Awarded once after a correct answer.
Follow supplied liquidity and outstanding debt
Useful first : Stablecoins: reserves, pegs and redemption · Hot, warm and cold wallets
Reading path · 8 / 14 · Beginner
Aave is a liquidity protocol deployed on multiple networks.
The essentials
Aave is a liquidity protocol deployed on multiple networks. In the V3 model discussed here, suppliers deposit assets into reserves and borrowers draw liquidity under market rules. Funds are pooled rather than matching every borrower to an individual lender.
How it works
Suppliers receive aTokens representing their supplied position and accrued interest under the protocol’s accounting. Borrowing creates a debt position that also changes with interest. AAVE, an aToken and the underlying asset are different objects with different roles.
What to watch
Withdrawals depend on available liquidity and, where the deposit supports debt, the remaining collateral health. Parameters vary by asset, market and version. Supplying a stablecoin introduces both protocol exposure and stablecoin exposure. Do not assume the mechanics described for V3 apply unchanged to every deployment or future release.
Understand the details
A lending pool combines supplied assets and makes part of them available to borrowers under protocol rules. The supplier receives a claim represented by the protocol’s accounting or receipt token. The underlying assets can be borrowed, so the displayed supply balance is not identical to cash immediately available for every supplier to withdraw at once.
Boundaries and common mistakes
Supplying and enabling collateral are distinct choices. Borrowing creates debt that can accrue interest even while the user is inactive. Each market and network has its own assets, limits and risk settings. A token named similarly on another chain is not automatically the same reserve or an equivalent claim.
The mechanism at a glance
- 01Supply 1,000
- 02Borrow 700
- 03Available 300
- 04Repayment restores liquidity
Read these as connected concepts, not necessarily consecutive steps.
Read the explanation
A lending pool combines supplied assets and makes part of them available to borrowers under protocol rules. The supplier receives a claim represented by the protocol’s accounting or receipt token. The underlying assets can be borrowed, so the displayed supply balance is not identical to cash immediately available for every supplier to withdraw at once.
Put the mechanism into context
In a fictional reserve, users supply 1,000 units and borrowers draw 700. Ignore interest and reserve adjustments. Map the 300 units of available liquidity separately from supplier claims and borrower debt. Then consider a withdrawal request of 400.
Apply it in the workshop →What this mechanism does not guarantee
Supplying and enabling collateral are distinct choices. Borrowing creates debt that can accrue interest even while the user is inactive. Each market and network has its own assets, limits and risk settings. A token named similarly on another chain is not automatically the same reserve or an equivalent claim.
The distinction that changes the analysis
In a simplified pool with 1,000 supplied and 800 borrowed, only 200 remain available before other adjustments. The supplier’s recorded claim is not identical to immediate pool cash. Repayments and new deposits can change availability.
Explain it yourself
Revisit the case above. Name what is established, what remains to be checked and the evidence needed to conclude. A strong answer addresses both sides of the diagram.
Apply the lesson to a case
In a fictional reserve, users supply 1,000 units and borrowers draw 700. Ignore interest and reserve adjustments. Map the 300 units of available liquidity separately from supplier claims and borrower debt. Then consider a withdrawal request of 400.
Only 300 units are currently available in the simplified reserve. The rest is owed by borrowers. Claim value and immediate withdrawability are different concepts. Explain what repayment would change, without assuming an external guarantee or inventing a withdrawal queue that this market may not implement.
The lifecycle of an Aave loan
Supply
Supply supported collateral to the selected market. Contract and asset risks begin here.
Prepare a correction note
Describe the passage and the proposed correction. This creates a local note for you to share; it sends nothing. Do not include personal or confidential information.