Aave V3 eliminated bad debt from 2023 to 2025: study
A Canadian banker's paper reports that Aave V3 will have non-zero loans by 2024, with more collaboration and automated liquidations helping to prevent lender defaults in the Ethereum lending market.
Using transaction-level data from January 27, 2023, to May 6, 2025, the study found that positions are liquidated before collateral values fall below debt, accounting for creditor losses in the sample.
But the model came with a sale, the newspaper said. While it did not protect lenders from insolvency, it limited risk to borrowers and capital inefficiency compared to traditional lending systems.
According to the paper, Aave V3's design relies on automatic risk control rather than traditional underwriting, which requires borrowers to post more collateral than they owe and liquidate positions when they breach risk limits.
Frequent interest fueled the demand for credit
According to the paper, Aave V3's lending activity was not solely driven by users seeking liquidity. It was found that the borrower's loan amount was more than 20% and 8.2% of loan transactions during the sample period.
Recurring leverage involves repeatedly borrowing against collateral, deploying borrowed assets as new collateral, and reborrowing to leverage exposure.
Related: Aave V4 Goes Live on Ethereum After Clearing Administrative Voice Release
The study said flexible borrowers are more exposed when markets change. According to the paper, liquidations on Aave V3 tend to occur in concentrated waves, with four properties accounting for 90% of the total liquidation value.
This includes Bundled Ether (WETH), Bundled Staked Ether (wstETH), Bundled Bitcoin (WBTC) and Bundled eETH (weETH).
The paper estimates that borrower losses are likely to be significant during major liquidity events. Liquidation fees typically range from 5% to 10% of liquidation value, with subsequent price recoveries and missed profits pushing combined losses to 10% to 30% in some cases, he said.
The staff paper notes that the design of the Aave V3 helps to prevent bad debt that is not covered in the sample, exposing borrowers to sudden losses when the value of securities falls sharply.
Cointelegraph reached out to Ave for comment but did not receive a response before publication.
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