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 stop lender losses in its Ethereum lending market.
Utilizing transaction-level knowledge from Jan. 27, 2023, to Might 6, 2025, the research discovered that positions had been usually liquidated earlier than collateral values fell under excellent debt, serving to comprise lender losses throughout the pattern.
However the mannequin got here with a tradeoff, the paper mentioned. Whereas it protected lenders from unrecovered losses, it additionally shifted threat onto debtors and constrained capital effectivity in contrast with conventional lending programs.
Based on the paper, Aave V3’s design depends on automated threat controls somewhat than conventional underwriting, requiring debtors to submit extra collateral than they borrow and liquidating positions after they breach threat thresholds.
Recursive leverage fueled borrowing demand
Based on the paper, Aave V3’s lending exercise was not pushed solely by customers searching for liquidity. It discovered that recursive leverage accounted for over 20% of complete borrowed quantity and eight.2% of borrowing transactions through the pattern interval.
Recursive leverage entails repeatedly borrowing in opposition to collateral, redeploying the borrowed property as new collateral and borrowing once more to amplify publicity.
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The research mentioned the dynamic made debtors extra uncovered when markets turned. Based on 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 could possibly be important. It mentioned liquidation charges usually ranged from 5% to 10% of liquidated worth, whereas missed positive factors from subsequent value recoveries pushed mixed losses to about 10% to 30% in some instances.
The workers paper urged that whereas the design for Aave V3 helped stop 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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