Aave V3: A Multi-Chain Liquidity Protocol

FEB 03, 2022 • 14 Min Read

DISCLOSURE: DELPHI HAS DONE CONSULTING WORK FOR AAVE IN THE PAST AND MEMBERS OF OUR TEAM HOLD AAVE. THIS STATEMENT IS INTENDED TO DISCLOSE ANY CONFLICT OF INTEREST AND SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE ANY TOKEN. THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE DECISIONS BASED SOLELY ON IT. THIS IS NOT INVESTMENT ADVICE.

Key Takeaways

  • Aave is currently the fourth largest DeFi protocol with ~$15bn in TVL, equating to more than a 6 fold increase since the beginning of 2021. They are the largest cross-collateral money market on Ethereum, Polygon and Avalanche and will soon be deploying on other chains.

  • Aave v3 has recently launched on testnet and will soon go live with new features such as Portals, High Efficiency Mode and Isolation Mode, among other improvements.

  • Portals offers whitelisted bridge protocols like Connext, Hop Protocol and Synapse access to credit lines which can be used to facilitate cross-chain transactions when there is insufficient liquidity on the native bridge protocol.

  • With High Efficiency Mode, users are granted a higher LTV if the borrow and collateral asset falls under the same category as “pegged” assets such as stablecoins. Utilization rates on stablecoins have been consistently high during certain periods of time. Allowing higher LTVs may thus put pressure on this metric and increase liquidity risk for lenders.

  • Isolation Mode allows select assets to be used as collateral up to a certain debt ceiling. However, borrowers can only borrow stablecoins and may not use another asset as collateral simultaneously. Other solutions to deal with isolated lending markets include Kashi, Fuse and Silo Finance offering varying levels of permissions, market risk, and capital efficiency.

  • We note that Compound Finance has also recently announced their intention to establish a cross-chain presence to build out “multi-chain share liquidity pools”. Given the competitive landscape, Aave’s ability to innovate and integrate faster remains more crucial than ever.

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