🟣 DeFi Day 88: Aave Oracles: How Does Aave Know Asset Prices? Today, let's understand a critical part of Aave's risk management: Price Oracles. 🔮 Aave needs reliable asset prices to determine collateral values, borrowing power, and liquidation eligibility. How does it work? * 📊 Price data: Aave obtains asset prices through its configured oracle system. * 🏦 Collateral valuation: The protocol uses those prices to calculate the value of deposited assets. * 💰 Borrowing limits: Prices help determine how much users can borrow. * ⚠️ Liquidation checks: If a position becomes unhealthy, updated prices can trigger liquidation eligibility. Example: You deposit ETH worth $3,000 and borrow against it. If ETH's price falls significantly, your collateral value decreases while your debt remains. Your Health Factor can fall, putting your position at risk of liquidation. Why do oracles matter? Incorrect or manipulated prices can cause excessive borrowing, unfair liquidations, or losses for a protocol. Aave's oracle configuration varies by market and asset, so reliable data sources and appropriate risk parameters are essential. DeFi insight: Smart contracts can enforce rules perfectly but if the price data they receive is wrong, the outcome can still be dangerous.