Buy Aave

Aave is a decentralised lending protocol. It lets people deposit cryptocurrency to earn interest, or use their cryptocurrency as collateral to borrow other assets, without a bank or broker in the middle. AAVE is the token used to govern it.

It began as ETHLend in 2017, a peer-to-peer lending project founded by Stani Kulechov, and relaunched as Aave on Ethereum in January 2020. The name is Finnish for ghost. It now runs on Ethereum and a number of other networks compatible with the Ethereum Virtual Machine. Our guide to decentralised finance covers the wider category Aave belongs to, and our guide to centralised finance explains the model it was built as an alternative to.

How does lending on Aave work?

Aave does not match individual lenders to individual borrowers. Deposits go into shared pools, and borrowers draw from those pools. That is what makes it work at scale: you do not have to wait for a counterparty.

• Supplying. Deposit an asset and you receive an interest bearing token in return, which represents your position in the pool and increases as interest accrues. You can redeem it for the underlying asset.
• Borrowing. You must post collateral worth more than you borrow. How much you can borrow against a given asset is set per asset by governance, because volatile collateral supports less debt than stable collateral.
• Interest rates. Rates are not set by a committee. They move algorithmically with pool utilisation, so the more of a pool that is borrowed, the more expensive borrowing becomes and the more suppliers earn.
• Liquidation. Every borrowing position has a health factor. If collateral falls in value or debt grows until that health factor drops below one, anyone can repay the debt and take the collateral at a discount. Liquidation is automatic, permissionless and mostly performed by bots.

Aave has been rebuilt several times. Aave V4 introduced a Hub and Spoke design: a Liquidity Hub holds the pooled assets and enforces system wide limits, while Spokes are the individual markets that connect to it, each with its own collateral types, risk settings and liquidation rules. Capital supplied through one Spoke becomes available to every Spoke on that Hub, which is intended to stop liquidity fragmenting across chains and asset types. Earlier V3 markets continue to operate alongside it. The official Aave documentation is the primary technical source.

One thing to correct, because it is still widely repeated: Aave used to offer a choice between stable and variable borrowing rates. Stable rate borrowing was disabled in November 2023 after a vulnerability was disclosed, and it has since been deprecated. Borrowing on Aave is variable rate.

What is a flash loan?

A flash loan is an uncollateralised loan that must be borrowed and repaid inside a single blockchain transaction. If it is not repaid, the entire transaction reverts as though it never happened, so the lender cannot be left short. Aave introduced the mechanism in 2020.

The legitimate uses are mostly professional: arbitraging a price difference between venues, swapping the collateral behind a loan without closing it, refinancing debt from one protocol to another, and funding liquidations.

They are also, fairly, a documented criticism of decentralised finance. Flash loans have been used as the funding tool in attacks on other protocols, typically by borrowing a large amount to distort a price feed within a single transaction. The loan itself is not the vulnerability, but it lowers the capital required to attempt one, and European regulators have noted the pattern.

What does the AAVE token do?

AAVE is a governance token. Holding it lets you vote on proposals that change the protocol, including which assets are listed, how much can be borrowed against each one, and how revenue is used. Holders can vote directly or delegate their voting power to someone who votes actively.

Governance has also approved using protocol revenue to buy AAVE on the open market, which is how value generated by the protocol is directed back toward the token rather than paid out as a dividend. The mechanics of that programme are set by governance and have changed more than once, so the Aave governance forum is the place to see what is currently in force.

Buying AAVE is not the same as lending on Aave

This is the most common misunderstanding, and it is worth being direct about.

When you buy AAVE, you are buying a governance token. You are not depositing into a lending pool, you are not earning the protocol's lending interest, and you have not taken out a loan. AAVE held in a CoinJar account does not accrue interest from Aave's borrowers, because it is not supplied to the protocol.

Supplying assets to earn interest is a separate activity that happens on the protocol itself, through a self-custody wallet, and it carries its own risks including smart contract failure. Buying AAVE is exposure to the governance token of a lending protocol. It is not a deposit account and it is not a yield product.

What is GHO?

GHO is a stablecoin native to Aave, designed to track the US dollar and created by borrowing it against collateral in Aave markets rather than by a company holding cash reserves. Interest paid by GHO borrowers flows to the Aave treasury rather than to a private issuer, and its parameters are set by governance. Our guide to stablecoins explains how the different backing models compare.

What are the risks of holding AAVE?

• Smart contract risk. Aave is code holding a large amount of value. It is heavily audited and runs a bug bounty, but audits reduce risk rather than remove it.
• Oracle risk. Borrowing and liquidation depend on external price feeds. If a feed is wrong or manipulated, positions can be liquidated incorrectly or debt can go unbacked.
• Bad debt. If collateral cannot be sold fast enough during a liquidation, the protocol can be left with debt it cannot recover. This has happened.
• Governance risk. Voting power is concentrated among large holders and delegates. Decisions that change risk settings, revenue use or token mechanics are made by that process, not by you individually.
• Competition and dependence. Aave competes with other lending protocols, and its markets depend heavily on stablecoins as collateral. Problems in a major stablecoin would transmit into Aave.
• Regulatory attention. Decentralised lending is an active area of regulatory interest in multiple jurisdictions, and rule changes could affect how the protocol operates or who may access it.
• Volatility. AAVE is not a stablecoin. Its value moves sharply and can fall substantially.
• No government compensation. Digital assets are not covered by the Australian Government's Financial Claims Scheme. If you lose value, there is no compensation scheme to fall back on.

Buying AAVE with Australian dollars on CoinJar

CoinJar has operated since 2013 and lists AAVE against Australian dollars, so you can buy, sell and hold it without converting through another cryptocurrency first. Current charges are on our fees page, and live Australian dollar rates are on our cryptocurrency prices page.

CoinJar Australia Pty Ltd is registered with AUSTRAC as a digital currency exchange provider, Registration No. DCE100749118-001.

How is AAVE taxed in Australia?

The ATO generally treats AAVE as a capital gains tax asset. A CGT event can occur when you sell it for Australian dollars, exchange it for another cryptoasset, spend it or give it away.

The ATO explains these rules on its official guidance page. Our guide to crypto tax in Australia provides a practical overview. This is general information, not tax advice. Consider speaking to a registered tax agent about your circumstances.