Quick Verdict
Aave (AAVE) is NOT HALAL. This is one of the clearest-cut cases in crypto Islamic finance. Aave's entire purpose is to facilitate interest-bearing lending and borrowing — the textbook definition of riba. There is no meaningful scholarly debate here.
What Aave Does
Aave is a "decentralized bank." Users deposit crypto assets (like ETH, USDC, WBTC) and earn interest. Borrowers put up collateral and borrow other assets, paying interest. The interest rate is determined algorithmically based on utilization rates. This is structurally identical to a bank's deposit and loan products — just automated and on a blockchain.
Why This is Clearly Riba
There is no ambiguity in Aave's model. When you deposit USDC and earn 5% APY, that is interest income. When you borrow ETH and pay 8% APR, that is interest expense. The fact that this happens through smart contracts rather than a bank branch doesn't change the substance of the transaction.
Islamic finance is concerned with the reality (haqiqa) of a transaction, not its form. Calling interest a "yield rate" or "protocol fee" doesn't make it something other than riba.
The Flash Loan Problem
Aave pioneered flash loans — uncollateralized loans that must be repaid within one transaction block. These are used for arbitrage and market manipulation. This is another form of impermissible speculation.
Bottom Line
Do not invest in Aave. It is a decentralized interest-bearing lending protocol — the core prohibited activity in Islamic finance. This is not doubtful; it is clearly impermissible.