AAVE (Aave) is an open-source, decentralised lending protocol built on the Ethereum blockchain. It allows users to deposit and lend various types of assets, as well as borrow other assets, in a decentralized and trustless manner.

AAVE V2 and AAVE V3 are different versions of the Aave protocol.

AAVE V2 is the previous version of the Aave protocol, which was launched in January 2020. It uses a system of collateralized debt positions (CDPs) and flash loans to facilitate lending and borrowing of assets on the Ethereum blockchain. In AAVE V2, liquidity providers earn interest on the assets they provide to the lending pool and borrowers must collateralize their loans with a certain amount of assets to ensure that they can repay the loan.

AAVE V3 is the latest version of the Aave protocol, which was launched in September 2021. It brings several new features and improvements over AAVE V2, including:

• Staking: AAVE V3 includes a staking mechanism, which allows users to stake AAVE tokens in order to earn governance rights and rewards. Stakers can vote on protocol upgrades and changes, and earn rewards for their participation in the protocol.

• New assets: AAVE V3 supports a wider range of assets than AAVE V2, including options and non-fungible tokens (NFTs).

• Improved risk management: AAVE V3 includes new risk management features to reduce the potential for flash loans to be used maliciously and to increase the security of the protocol.

• Gas token: The new version introduced Gas Token, which aims to reduce the gas costs associated with transactions on the Ethereum blockchain, as well as a decentralized oracle which is used to price assets and determine collateral requirements.

• Generalized liquidity pools: AAVE V3 introduced the concept of Generalized liquidity pools, which allows the creation of any type of liquidity pool, such as synthetic assets, algorithmic stablecoins, etc.

• New governance mechanism AAVE V3 introduces a new governance mechanism, which allows stakers to vote and determine the future of the protocol.

It's worth mentioning that AAVE V3 is backward compatible with AAVE V2, means users and developers can use AAVE V2 contracts with AAVE V3. However, they will not benefit from the new features and improvements introduced in AAVE V3.