Boost Your Capital: Aave V3 E-Mode for Correlated Assets

Unlock More With Less: The Aave V3 E-Mode Advantage

Let's be real: in DeFi, capital efficiency is the holy grail. Standard lending protocols often leave a lot of your collateral's value on the table, limiting your borrowing power and tying up precious capital. With markets largely sideways right now, focusing on yield optimization and capital efficiency like this is absolutely key. We're not seeing the kind of volatility that pushes trending assets like Pepe to new ATHs, but rather a more measured approach—perfect for optimizing existing positions. This is where Aave V3's E-Mode really shines, especially when you're working with highly correlated assets like stETH and ETH.

Honestly, setting up an E-Mode position with stETH and ETH can feel like a cheat code once you understand it. It drastically increases your Loan-to-Value (LTV) ratio, letting you borrow more ETH against your staked ETH. Most guides just scratch the surface, but we're going to dive deep into the practicalities, risks, and the specific steps needed to set this up right. Trust me, I've seen too many people miss out on this due to fear or simply not knowing the ropes.

What You'll Need Before Starting

Before we jump in, let's make sure your toolkit is ready. You don't want to get halfway through and realize you're missing something crucial.

• A Web3 Wallet (like MetaMask or Ledger): Connected to the Ethereum Mainnet. Make sure it's funded with enough ETH for gas—Ethereum can get spicy on gas, especially during network congestion.
• Some stETH (or another correlated asset pair): For this tutorial, we'll assume you have stETH (Lido Staked ETH) that you're ready to deposit as collateral. If you don't have stETH yet, you'll need to acquire it first, either by staking ETH on Lido or swapping for it on a DEX.
• ETH for Borrowing: You'll be borrowing ETH against your stETH, so think about what you want to do with that borrowed ETH.
• Basic Understanding of DeFi Lending: You should know what collateral, borrowing, LTV, and health factor generally mean. We'll go over them in this context, but a baseline understanding helps.
• Estimated time: 15-20 minutes for the actual Aave setup, plus whatever time you need to acquire stETH.

Step 1: Connecting Your Wallet and Navigating to Aave V3

First things first: head over to the official Aave V3 application. Be extremely careful about phishing links—always double-check the URL to ensure it's app.aave.com. Seriously, this isn't optional. I've seen users lose thousands because they clicked a malicious link.

Once you're on the right site, connect your Web3 wallet. You'll typically see a 'Connect Wallet' button in the top right corner. Select your wallet provider (e.g., MetaMask), approve the connection, and then choose the Ethereum Mainnet if it doesn't default to it. Aave V3 is deployed on several chains, but E-Mode for stETH/ETH is primarily an Ethereum Mainnet play.

Now, before we do anything else, let's talk about why we're choosing stETH and ETH. The magic of E-Mode really comes alive with assets that are highly correlated—meaning their prices tend to move in tandem. stETH and ETH are practically Siamese twins. One stETH token is designed to eventually be redeemable for one ETH after the Merge (and Shanghai upgrade, which enabled withdrawals), so their prices track each other incredibly closely. This tight correlation minimizes liquidation risk from price divergence, making it a perfect candidate for E-Mode's higher LTVs.

Pro tip

Always, and I mean always, check the current market conditions for your chosen correlated assets. While stETH/ETH correlation is generally solid, temporary de-pegs can occur, especially during extreme market stress. Look at a chart comparing stETH to ETH (like on TradingView or CoinGecko) to get a feel for their current peg. Don't just assume it's 1:1 at all times; a slight discount can impact your health factor more than you'd think.

Step 2: Activating E-Mode and Supplying Your stETH

Once your wallet is connected and you're on the Ethereum Mainnet deployment of Aave V3, you'll see a dashboard showing your current positions (if any) and available markets.

To activate E-Mode, you first need to understand what it is. E-Mode, or Efficiency Mode, is a feature unique to Aave V3 that allows borrowers to achieve significantly higher LTVs for assets within the same E-Mode category. The 'stETH/ETH' category is one such example. It's essentially a grouping of assets that the Aave governance community has deemed highly correlated and thus eligible for boosted capital efficiency.

