A Financial institution of Canada workers paper discovered that Aave V3 reported zero non-performing loans in 2024, with overcollateralization and automatic liquidations serving to forestall lender losses in its Ethereum lending market.
Utilizing transaction-level information from Jan. 27, 2023, to Could 6, 2025, the research discovered that positions had been sometimes liquidated earlier than collateral values fell beneath excellent debt, serving to include lender losses throughout the pattern.
However the mannequin got here with a tradeoff, the paper stated. Whereas it protected lenders from unrecovered losses, it additionally shifted threat onto debtors and constrained capital effectivity in contrast with conventional lending methods.
In line with the paper, Aave V3’s design depends on automated threat controls fairly than conventional underwriting, requiring debtors to publish extra collateral than they borrow and liquidating positions once they breach threat thresholds.
Recursive leverage fueled borrowing demand
In line with the paper, Aave V3’s lending exercise was not pushed solely by customers in search of liquidity. It discovered that recursive leverage accounted for over 20% of complete borrowed quantity and eight.2% of borrowing transactions in the course of the pattern interval.
Recursive leverage entails repeatedly borrowing towards collateral, redeploying the borrowed property as new collateral and borrowing once more to amplify publicity.
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The research stated the dynamic made debtors extra uncovered when markets turned. In line with the paper, liquidations on Aave V3 tended to happen in concentrated waves, with 4 property accounting for 90% of complete liquidated worth.
This consists of Wrapped Ether (WETH), Wrapped Staked Ether (wstETH), Wrapped Bitcoin (WBTC) and Wrapped eETH (weETH).
The paper estimated that borrower losses throughout main liquidation occasions may very well be important. It stated liquidation charges sometimes ranged from 5% to 10% of liquidated worth, whereas missed features from subsequent value recoveries pushed mixed losses to about 10% to 30% in some circumstances.
The workers paper advised that whereas the design for Aave V3 helped forestall unrecovered unhealthy debt within the pattern, it did so by exposing debtors to abrupt losses when collateral costs fell sharply.
Cointelegraph reached out to Aave for remark however didn’t obtain a response earlier than publication.
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