Aave is a liquidity protocol that enables borrowing different cryptoassets from the liquidity pools. Depositors receive aTokens, in exchange of cryptocurrency deposits.
The liquidity of the protocol is the availability of the capital to face business operations: borrowing amounts and redeeming aTokens. It is a key metric, as lack of liquidity will block business operations.
At any point in time, the liquidity of the protocol can be assessed through the utilisation ratio: the share of reserve that is currently borrowed for each currency.
The historical utilisation and aToken valuation help us assess the level of liquidity risk of the protocol. Once this risk is understood, we can put in place risk management techniques through the borrow interest rate model and set up alternative sources of aToken liquidity.