Rapture #171: Aave V3
A couple days ago, Aave launched their V3. Yet again, Aave continues to display that the lending protocol is a leader in innovation.
There were four major updates in Aave V3: portals (facilitates cross-chain transactions), high efficiency mode (unlocks higher borrowing power), isolation mode (allows for new assets to be listed while protecting the protocol), and gas optimization (gas costs for all functions reduced by 20 - 25%).
Lets dive in and examine these new features one by one. If you are interested in reading the specs in further detail, you can find the white paper here.
Portals
In Aave V3, the portals feature allows users to move assets in a seamless manner across different networks. Because of this feature, a user's supplied liquidity can be transferred from one network to another simply by burning aTokens on the original source network while minting them on the destination network.
Aave governance can now grant any cross-chain protocol (Connext, Hop Protocol, Anyswap, xPollinate, etc.) to tap into Aave Protocol liquidity in order to facilitate cross-chain interactions.
This feature more than any other developed dramatically increases the composability of Aave across other chains beyond Ethereum, ensuring that the leading lending protocol can easily be utilized whether a user is on Polygon, Harmony, Avalanche, and more!
High efficiency mode
The high efficiency mode allows borrowers to ensure they are able to achieve the highest borrowing power with their own collateral.
In essence, this new feature enables Aave Governance to "categorize" assets based on LTV, liquidation threshold, liquidation bonus, and an optimal custom price oracle.
As long as a user supplies assets of the same category as the user's collateral, the borrowing power and maintenance margin are overridden by the eMode category configuration to allow for higher capital efficiency.
Effectively, high efficiency mode allows users to borrow more based on the collateral they post as long as the underlying are the same type of assets. For example, stablecoins, which contain USDT, DAI, and USDC, could be a category, as could ETH, which contains ETH, stETH, and alETH.
Now you can borrow ETH based on your stETH, stake that borrowed ETH, supply it on Aave, and then borrow more ETH! Demand for stETH is skyrocketing because of this feature.
Isolation mode
“Isolation Mode” allows Aave Governance to enact risk mitigation features when a new asset market is created on the protocol.
When a community member submits a governance proposal to create a new asset market on V3, the proposal can seek to list the assets as “isolated collateral” such that users supplying those “isolated” assets can only borrow stablecoins that Aave Governance has “permissioned” to be borrowed in isolation mode, up to a specified debt ceiling.
When a user supplies an “isolated asset” as collateral, that user can only use that asset as collateral; even if the user supplies other assets to the protocol, the user can only earn yield on those assets and cannot use those assets as collateral.
Because of isolation mode, assets with lower liquidities can be added to Aave's debt markets as long as appropriate debt ceilings are set. This feature allows for more customization of debt market's risk parameters.
Gas optimization
This feature change is self explanatory. Gas costs of all functions are reduced by approximately 20 - 25% across the board, meaning it is cheaper for users to utilize Aave.
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