first deposit collateral. But not all tokens qualify.
For instance:
- USDT cannot be used as collateral (marked “No” under Used as Collateral).
- ETH, DAI, and other major assets typically can.
Critical Risk Parameters for Collateral
When viewing an eligible asset like ETH, pay attention to three key values:
- Maximum LTV (Loan-to-Value): Up to 80%. This means $100 worth of ETH can secure up to $80 in loans.
- Liquidation Threshold: At 82.5%, if your LTV exceeds this level, your position is at risk of liquidation.
- Liquidation Penalty: A 5% fee is charged if liquidated — incentivizing users to maintain healthy collateral ratios.
📌 Example: If ETH drops sharply in value and your loan balance rises above 82.5% of your collateral value, the system will automatically sell part of your ETH to repay debt — at a 5% discount to market price.
To deposit:
- Click “Deposit” next to your chosen asset.
- Approve the transaction in your wallet.
- Confirm — your funds are now earning yield and available as collateral.
Borrowing Cryptocurrency
After depositing collateral, navigate to the Borrow tab. Aave will display your available borrowing limit based on your current collateral.
Smart Borrowing Tips:
- Never borrow up to your maximum limit if your collateral is volatile (e.g., ETH).
- Sudden price drops can trigger liquidations quickly.
- Always maintain a buffer — aim for an LTV below 70% during high volatility.
To borrow:
- Select the asset you want (e.g., DAI, USDC).
- Enter the amount.
- Confirm the transaction via your wallet.
You now hold borrowed funds — use them for trading, liquidity provision, or other DeFi strategies.
Claiming AAVE Rewards
Your earned AAVE rewards are visible under the My Dashboard section. To claim them:
- Click “Claim”.
- Sign the transaction in your wallet.
But here’s a crucial detail:
When you claim, you don’t receive AAVE directly — you get stkAAVE, which stands for staked AAVE.
What Is stkAAVE?
stkAAVE is a derivative token representing staked AAVE. It automatically participates in protocol security and governance with enhanced voting power. However:
- To convert stkAAVE back to AAVE, initiate the “Cooldown” process under the Stake section.
- The cooldown period lasts 10 days.
- Only after completion can you unstake and transfer or trade your AAVE tokens.
This mechanism ensures stability and long-term commitment within the Aave ecosystem.
Frequently Asked Questions (FAQ)
Q: Can I lose money using Aave?
A: Yes. Risks include liquidation due to collateral price drops, smart contract vulnerabilities, and reward volatility. Always monitor your position health.
Q: Why can’t I use USDT as collateral?
A: Some stablecoins like USDT have lower collateral eligibility due to perceived risks around centralization and reserve transparency. Protocols often favor more decentralized alternatives like DAI.
Q: Are AAVE rewards guaranteed?
A: No. Reward rates change frequently based on protocol incentives and funding pools. High yields today may drop tomorrow.
Q: What happens if I get liquidated?
A: Part of your collateral is sold at a discount (e.g., 5%) to repay debt. You lose both assets and face penalties — avoid high LTV ratios.
Q: Is Aave safe to use?
A: Aave is one of the most audited and trusted DeFi protocols. However, no system is risk-free. Use strong security practices (hardware wallets, 2FA) and understand each action before confirming.
Q: Can I earn passive income with Aave?
A: Absolutely. By depositing stablecoins or other assets, you earn interest plus potential AAVE rewards — a powerful combo for yield generation.
Final Thoughts
Aave represents a cornerstone of modern DeFi — offering secure lending, borrowing, and yield opportunities without intermediaries. Its innovative use of governance tokens, dynamic risk models, and user incentives sets a benchmark for decentralized finance platforms worldwide.
By mastering how to deposit wisely, borrow responsibly, and claim rewards strategically, you position yourself to benefit from one of crypto’s most robust financial ecosystems.
👉 Secure your crypto future — begin your DeFi journey now
Remember: Knowledge is power in DeFi. Stay informed, stay cautious, and let protocols like Aave work for you — not against you.