Short answer. Aave is a decentralised lending protocol. You supply crypto such as stablecoins or ETH and earn variable interest paid by borrowers, who must post more collateral than they borrow. Rates move with how much of each asset is borrowed. Risks include smart contract bugs, liquidations and stablecoin depegs, so start small and understand each market.
Last updated 30 October 2026
What Is Aave?
Aave is a decentralised, non-custodial liquidity protocol. Users supply assets to earn yield, and borrowers take loans against collateral they deposit. Interest rates, collateral checks and liquidations all run on chain through smart contracts, so there is no company holding your funds or approving loans.
The Collective Shift Knowledge Hub lists Aave as the lending protocol members most often use to supply crypto and earn interest, or to borrow against collateral at variable rates.
Aave V3 and Aave V4
Aave V3 organises lending into separate markets, one pool per market and network. Aave V4 launched on Ethereum mainnet on 31 March 2026 and uses a Hub and Spoke design. A Liquidity Hub holds shared liquidity and accounting, while Spokes are modules for specific use cases, asset types or risk profiles. You interact with a Spoke, and the Spoke routes liquidity to and from the Hub.
According to Aave's documentation, this lets governance add features or markets without moving liquidity, and keeps the risk of each Spoke separate. Both versions are live in 2026, so always check which version and network the market you are using runs on.
How Supplying and Earning Interest Works
When you supply an asset, it joins the pool that borrowers draw from, and you earn a share of the interest they pay, after protocol fees. Your supplied balance grows as interest accrues, and you can withdraw as long as there is enough unborrowed liquidity in that market.
Rates are set by a utilisation curve. Utilisation is the share of an asset's liquidity that is currently borrowed. Below an optimal level, the borrow rate rises gradually. Above it, the rate rises sharply to attract more supply and encourage repayment. The supply rate follows the borrow rate, so it changes constantly with demand. That is why this guide does not quote rates: check the live figure in the Aave app before you supply.
How Borrowing and Liquidation Work
Borrowers must deposit collateral worth more than their loan. Aave tracks each position with a health factor: eligible collateral value divided by debt. If the health factor falls below 1, for example because the collateral's price drops, the position can be liquidated. A liquidator repays part of the debt and receives some of the collateral at a bonus.
In V4, liquidators repay only enough debt to bring the position back to a target health factor set for each Spoke, and the liquidation bonus scales with how unhealthy the position is. Interest also accrues on a loan over time, which slowly lowers the health factor unless you repay or add collateral.
How to Supply Assets on Aave
- Open the official app at app.aave.com, typed directly or from a saved bookmark, never from a search ad.
- Connect a self-custody wallet such as a hardware wallet with a browser extension.
- Choose the network and market, and check whether it is a V3 market or a V4 Spoke.
- Review the asset's current supply rate, utilisation and any supply caps.
- Select Supply, enter a small test amount, approve the token and confirm the transaction.
- Track your position in the dashboard and withdraw the same way when you are done.
Risks to Understand Before You Use Aave
- Smart contract risk: a bug in the protocol or an integrated contract could cause losses.
- Liquidity risk: if most of an asset is borrowed, withdrawals can be delayed until borrowers repay or new supply arrives.
- Collateral and oracle risk: sharp price moves, or a faulty price feed, can trigger liquidations.
- Stablecoin risk: a stablecoin can lose its peg, which affects both suppliers and borrowers.
- Governance risk: Aave's parameters are set by its DAO and can change.
In Australia, interest earned from DeFi lending is generally treated as ordinary income. Keep records of every supply, withdrawal and interest payment, and speak to a registered tax agent about your situation.
Watch: Ben Simpson on this topic
Key takeaway: Ben explains realistic ways to earn income on crypto, why very high advertised returns are not sustainable, and the risks to understand first.
What Collective Shift research says about Aave in 2026
The Research Hub has tracked Aave's newest version through 2026. Aave V4 launched on Ethereum mainnet on 31 March 2026 with institution-specific borrowing environments and real-world-asset-backed lending. V4 deposits reached a then record of US$806 million on 28 August 2026, after a 30% rise over seven days.
On 26 September 2026, the Hub recorded a new Aave V4 market on Base that lets eligible non-US holders of seven Coinbase-issued stock tokens borrow USDC against them. It is an early sign of traditional assets being used as collateral on chain.
- Check the version and network before you supply.
- Start with a small test transaction.
- Keep any borrowing well above a health factor of 1.
- Record every transaction for tax.
“Just a quick disclaimer, everything in crypto is super risky, especially when you're trying to earn an income on your crypto.”
Ben Simpson, Founder of Collective Shift (April 2026), in How To Earn Income On Your Crypto (Without Getting Wrecked)
Where this guide comes from
This guide is written and reviewed by the Collective Shift research team. Collective Shift is a crypto research and education company founded in 2020 in Melbourne, and a research and education partner to Coinbase, Swyftx and CoinSpot. Sources used in this update:
- Video: How To Earn Income On Your Crypto (Without Getting Wrecked), Ben Simpson on YouTube (2026-04-06)
- Collective Shift Knowledge Hub: Knowledge Hub tool profile: Aave (May 2026) (ref 403371e2), original source: aave.com
- Collective Shift Knowledge Hub: Research Hub: Aave V4 launches on Ethereum mainnet (31 Mar 2026) (ref 81915703), original source: thedefiant.io
- Collective Shift Knowledge Hub: Research Hub: Aave V4 deposits reach US$806 million (28 Aug 2026) (ref 19b16fe2), original source: thedefiant.io
- Collective Shift Knowledge Hub: Research Hub: Aave V4 market on Base accepts tokenised stocks as collateral (26 Sep 2026) (ref abf70aab), original source: thedefiant.io
- Official documentation: Aave documentation: Aave V4 overview
Last updated 30 October 2026. General information only, not financial advice. Consider your own circumstances and seek professional advice before making investment decisions.
Frequently Asked Questions
What is Aave V4?
Aave V4 is the latest version of the Aave protocol. It launched on Ethereum mainnet on 31 March 2026 and uses a Hub and Spoke design, where a shared Liquidity Hub supplies modular Spokes that each have their own risk settings.
Why doesn’t this guide quote Aave interest rates?
Aave rates are variable and change with how much of each asset is borrowed, so any figure goes out of date quickly. Check the live supply rate in the official Aave app before you supply.
Is interest earned on Aave taxable in Australia?
Generally yes. DeFi interest is usually treated as ordinary income rather than a capital gain. Keep records of each transaction and get advice from a registered tax agent for your situation.
Where can I learn to earn yield more safely?
The Collective Shift Accelerator membership is a 12-month guided program that starts with 4 live weeks and covers research, portfolio planning and security. More free guides are on Collective Shift Insights.