Here's how you activate it:

1. Find the E-Mode toggle: On your Aave dashboard, usually under your 'Supply' or 'Borrow' sections, there's an 'E-Mode' toggle or button. Click on it.
2. Select the 'stETH/ETH' category: A menu will pop up showing different E-Mode categories. Find and select the 'Staked ETH (stETH) & ETH' category. This tells Aave that any stETH you supply and ETH you borrow will be treated with the preferential E-Mode LTVs. Confirm the selection.
3. Supply your stETH: Navigate to the 'Supply' section. Find stETH in the list of available assets. Click on it. Enter the amount of stETH you wish to supply as collateral. Before confirming, make sure the 'Use as collateral' toggle is on (it usually is by default for collateral assets).
4. Approve and Confirm: Your wallet will prompt you to approve Aave to spend your stETH (if it's your first time or you've revoked permissions). This is a standard ERC-20 token approval. Confirm that transaction. Once approved, you'll then confirm the actual supply transaction. Both of these will incur gas fees.

You've just supplied your stETH as collateral within the E-Mode framework. You should now see your supplied stETH on your dashboard, and your 'Borrowing Power' should reflect the boosted LTV—for stETH/ETH, it's typically around 97%, which is phenomenal. Compare that to the standard LTV for ETH, which might be 82.5%. It's a massive difference.

Pro tip

Keep an eye on gas fees. During high gas periods (think 100+ gwei, which isn't unheard of on Ethereum Mainnet), these transactions can get pricey fast. Check a real-time gas tracker (like Etherscan's gas tracker) before initiating to avoid unexpected costs. Sometimes waiting 10-15 minutes can save you a significant amount in fees.

Step 3: Borrowing ETH and Actively Managing Your Health Factor

Now for the fun part: borrowing! With your stETH supplied and E-Mode activated for the stETH/ETH category, you're ready to borrow ETH.

1. Navigate to the 'Borrow' section: On your Aave dashboard, find ETH in the list of available assets to borrow. Click on it.
2. Choose your borrowing amount: Aave will show you your maximum borrowing capacity. You'll see your 'Health Factor' adjust as you input different amounts. This is the most critical metric to watch.
3. Understand the Health Factor: Your Health Factor indicates the safety of your loan. A Health Factor of 1 means you're at the liquidation threshold. Anything below 1, and your position is eligible for liquidation. With E-Mode at 97% LTV, a slight move can send your Health Factor plummeting if you borrow near the max. I personally aim for a minimum Health Factor of 1.25-1.5, especially in neutral markets like we're experiencing, to give myself a buffer. You can use our Health Factor Calculator to play with different scenarios before you commit.
4. Select your interest rate mode: Aave typically offers two options:
   • Stable Rate: More predictable, but can be adjusted by Aave governance. Generally higher than variable rates.
   • Variable Rate: Fluctuates based on supply and demand for borrowing ETH. Can be cheaper but also riskier if demand for borrowing ETH suddenly spikes. For this strategy, either can work, but most users opt for the variable rate to minimize borrowing costs, especially if you plan to loop or just hold the ETH.
5. Confirm the borrow transaction: Review all details, then confirm the transaction in your wallet. Again, gas fees will apply.

Once confirmed, you'll see the borrowed ETH in your wallet, and your Aave dashboard will update with your outstanding debt and current Health Factor. This is your live position, and it needs active management. Monitoring your Health Factor constantly is paramount. I recommend setting up alerts through tools like DefiLlama or Token Terminal, or even a simple calendar reminder to check your position daily. A sudden, albeit unlikely, de-peg event between stETH and ETH or a spike in borrowing interest could quickly erode your buffer. For more in-depth risk assessment, try our Aave Position Simulator to stress-test your position against different price movements.

Pro tip

Never, ever borrow the absolute maximum amount. It's a rookie mistake that can cost you dearly. The 97% LTV for E-Mode is fantastic for capital efficiency, but it leaves almost zero room for error. A tiny fluctuation (like stETH going from 0.999 ETH to 0.995 ETH), or even just increased network congestion delaying your ability to repay, could push you below the 1.0 Health Factor. Always leave a buffer—I'd suggest targeting a Health Factor above 1.05 at minimum, but closer to 1.15-1.2 if you plan to sleep at night.

Common Mistakes to Avoid

I've been in DeFi long enough to see these mistakes play out repeatedly. Learn from others' pain, not your own.

