When users supply tokens to the Aave Protocol, they earn interest on their digital assets while also gaining the ability to use those supplied tokens as collateral. Once supplied, the tokens are deposited into Aave’s liquidity pools — a network of smart contracts that enable overcollateralized borrowing.

Supplied tokens automatically start accruing interest, calculated dynamically based on the current market supply rate. As time progresses, the user’s balance increases to reflect the interest earned, adjusting in real-time according to market conditions.

The interest rates for suppliers are primarily determined by the borrow utilisation rate — the percentage of assets currently borrowed out of the total liquidity available in the pool. Additionally, these rates can be influenced by governance decisions, where Aave token holders adjust key parameters such as collateralization thresholds and interest rate models.

Critical inputs for these calculations include on-chain factors like:

• Total token balances,
• Price feeds from decentralized oracles,
• Current borrow utilisation ratios.

As liquidity is supplied, borrowed, repaid, or withdrawn from the pools, the supply and borrow rates are automatically updated to reflect the latest market conditions, ensuring a fair and transparent system for all participants.