Founded in 2017, ETHLend underwent a branding makeover to embrace a name that doesn’t tie the protocol to a single smart contract platform, and thus Aave (AAVE) was christened.
Today, Aave is inarguably the largest DeFi borrowing and lending protocol and stands alongside the likes of Curve Finance (CRV), Maker (MKR), and Uniswap (UNI) as some of the DeFi juggernauts with enviable total value locked (TVL) in digital assets.
According to data from DeFi Llama, Aave is the third-largest DeFi protocol in existence in terms of TVL, securing digital assets worth $15.83 billion across some of the leading smart contract platforms such as Ethereum, Polygon, and Avalanche.
(Source: DeFi Llama)
Most recently, the Aave team announced the launch of Aave V3, a significant upgrade to Aave V2 consisting of several innovative and robust tools and utilities that remind us why Aave continues to be a DeFi blue-chip token.
What is Aave V3?
The official governance proposal introducing Aave V3 was floated on November 4 on the Aave governance forum. The proposal received strong positive feedback from the Aave community due to the numerous performance improvements and innovative tools the protocol offers in its latest upgrade.
Let us examine some of the new and exciting features of Aave V3 and how they hold the potential to change the game of DeFi as we know it today.
Introducing Aave Portal
Aave Portal is a major upgrade in Aave V3 that seeks to ease the process of switching digital assets from one blockchain to another. Essentially, Portal allows users to seamlessly move their assets to different networks without having to use any bridge between the blockchains.
Per the proposal, Aave achieves the aforementioned by simply burning token A on the source network (for example, Ethereum), and minting it on the destination network (eg, Avalanche).
Managing Liquidation Risk Via Isolation Mode
Oftentimes it happens that a project with a small market cap is unable to create its marketplace on a leading DeFi protocol due to the lack of liquidity which can cause violent price fluctuations and initiate cascading liquidations of borrowers’ collateral.
To address this menace, Aave V3 introduces “Isolation Mode” that enables Aave Governance to put in place certain risk mitigation features when a new asset market is created on the protocol.
Put simply, whenever a community member submits a governance proposal to create a new asset market on Aave V3, the said proposal can seek to list the underlying asset as “isolated collateral” to ensure that the said “isolated” asset can only borrow certain permissioned assets — in the following chart, only USDT, DAI, or USDC – from the Aave protocol up to a predefined debt ceiling.
The “Isolation Mode” feature allows Aave to list project tokens with small market caps and puts the protocol in direct competition with certain yield aggregating protocols such as Rari and Cream Finance that are well-known in the DeFi circles for catering to the liquidity needs of smaller projects.
For Aave, the protocol will benefit from the isolation mode as it adds more projects with tiny market caps, and, in turn, grows its TVL.
Enabling Greater Capital Efficiency
Aave V3 promises to offer greater capital efficiency to all its users and to that effect it has unveiled eMode, short for High-Efficiency Mode that enables borrowers to ensure they achieve the highest borrowing power with their collateral.
Essentially, eMode allows the protocol to categorize assets based on the following three major parameters.
- Liquidation Threshold.
- Liquidation Bonus.
Based on the above-mentioned parameters, users can segregate digital assets in Aave V3.
Borrowers can leverage Aave’s eMode to ensure they have greater access to capital by choosing the category of an asset they wish to borrow. Here, by category, we mean a set of digital assets that are pegged to the same underlying asset, for instance, stablecoins pegged to the US dollar, and others.
Aave’s eMode category configuration will automatically override a user’s collateral’s borrowing power (LTV) and maintenance margin (liquidation threshold) if the user borrows an asset of the same category as that of his collateral. This way, by grouping assets of similar categories together, eMode allows for higher capital efficiency.
Aave is one of the leading DeFi protocols with an extremely talented team that continues to innovate and push the envelope in the DeFi space while keeping all their work completely open-source per the DeFi ethos.
Aave V3 promises to take DeFi to the next level and it will be interesting to see whether the launch of the latest iteration of the top DeFi protocol could trigger the beginning of another DeFi tokens run in the wider crypto markets.