Introduction

Borrowing tokens from the Aave Protocol enables participants to access liquidity against supplied collateral tokens. This process requires maintaining sufficient collateral and understanding the associated risks, such as liquidation. Borrowers must maintain that their collateral remains adequate to cover the borrowed amount, as falling below the required collateralization level could lead to liquidation. The interest rates for borrowed tokens are dynamically determined by the protocol based on factors like the borrow utilization rate and governance parameters, which can change through community decisions.

Borrowing can be performed through protocol smart contracts or through a frontend such as the Aave Labs interface by performing the following steps:

Step 1: Connect Wallet

To begin, press ‘Connect Wallet’ and select the Ethereum wallet provider corresponding to the wallet holding the collateralized tokens.

Step 2: Select Token to Borrow

Once connected, navigate to the ‘Dashboard’ and locate the ‘Assets to Borrow’ table. This table lists the available tokens for borrowing, along with key parameters such as available amount, interest rates, and your health factor. The interest rates displayed here are influenced by the borrow utilization rate, which measures the proportion of assets currently borrowed against the total supplied in the pool. As liquidity is borrowed or repaid, these rates are dynamically adjusted to reflect current market conditions.

Select the token you wish to borrow.

Step 3: Review Borrow Parameters

Before proceeding, review the borrow parameters including the Loan-to-Value (LTV) ratio, Liquidation Threshold (LT) ratio, and your current health factor. These parameters are crucial for maintaining sufficient collateral and avoiding liquidation.

If you are borrowing a network base asset (e.g., ETH), you will first need to approve the WrappedTokenGateway contract. This approval enables the contract to perform a credit delegation, which performs a borrow and unwraps to the base asset in a single transaction.

Step 4: Confirm Borrow Transaction

Enter the amount you wish to borrow and confirm the transaction in your wallet. Upon confirmation, the borrowed tokens will be transferred to your wallet. It's important to note that interest on the borrowed tokens begins to accrue immediately and is dynamically adjusted based on the borrow utilization rate.

Step 5: Monitor Health Factor

Regularly monitor your health factor from the ‘Dashboard’ to verify that your collateral remains sufficient. If your health factor drops, consider supplying more collateral or repaying part of your borrow position to avoid liquidation. The health factor is a critical indicator of the safety of your borrow position, and maintaining it above the liquidation threshold is essential to prevent your collateral from being liquidated.