Aave is one of the largest decentralized money markets, allowing anyone to lend and borrow crypto assets across blockchains.
Aave consists of a decentralized system of lending pools. Users deposit assets they want to lend into a liquidity pool and borrowers draw from the pool when they want to take out a loan. Aave borrowers must first supply assets before they can borrow. Given the high volatility of crypto assets, borrowers must post more collateral than the value of the loan, or commonly referred to as overcollateralization. Interest rates on Aave are driven by market supply and demand. To facilitate this activity, Aave issues aTokens to lenders that reflect accruing interest on the underlying token.
Aave currently has two income streams that accumulate to the ecosystem reserve to support the Aave DAO and pay protocol contributors. The first income stream comes from flash loans, which incur a 0.09% service fee. This service enables users to borrow any available amount of assets without posting any collateral, as long as the liquidity is returned to the protocol within the same transaction block. The second income stream comes from a reserve factor introduced in V2 that allocates a share of borrowers' fees to the ecosystem reserve. Each supported asset has a reserve factor that determines how much goes into the reserve.
You earn lending fees on Aave by depositing your idle crypto assets to be used by borrowers looking for leverage. For newer markets, Aave also offers additional protocol incentives in its native AAVE token to bootstrap demand. You can further stake Aave in the safety module to backstop the protocol against bad debt to receive inflationary AAVE emissions.