---
# System prepended metadata

title: Aave Mechanisms Review
tags: [LitReview]

---

---
tags: LitReview
---

# Aave Mechanisms Review

## Aave

### Summary

- Aave is an open source and non-custodial liquidity protocol for earning interest on deposits and borrowing assets.
- A pool of funds are used where borrowers provide liquidity and depositors can take loans (but must place collateral) and do not need to be individually matched.

![](https://i.imgur.com/HWZ8Phj.png)

![](https://i.imgur.com/ZGppfnP.png)


### Rates

- Rates are decided algorithmically based on the amount of funds within the pool. This effects both the borrowers and the lenders.
- Liquidity reserve is algorithmically safeguarded to ensure withdrawls can happen at any time.
- Every position can have a stable or variable borrow rate.
- Based upon the utilization rate (borrowed funds / total liquidity)

![](https://i.imgur.com/qP9iPi2.png)


### Pools

![](https://i.imgur.com/chhOzPB.png)

- Liquidity is defined as the total amount of ethereum and there are also reserve currencies.
- Collateral must be greater than or equal to the loan taken out.
- Borrows have an infinite duration and repayment can happen at any time through either partial or full payments.
- The amount one can borrow depends on the currencies deposited still available in the reserves. Every reserve has a specific Loan-To-Value (LTV), calculated as the weighted average of the different LTVs of the currencies composing the collateral, where the weight for each LTV is the equivalent amount of the collateral in ETH; figure 3 shows an example of parameters.

![](https://i.imgur.com/GbgInYN.png)

### Liquidation

- Price fluctuations can lead to a liquidation when collateral drops below a liquidation threshold.
- Reaching this ratio channels a liquidation bonus, which incentivizes liquidators to buy the collateral at a discounted price

![](https://i.imgur.com/zJwn1Kh.png)

![](https://i.imgur.com/WkyRwJj.png)

### Interest Accrual

- Depositors receive tokens which map to assets than accrue interest over time.
- The interest can be split out from the principal
- Interest is also accruing for the borrower over time which decreases the health factor and can lead to a liquidity event.

### Summary

- AAVE solves risks with overcollateralization only.
- In the context of streamr, this may not work because overcollateralization would defeat the purpose of delegation.


1. https://github.com/aave/aave-protocol/blob/master/docs/Aave_Protocol_Whitepaper_v1_0.pdf
