Aave Set To Launch v3 On Ethereum Blockchain
The DeFi crypto lending and borrowing protocol is launching its third iteration, Aave v3, on the Ethereum network. Initially, v3 will support seven assets pre-approved by the DAO.
After a successful DAO vote, decentralized crypto lending and borrowing platform Aave is set to launch the third version of its protocol on the Ethereum (ETH) blockchain. The Aave community voted for a proposal made by DeFi risk manager Chaos Labs on January 25, in light of an attack that happened on the decentralized exchange.
In November 2022, a hacker known as Ponzishorter.eth, or Avi, noticed that the founder of DeFi lending protocol Curve had deposited 47.16 million CRV tokens on Aave as collateral to borrow stablecoins. Avi then tried to liquidate this large open position by shorting Curve. The $50 million worth of CRV deposited on the lending protocol was about 3 times its on-chain supply.
Avi deposited $58 million USDC as collateral to borrow the $50 million CRV and then dump them on a centralized exchange. The plan behind this massive borrowing was to create panic among CRV investors and force them to chain-sell their tokens to liquidate the entire portfolio. Later the hacker would buy back the tokens at a cheaper price, cash out the profit and withdraw the USDC. This would have left Aave with bad debt.
While the attack was taking place, Curve announced the crvUSD stablecoin, which caused CRV prices to pump. The stablecoin implemented a mechanism called the Lending-Liquidating Automated Market Maker Algorithm (LLAMMA) which converts collateral assets into stablecoins when their prices drop below a threshold. LLAMMA has a low risk of bad debt. CRV’s price pump was the signal for Avi to liquidate his position, but it did not create the impact that he had hoped for. However, the event left Aave with a bad debt of $1.6 million, as there was not enough collateral on the platform to liquidate Curve’s position.
Chaos Labs’ Aave v3 proposal was aimed at enhancing security and protecting consumers of the platform by providing lenders and borrowers with a set of “agent-based simulations” that will inform them about the risk parameters beforehand. Aave v3 will be launched on Ethereum, its oldest and largest chain, with support for seven ERC-20 tokens: wrapped Bitcoin (wBTC), wrapped Ether (wETH), wrapped staked Ether (wstETH), USDC and DAI stablecoins, Chainlink (LINK) and AAVE. The DeFi platform has $3.8 billion in total value locked (TVL) across the Ethereum network. v3 will go live on January 27, 2023.
Aave calls v3 the “most significant upgrade” to the protocol since its launch in January 2017. The company is expanding its multi-chain approach with v3 which was deployed on Arbitrum, Optimism, Polygon, Avalanche, Fantom and Harmony in March 2022.
The third version will exist along with its predecessor Aave v2 on Ethereum because the DAO decided to go with an entirely new protocol rather than upgrading the older iteration.
Aave will implement Chainlink’s pricing oracle to set prices of all assets except wBTC and wstETH. According to a proposal made by Bored Ghost Developing Labs, the engineering team behind Aave v3, the pricing of wrapped Bitcoin and wrapped staked Ether will be dependent on a price adapter smart contract. This smart contract will also be based on the Chainlink live price data feed.
There will be an efficiency mode, or “e-mode”, which allows for maximum capital efficiency for collateral and borrowed assets with high price correlation. In the beginning, e-mode will only be supported by wETH and wstETH tokens.
Interest rate models on v3 will be different from that on v2, with the main difference coming from stablecoin rates. However, Bored Ghost has stated that the initial interest rate model will follow “those present on v2 Ethereum assets and other existing instances of v3”.
Aave v3 is a big step forward for the company as it looks to improve user experience, risk management and capital efficiency in decentralized finance.
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