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Using the AAVE lending market.

· 7 min read

We have now reached lending markets, and I am currently on the largest lending platform in the entire crypto ecosystem — AAVE. I will be using it on the Avalanche blockchain. It is available on many networks: Arbitrum, Fantom, Optimism, Ethereum, Polygon, and Avalanche.

Version V2 is also available. It is an older version, but there is nothing wrong with using it — it works perfectly fine. However, V3 is more advanced, so I will demonstrate everything using V3.

The first step to interacting with the platform is connecting your wallet. You already know how this works: click Connect, choose Browser Wallet, and your main wallet will be connected automatically.

On the left side, you can see all available assets that can be supplied as collateral. Now I will show, in detail, how the borrowing process works and why you might want to use it.

I can supply Bitcoin, Ethereum, or other assets as collateral. In the Markets section, you can see all supported assets. Next to each one, you can see the annual yield you earn for supplying it to the platform.

For example, supplying stablecoins yields around three percent per year, supplying wrapped Bitcoin yields around four percent per year, and so on. These yields are small — very small — which is why I would not consider AAVE as a platform for earning money through supply APY alone.

The main purpose of AAVE and other lending markets is the ability to borrow funds against your assets: against Bitcoin, Ethereum, staked Avalanche, or stablecoins. In this example, I will demonstrate how to use your staked token sAVAX as collateral.

If you remember the staking module, I staked regular AVAX and received sAVAX. This token simply sits in my wallet and earns about seven and a half percent annually relative to regular AVAX. So why not use it to build a simple strategy that allows you to increase your total yield on staked AVAX?

What can I do next? I can go to the Dashboard and supply my sAVAX by clicking Supply. It is important to pay attention to the two types of yields displayed in the asset section. The first yield, highlighted in black, is the main annual supply APY. Some assets also show a second, red yield value below it.

For example, for USDT:
— 3.5% — the base annual supply yield;
— 0.25% — additional yield paid in AVAX tokens.

This additional yield is provided by the Avalanche Foundation to encourage users to actively use the ecosystem. Therefore, by interacting with DeFi services (including AAVE), users earn a small additional reward in AVAX.

The same applies to sAVAX. Its base yield from supplying is zero because sAVAX cannot be borrowed. But there is additional yield in AVAX simply for supplying it as collateral. This is important to understand.

The platform also shows Total Borrowed, which is the total amount of assets borrowed by users. For example:

  • Total available: 219 million dollars
  • Borrowed: 116 million dollars
  • Borrow APR: 2.38%

Naturally, the supply APY is always lower than the borrow APR. The difference between these rates is how AAVE generates revenue. I will explain this in a later lesson.

For now, I need to supply my sAVAX to the platform. I will supply the full amount. The first transaction gives approval for AAVE to use my tokens. The second transaction actually supplies sAVAX as collateral. I click Supply sAVAX, and now my tokens are deposited.

The platform also offers to add the aSAVAX token to my wallet — and this is important. This token represents my share of the AAVE liquidity pool. It works similarly to staking MATIC and receiving MaticX. It is not a separate asset but an accounting token showing my share in the pool.

It appears as aAvalanche sAVAX. I receive the same amount in aSAVAX, and when I later withdraw my collateral, these tokens are burned and I receive my sAVAX back.

At this point, I have supplied 0.28 sAVAX.

· It already earns the base 7.5% annual staking yield.
· And I additionally receive 1.62% in AVAX for supplying it to AAVE.

So the total yield on my staked AVAX already exceeds 9% per year, entirely passively. This additional yield, highlighted in red, is accumulated here and can be claimed once a sufficient amount of AVAX has been collected.

Naturally, it only makes sense to claim rewards when the network fee is lower than the reward itself. My balance is only four dollars, so claiming rewards is currently unprofitable. However, with a larger portfolio, these rewards can be collected almost daily and reinvested.

Now an important part. Every asset on AAVE has a specific Loan-to-Value (LTV) ratio, which determines how much you can borrow against your collateral. For example, using sAVAX as collateral, I can borrow regular AVAX — and now I will show how this works.

To do this, I need to enable Efficient Mode. This mode allows borrowing the maximum possible amount of AVAX against sAVAX. I click to activate it and select the AVAX category because I will be borrowing AVAX. After activation, the available borrowing percentage increases relative to the value of my collateral. I enable the mode, click Approve, and now I can borrow up to ninety-two percent of the value of my sAVAX in regular AVAX. I will now explain why this is useful.

Next, I click Borrow, and I can borrow almost as much AVAX as I supplied. But I do not borrow the maximum amount, because even small market movements can cause liquidation. So I borrow 0.23 AVAX instead. I confirm that I understand the risks, click Continue, and take the loan.

The borrow rate is 5.82% per year — which is lower than my staking yield. My sAVAX earns around 7.5%, plus 1.62% additional AVAX rewards for supplying it — a total of about 9% annually, while the loan costs only 5.82%.

This difference in yields is the basis of the strategy. This is the simplest form of leverage. AAVE allows for far more advanced strategies, but here I demonstrate a basic example of increasing staking yield through borrowing.

I borrow AVAX and then stake it again using Benqi Finance. I stake exactly the amount I borrowed — 0.23 AVAX. This gives me new sAVAX — 0.2188 — which I then supply back into AAVE. I click Supply and add more sAVAX.

At this point, I am gradually creating leverage — expanding the size of my collateral with the same asset. My total sAVAX collateral becomes larger than my initial amount.

Now the increased total earns:

  • 7.5% base staking yield;
  • +1.62% in AVAX rewards;
  • +additional yield because of the leveraged collateral.

As a result, the yield on my original position rises to roughly 11% annually, because the collateral size has increased.

This process can be repeated multiple times. That is the idea behind the strategy. Of course, similar logic applies to other assets — you could supply bitcoin, borrow stablecoins, and provide liquidity on a DEX.

This lesson shows AAVE’s functionality: how collateral works, how borrowing works, and how these mechanics form the basis of DeFi strategies.

Full details about advanced AAVE strategies are provided in the module, including an up-to-date list of ready-to-use strategies suitable for different portfolios and yield preferences.

These materials are created for educational purposes only and do not constitute financial advice.