Aave V3 Upgrade
Powerhouse upgrade unlocking cross-chain features, higher capital efficiency, new token listings, and increased protocol safety.
Aave protocol is a decentralized non-custodial protocol enabling users to act as borrowers, suppliers, or liquidators. Suppliers supply capital and earn interest and borrowers pay interest on borrowed capital. Liquidators run bots to enable liquidations when borrowers’ health factor goes below 1 due to their collateral not covering the loan value. The liquidators take the liquidation fee or penalty which is deducted from borrowers’ collateral and thus helps in securing lenders’ money; making the system efficient.
Since its launch Aave team is consistently leading innovation in the Defi ecosystem providing new features and is available on multiple chains, unlike compound which is following a rather conservative approach toward multi-chain ecosystem. Aave team is one of the best shippers in the crypto market with a treasury of more than 50 Million dollars with total liquidity across all markets of around 15 billion dollars. With the V3 upgrade, aave has taken things to next level with the launch of its various capital efficiency (Portals, Efficiency, and Isolation Mode) and risk management upgrades.
Portals allow users to transfer capital from one chain to other chains in a decentralized and seamless way. Aave protocol allows governance-approved bridges to whitelist and burn aTokens of an asset on the source network while minting unbacked aTokens instantly on the destination network. For a user, it happens instantly but bridges need to transfer the asset to the Aave pool on the destination network in a deferred manner to back the unbacked tokens.
Only the approved bridges will be able to access supply on the destination chain by minting unbacked aTokens. Bridges like Hop Protocol, Connext, Anyswap, xPollinate, etc can leverage Portal to access Aave's deep liquidity to process seamless cross-chain transactions. To access portals or get BRIDGE role they need governance approval.
The interest rate computation is decided by the core protocol but the deferred transfer gas and fee paid to the protocol are decided by governance vote at the time of the approval of the bridge. Portals would also allow cross-chain lending in the future. You could deposit on Ethereum, borrow on polygon and repay the loan on avalanche, all under the hood.
Efficiency Mode (eMode) allows users to borrow at a higher loan to value ratio when borrowed and supplied assets are correlated in price such as stablecoins pegged to USD or stETH, alETH, etc are derivatives of ETH. This can enable a wave of new use cases such as High leverage forex trading, Highly efficient yield farming (for example, deposit ETH staking derivatives to borrow ETH), Diversified risk management, etc. Aave governance can set a maximum of 255 eMode categories with each having varying degrees of risk management parameters:
-LTV (Loan to Value
- Liquidation threshold
- Liquidation bonus
- A custom price oracle (optional)
For e-Mode category, specific oracles (eg: WBTC/USD, renBTC/USD oracles are asynchronous as compared to BTC/USD) would be more beneficial as it eliminates oracle asynchronicity but it is riskier for the protocol if one of the assets fails to keep value it would cause insolvency. E-mode is more suitable for faster networks such as rollups where oracles can be more efficient and liquidations do not occur due to high transaction costs.
Category 0 is the default category non-eMode category. All assets on Aave v3 will have category 0 by default which can later be changed by the user if the following conditions are met:
-All borrowed assets are in the chosen category
-Changing eMode doesn’t leave the position under-collateralized
Isolation Mode enables to list of new tokens in Aave protocol V3. Being one of the most trusted defi protocols Aave has been following a cautious approach while listing new tokens. Enabling a new listing, borrowers have access to all of the protocols liquidity using the new token as collateral. This makes it difficult to list new assets. This has given room for new players which are forks of either aave/compound on multiple chains providing collateral of native and new tokens but with inherent risks. The isolated mode feature has been inspired by MakerDAO and allows assets to be listed as isolated asset after the governance vote. Borrowers supplying an isolated asset as collateral cannot supply other assets as collateral for borrowing (Can supply to capture yield though). Borrowers supplying isolated assets can borrow stablecoins approved by aave governance up to a specified debt ceiling. Users can turn off isolation mode by disabling the isolated asset as collateral which can be done only if the user has no outstanding debt. This allows true permissionless listing of new tokens with exposure management and higher capital efficiency.
Risk Management features have been added in V3 to protect the protocol from insolvency.
Supply and Borrow Caps have been implemented. Borrow caps allow to moderate how much of an asset can be borrowed reducing insolvency risk and Supply Caps allow to limit how much exposure protocol has to a certain asset and mitigate attacks like infinite minting or price oracle manipulation.
Borrowing Power Control has been enabled to lower the borrowing power of any asset to as low as 0% without any impact on existing borrowers.
Price Oracle Sentinel feature introduces a grace period for liquidations and disables borrowing under specific circumstances. This feature has been specifically designed for L2s to handle the eventual downtime of the sequencer.
The liquidation mechanism has been improved allowing liquidators to liquidate 100% of the position when approaching insolvency (HF<0.95). Currently, only half of the position could be liquidated at any point.
Repaying with aTokens in case the underlying borrowed asset is locked in the Aave liquidity pool.
Multiple rewards per token have been enabled. Now it is possible for an asset listing to enable incentive rewards denominated in their native tokens. Users can claim all the rewards or an individual reward per transaction and claim rewards to another account as well as self.