1. Ignoring the De-peg Risk: Contrary to popular belief, stETH isn't always exactly 1:1 with ETH. While the long-term peg is solid (due to redeemability), temporary de-pegs can and do happen. During the UST/LUNA implosion in May 2022, stETH traded at a noticeable discount to ETH. Many users who borrowed near max LTV using stETH as collateral faced liquidation. If stETH drops even a few percent against ETH, your Health Factor will plummet. Always remember that even highly correlated assets carry some divergence risk.
2. Borrowing at Max LTV Without a Buffer: We just talked about this, but it bears repeating. Borrowing at 97% LTV is tempting because it feels incredibly efficient, but it's a tightrope walk. During high gas periods (100+ gwei on Ethereum Mainnet isn't unheard of), an emergency repayment can get pricey fast. If your Health Factor dips to 1.01 and you need to act quickly, you're paying top dollar for gas. Use a tool like our Liquidation Price Calculator to understand your exact danger zone. Trust me, I've seen users lose thousands because they thought they had 'just enough' buffer, only for a small market blip or gas spike to catch them out.
3. Forgetting About Borrowing Interest Rates: While the immediate focus is on LTV and Health Factor, remember you're incurring debt. Variable rates can be, well, variable. If ETH borrowing demand spikes, your interest rate could increase significantly, eating into your profits or even pushing your Health Factor down if your accumulated debt starts to weigh too heavily on your collateral value. Check the current APY for borrowing ETH on Aave and factor it into your calculations. You can simulate loan costs with our Loan Cost Calculator to be sure.
4. Not Actively Monitoring Your Position: This isn't a "set it and forget it" strategy. You absolutely need to monitor your Health Factor, stETH/ETH peg, and ETH borrowing rates regularly. A 5% dip in the stETH/ETH peg combined with a sudden spike in ETH borrowing costs could turn a healthy position toxic very quickly. Set up notifications or religiously check your Aave dashboard. Debank and Zapper are excellent dashboards for a quick overview of your entire DeFi portfolio, including Aave positions.

Quick Reference Summary

Let's condense the essentials. Screenshot this, bookmark it, tattoo it on your arm—whatever works.

• Goal: Maximize ETH borrowing against stETH using Aave V3 E-Mode.
• Key Asset: stETH (Lido Staked ETH) as collateral.
• E-Mode Category: Select 'Staked ETH (stETH) & ETH' for ~97% LTV.
• Health Factor Target: Aim for >1.15, ideally 1.25+, to provide a solid buffer against market moves or de-pegs. Never borrow near max LTV.
• Monitoring: Continuously track your Health Factor and the stETH/ETH peg. Set alerts.
• Risks: Temporary stETH de-peg, high variable borrowing rates, gas spikes impacting emergency actions.
• Tools: Aave Position Simulator, Health Factor Calculator, Liquidation Price Calculator.

What's Next?

So, you've successfully set up your E-Mode position and have some freshly borrowed ETH in your wallet. What's next for that ETH? This is where the real strategies begin.

Many users will "loop" this borrowed ETH back into stETH by swapping it for more stETH (or restaking it through Lido), then depositing that new stETH back into Aave as collateral, and repeating the borrowing process. This amplifies your exposure to ETH staking yield and your overall borrowing power. Be warned, though: looping increases your effective LTV and thus your liquidation risk. Each loop compounds both potential gains and losses, so proceed with extreme caution and a deep understanding of the mechanics. Our Borrowing Power Calculator can help you visualize the leverage.

Alternatively, you might use the borrowed ETH for other DeFi opportunities—perhaps providing liquidity on a DEX, farming on another protocol, or simply holding it for a spot trade if you're bullish. Just remember that whatever you do with the borrowed ETH, your Aave loan is still active, and its health factor is paramount. Always keep a close eye on the value of your collateral relative to your debt. This is an advanced strategy, but with careful execution and constant monitoring, E-Mode can genuinely transform your capital efficiency in DeFi. For a broader view on lending, check out our DeFi Lending Guide.

Good luck, and stay safe out there.

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Ready to put this knowledge into action? Try our Aave Position Simulator to simulate your positions and optimize your DeFi strategy risk-free.