Aave E-Mode: Maximize Capital Efficiency
E-Mode (Efficiency Mode) lets you borrow up to 97% of your collateral value when using correlated assets. Learn how it works, when to use it, and the risks involved.
What is E-Mode?
E-Mode (Efficiency Mode) is an Aave V3 feature designed for capital efficiency. It recognizes that borrowing one stablecoin against another (like USDC against DAI) is lower risk than borrowing against volatile assets like ETH.
Since both DAI and USDC target $1, the chance of a large price divergence is much smaller than ETH moving 30% in a day. E-Mode rewards this lower risk with:
- Higher LTV: Borrow more against your collateral (up to 97%)
- Higher liquidation threshold: More room before liquidation
- Lower liquidation penalty: Less loss if liquidated (typically 1%)
E-Mode vs Standard Mode
| Parameter | Standard | Stablecoin E-Mode |
|---|---|---|
| Max LTV | 77% | 97% |
| Liquidation Threshold | 80% | 97.5% |
| Liquidation Penalty | 5% | 1% |
Example: With $10,000 DAI collateral, you can borrow $7,700 USDC in standard mode vs $9,700 in E-Mode.
E-Mode Categories
E-Mode groups assets into categories based on price correlation. You can only use E-Mode parameters when both your collateral and borrowed asset are in the same category.
Stablecoins
Dollar-pegged stablecoins that should always be worth ~$1
ETH Correlated
ETH and liquid staking derivatives that track ETH price
Note: E-Mode categories vary by network. Ethereum mainnet, Arbitrum, and Optimism may have different assets in each category. Always check the Aave interface for your specific network.
How to Enable E-Mode
Connect your wallet and navigate to your dashboard.
Look for "E-Mode" or "Efficiency Mode" in your dashboard settings.
Choose "Stablecoins" or "ETH Correlated" based on your strategy.
Approve the transaction. E-Mode is now active for your position.
Important Restrictions
- You can only borrow assets within your selected E-Mode category
- Collateral outside the category uses standard (lower) LTV parameters
- You can have multiple collateral types, but E-Mode benefits only apply to matching assets
- Switching or disabling E-Mode requires sufficient Health Factor after the change
E-Mode Strategies
1. Stablecoin Carry Trade
Borrow one stablecoin at low rates to earn higher rates elsewhere.
Example: Deposit $10,000 USDC → Enable stablecoin E-Mode → Borrow $9,500 DAI @ 5% APR → Deposit DAI in higher-yield protocol @ 8% APY → Profit from the spread.
2. LST Leverage
Amplify ETH staking yield using liquid staking tokens.
Example: Deposit wstETH (earning ~4% staking yield) → Enable ETH E-Mode → Borrow ETH @ 2% APR → Swap ETH for more wstETH → Repeat for 2-3x leverage on staking yield.
3. GHO Minting
Use stablecoin collateral to mint GHO at favorable rates.
Example: Deposit $10,000 USDC → Enable stablecoin E-Mode → Mint up to $9,700 GHO at discounted rates (especially if you hold stkAAVE).
E-Mode Risks
E-Mode is designed for correlated assets, but "correlated" doesn't mean "identical." Here are the key risks:
Stablecoin Depeg Risk
If your collateral stablecoin loses its peg (like UST in 2022), you face rapid liquidation. At 97% LTV, even a 3% depeg puts you at liquidation risk.
LST Depeg Risk
Liquid staking tokens can trade at a discount during market stress. stETH traded at 6% discount in 2022. With 93% LTV, this could trigger liquidation.
Interest Rate Risk
With 97% LTV, even small interest accumulation can push you toward liquidation. Monitor your position and the accruing debt regularly.
Thin Margin for Error
The gap between 97% LTV and 97.5% liquidation threshold is only 0.5%. This leaves almost no room for price fluctuations or oracle discrepancies.
Best Practice
Even in E-Mode, consider borrowing at 80-90% of max LTV instead of the full 97%. This gives you buffer for interest accrual and minor price fluctuations.
When to Use E-Mode
Good Use Cases
- ✓Stablecoin carry trades with trusted stables
- ✓Leveraging LST yield with established tokens
- ✓Minting GHO with conservative LTV
- ✓Short-term positions you actively monitor
Avoid E-Mode When
- ✗Using algorithmic stablecoins as collateral
- ✗Can't monitor position during market stress
- ✗Planning long-term unmonitored positions
- ✗Using new/untested LST tokens
Frequently Asked Questions
What is E-Mode on Aave?
E-Mode (Efficiency Mode) is an Aave V3 feature that allows higher LTV ratios when borrowing assets that are correlated in price with your collateral. For example, borrowing USDC with DAI collateral can get up to 97% LTV instead of the usual 77%.
What assets can I use in E-Mode?
Aave groups correlated assets into E-Mode categories. The main ones are: Stablecoins (USDC, DAI, USDT, FRAX) and ETH-correlated (ETH, wstETH, rETH, cbETH). Only assets within the same category can benefit from E-Mode parameters.
Is E-Mode risky?
E-Mode is designed for correlated assets that should maintain similar prices. The main risk is a stablecoin depeg or liquid staking token losing its peg. While rare, these events can cause rapid liquidations due to the higher LTV.
Can I switch E-Mode on and off?
Yes, you can enable or disable E-Mode at any time through the Aave interface. However, if disabling E-Mode would put your Health Factor below the safe threshold, you'll need to repay debt or add collateral first.
What happens if an E-Mode asset depegs?
If your collateral depegs (loses its $1 peg for stablecoins), your position can be rapidly liquidated because E-Mode uses higher LTV. This is the main risk of E-Mode and why it should only be used with truly correlated assets.
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Educational Purpose: This content is designed to help you understand DeFi concepts and is not a recommendation to buy, sell, or hold any cryptocurrency or use any particular protocol. The examples and calculations shown are for illustrative purposes only.
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