What Is DeFi Lending? A Beginner's Guide to Using Aave [2026]

DeFi lending is a system that allows you to lend and borrow crypto assets using smart contracts. Because you can earn interest income without going through a bank, it has gained attention as a way to put your crypto assets to work. In this guide, we'll walk you through the specific steps using Aave, the largest lending protocol, in a step-by-step format.

What you'll learn in this guide

• ✅ How DeFi lending works
• ✅ Differences between major protocols in a comparison table
• ✅ How to use Aave step by step
• ✅ Risks and important considerations

DeFi lending is a service that enables lending and borrowing of crypto assets through smart contracts on the blockchain. Unlike traditional bank lending, there are no intermediaries — everything is processed automatically by programs.

• Supply/Deposit: You can deposit your tokens into the protocol and earn interest
• Borrow: You can deposit collateral and borrow different tokens

Compared to centralized lending services (CeFi), DeFi lending offers the following advantages:

• Available 24/7: Smart contracts process transactions automatically, with no business hour restrictions
• Transparency: Interest rates and collateral ratios are published on-chain and verifiable by anyone
• No custody required: You don't need to entrust your asset management to a third party

DeFi lending operates through three flows: "Supply," "Borrow," and "Liquidation."

Supply

Lenders deposit tokens into the protocol's liquidity pool. The deposited assets are automatically lent to borrowers, and lenders receive interest (Supply APY). Interest rates fluctuate in real time based on supply and demand.

Borrow

Borrowers deposit collateral exceeding the amount they wish to borrow. This is called "over-collateralization." For example, if you deposit $100 worth of ETH as collateral, you can borrow $70–80 worth of stablecoins. Borrowers pay interest (Borrow APY).

Liquidation

When the value of collateral falls below a certain threshold (liquidation threshold), the collateral is automatically sold. This is called "liquidation." To avoid liquidation, you need to keep your Health Factor above 1.0 at all times. Maintaining a comfortable collateral ratio is essential.

Let's compare the major DeFi lending protocols in a comparison table.

In this guide, we'll use Aave, the most widely used protocol, to walk through the actual steps.

What You'll Need

• Rabby Wallet
• ETH (testnet)
• Internet connection

If you're unfamiliar with how to set up a wallet or obtain testnet ETH, complete the following guides first.

Rabby Wallet User Guide

How to Receive Testnet Faucet — Your First Step to the Blockchain Practice Ground

If you'd like to try on the mainnet from the start, you'll need to prepare real funds.

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Connecting Your Wallet

Open Aave in your browser: https://app.aave.com/

Click the "Connect Wallet" button.

Select "Rabby Wallet" from the wallet list.

The Rabby Wallet app will launch and ask for connection permission — click "Connect."

For this tutorial, we'll use testnet ETH instead of real funds to learn the interface.

Click the gear icon in the upper right corner and turn on Testnet Mode to switch to the testnet.

Supplying Tokens

A list of available tokens will be displayed. Click the "Supply" button next to the token you want to lend (e.g., ETH).

Enter the amount you want to lend. Since this is a testnet, try about half of what you have.

Once entered, the following information will be displayed:

• Supply APY (Annual Percentage Yield): The interest rate you'll earn from supplying (variable rate on Aave)
• Collateral eligibility: Whether this asset can be used as collateral for borrowing

Click the "Continue" or "Supply" button.

The Rabby Wallet will launch and ask for transaction approval — click "Approve."

Once the supply is complete, a confirmation screen will appear.

Navigate to the "Dashboard" to view your supplied tokens and the interest being earned.

Your token supply is now complete. Your deposited tokens will start generating interest (0% on testnet).

Borrowing Tokens Using Collateral

The right side of the dashboard displays borrowing information.

The top shows your current borrows (Your borrows), and the bottom shows assets available for borrowing (Assets to borrow).

The Assets to borrow section shows a list of tokens you can borrow. The borrowable amount is determined by the value of your supplied tokens.

Click the "Borrow" button next to the token you want to borrow (e.g., GHO).

Click the Details button to view detailed information about the token you're borrowing.

Enter the amount you want to borrow. Try about 50% of your borrowable amount.

Once entered, the following information will be displayed:

• Health Factor: The state of your collateral ratio after borrowing. A value of 3.30 on the screen indicates a 330% collateral maintenance ratio relative to the borrowed amount. Since liquidation occurs below 1.0, maintain a comfortable margin

Click the "Borrow GHO" button. A confirmation screen will appear — review the details and click "Confirm."

The Rabby Wallet will launch and ask for transaction approval — click "Approve."

Once the borrow is complete, a confirmation screen will appear.

Navigate to the "Dashboard" to view your borrowed tokens and the interest you're paying.

DeFi lending offers significant benefits, but it's important to understand the following risks before using it.

Liquidation Risk

When the value of your collateral drops, your Health Factor falls below 1.0, and automatic liquidation (forced sale of collateral) is executed. Since crypto assets are highly volatile, always maintain a comfortable collateral ratio (Health Factor of 2.0 or above recommended).

Smart Contract Risk

DeFi lending operates on smart contracts, so there's a risk of fund loss if the code contains vulnerabilities. While major protocols like Aave have undergone multiple audits, the risk is never zero.

Variable Interest Rate Risk

Aave's interest rates fluctuate in real time based on supply and demand. Even if the rate is low at the time of borrowing, it can spike when demand increases. Check the dashboard regularly to monitor interest rates.

Tips for Reducing Risk

• Keep borrowing below 70% of your borrowable amount to maintain safety
• Check the dashboard regularly to monitor your positions
• Practice thoroughly on testnet before using real funds
• Consider diversifying across multiple protocols instead of concentrating on one

As you become more comfortable with DeFi lending, you can combine it with other DeFi services. For related knowledge, check out the following guides:

👉 What Is a Crypto Bridge?

👉 Introduction to Layer 2

What is DeFi lending?

DeFi lending is a service that allows you to lend and borrow crypto assets through smart contracts. Without going through a bank, lenders can earn interest and borrowers can borrow funds by depositing collateral.

What are the risks of DeFi lending?

The main risks are liquidation risk (forced sale due to collateral value decline), smart contract vulnerabilities, and interest rate fluctuations due to variable rates. Maintaining a comfortable collateral ratio is essential.

What kind of returns can you expect from DeFi lending?

It depends on the protocol and asset, but generally 2–8% APY for stablecoins and 1–5% APY for ETH. Yields fluctuate in real time based on supply and demand.

DeFi lending is a powerful way to earn interest income using crypto assets. In this guide, we covered the specific steps for supplying and borrowing on Aave.

Key takeaways

• DeFi lending works by depositing collateral to borrow tokens
• Always monitor your Health Factor and manage liquidation risk
• Practice thoroughly on testnet before using real funds
• Keep borrowing below 70% of your borrowable amount to maintain safety