Aave V3 Avoided Unrecovered Bad Debt From 2023 to 2025: Study
A Bank of Canada study found Aave V3 avoided bad debt through overcollateralization and liquidations, but shifted risk to borrowers.Summary
A recent Bank of Canada staff paper analyzed Aave V3’s performance from January 27, 2023, to May 6, 2025, revealing zero non-performing loans in 2024. This success was attributed to the platform’s reliance on overcollateralization and automated liquidations, which prevented lender losses in its Ethereum lending market. However, the study highlighted a key tradeoff: while lenders were protected, the risk was transferred to borrowers, and capital efficiency was reduced compared to traditional lending. Recursive leverage, where users repeatedly borrow against collateral, accounted for over 20% of borrowed volume, increasing borrower exposure during market downturns. Liquidations tended to occur in concentrated waves, primarily affecting Wrapped Ether (WETH), Wrapped Staked Ether (wstETH), Wrapped Bitcoin (WBTC), and Wrapped eETH (weETH), with borrower losses potentially reaching 10% to 30% due to liquidation fees and missed gains.
(Source：Cointelegraph)