Learn · lending

Lending yield: income, liquidity and loss

A supplier earns because borrowers pay to use tokens. An increasing balance is a claim on the pool. It does not mean the same amount of cash is available to withdraw.

Start with Aave: lending, borrowing and liquidation. This version-independent teaching model uses fictional parameters, not an exact Aave implementation or a return forecast. No wallet or real funds.

Who pays the supplier?

Utilisation is the fraction of supplied tokens currently borrowed. Interest charged on those loans is divided between suppliers and a protocol reserve. The reserve factor is the fraction retained by the protocol. Idle cash earns no borrower interest in this model, so supplier APR is lower than borrower APR.

With 80% utilisation, 6% borrower APR and a 10% reserve factor, supplier APR is 6% × 80% × 90% = 4.32%. APR expresses an annual rate; it is not the amount earned over a 30-day period. Rates, utilisation and prices can change.

Fictional · computed in your browser

A claim can grow while cash stays scarce

Borrowed share: 80%Elapsed days: 30Unrecoverable principal: $0.00

You supply 1,000 of a total 10,000 dollar-pegged tokens (assumed $1 each). Borrowed share stays fixed. Simple interest; 10% reserve cut; no rewards or compounding. Loss is capped at borrowed principal and shared proportionally among suppliers here. This is a fictional loss allocation, not Aave’s loss-handling rules.

1 / 4 · Supply and borrow

Tokens lent out become receivables: a right to repayment, not cash in the pool.

Borrow APR / supply APR: 6.00% / 4.32%
Borrower interest accrued: $0.00
Supplier interest / reserve cut: $0.00 / $0.00
Pool cash: $2,000.00
Loan receivable after write-off: $8,000.00
All supplier claims / reserve claim: $10,000.00 / $0.00
Your interest / loss: $0.00 / $0.00
Your net gain or loss: $0.00
Your remaining claim: $1,000.00
Withdrawal paid / unpaid request: $0.00 / $0.00

Accounting check: cash + loan receivable = supplier claims + reserve claim. APR is an annualised rate under these assumptions, not a promised return. A withdrawal pays out an existing claim; it is not new income.

Try normal conditions first. Step through interest, loss and withdrawal. Then select liquidity stress: the claim grows, but there are only 100 tokens of cash. Finally select credit loss and compare your interest with your share of the write-off.

A withdrawal delay and a loss are different

When most tokens are borrowed, a reserve can have valuable loan claims but little cash. Withdrawals depend on liquidity returning through repayment or new supply. A request that cannot be fully paid now is not itself proof of permanent loss, and interest accrual alone does not replenish cash.

Bad debt means some amount owed cannot be recovered. The lab applies a fictional proportional reduction to supplier claims to make the loss visible. Actual protocols have their own reserve, deficit and recovery arrangements; the order of who absorbs losses is not modelled here.

Your claim is 1,010 tokens, but the pool has only 100 tokens available. What can this example pay immediately?1,010, because accrued interest is cash.At most 100 tokens, even though the accounting claim is larger.Nothing ever again; low liquidity always means total loss.

The downside belongs beside the rate

A high displayed rate can coincide with scarce liquidity. Contract exploits, oracle failures and unrecovered borrower debt can damage a reserve. A token depeg can reduce the dollar value of principal and interest even when the token balance rises. Incentive rewards, if present, have their own price risk; none are included here.

Supplying alone does not create a debt position to liquidate. A supplier who also borrows against collateral can face liquidation, and withdrawals may be restricted by that borrowing position. Removing borrowing risk does not remove contract, asset or liquidity risk.

You only supply tokens and never borrow. Which statement fits?A collateral-price fall automatically liquidates your supply.Interest guarantees that your principal cannot lose value.You have no borrowing position to liquidate, but other losses and withdrawal constraints remain possible.

Read the protocol sources

Aave explains supplying tokens, withdrawal constraints and V3 interest-rate strategy. Use the relevant market’s documentation for actual parameters and loss handling.