## Understanding Aave V3 Aave is a decentralized protocol that allows users to get over-collateralized loans. The protocol involves two types of users: the supplier and the borrower. The supplier will supply a token to the Aave protocol to earn some interest. For example, a user can supply DAI to the Aave protocol. This user’s DAI will then earn interest. On the other side, we have the borrower. Let’s say that this user wants to borrow the DAI that the supplier supplied. To do this, the borrower will need to get an over-collateralized loan. The first step for the borrower is to deposit collateral. For example, this user can supply ETH as collateral. And now this user can borrow tokens inside the Aave protocol, for example, DAI. There’s a limit to the amount of tokens that this user can borrow. The amount that they can borrow must be less than the amount of collateral that they supply. This is called an over-collateralized loan. For example, if this user provides one ETH and one ETH is equal to \$1,000, and DAI is one dollar. So the amount of DAI that this user can borrow will be less than \$1,000. The specific amount of tokens that this user can borrow from the Aave protocol will depend on the protocol settings for the collateral that was deposited. The borrowed tokens will accrue interest. So when this user decides to repay the amount of tokens that they borrowed, they’ll have to pay the amount that they borrowed, plus the interest that accrued on the amount of tokens that they borrowed. Part of the interest that the borrower repays will go to the supplier. This is how the supplier is able to earn some interest on the token that they supply.