V3 Overview

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V3 Overview

The Aave Protocol is decentralised non-custodial liquidity protocol where users can participate as suppliers, borrowers or liquidators. Suppliers provide liquidity to a market and can earn interest on the crypto assets provided, while borrowers are able to borrow in an overcollateralized fashion. Borrowers can also engage in one-block borrow transactions (”flash loans”), which do not require overcollateralization.
V3 of the Aave Protocol augments the core concepts of Aave Protocol (aTokens, instant liquidity, stable rate borrowing, credit delegation, etc.) with new features in following area.
Capital Efficiency
V3 allows users to optimise their assets supplied to the Aave Protocol in terms of yield generation and borrowing power.
​Portal​
This feature allows flow of liquidity between Aave V3 markets across different networks. Protocol V3 allows governance-approved bridges to burn aTokens on the source network while instantly minting them on the destination network. The underlying assets can then be supplied to Aave on the destination network in a deferred manner, by passing it to the pool after it has been moved through a bridge.
Aave V3 provides new system role - BRIDGE - with permission to leverage Portal feature. Only the addresses with the BRIDGE_ROLE can move the supplied liquidity in Aave V3.
​Aave Governance holds the ability to grant BRIDGE_ROLE to any of the cross-chain protocol.
This can help bridging protocols like Connext, Hop Protocol, Anyswap, xPollinate and novel solutions that can be specifically built to leverage Portal, to tap into Aave Protocol liquidity to facilitate seamless cross-chain interactions.
In order to support Portal, following three additional features are required by the protocol:
Mint Unbacked Tokens: Allows addresses, with BRIDGE role permission, to mint unbacked aTokens to the onBehalfOf address.
Back Unbacked Tokens: Allows contracts, with BRIDGE role permission, to back the currently unbacked aTokens with amount of underlying asset and pay fee.
Whitelist Bridges: allows the Bridge Role Admin to add/remove addresses for BRIDGE_ROLE.
Check out Portal for more technical details.
​Efficiency Mode (eMode)​
The High Efficiency Mode or eMode allows borrowers to extract the highest borrowing power out of their collateral when supplied and borrowed assets are correlated in price, particularly when both are derivatives of the same underlying asset (eg. stablecoins pegged to USD).
This can enabling a wave of new use cases such as High leverage forex trading, Highly efficient yield farming (for example, deposit ETH staking derivatives to borrow ETH), Diversified risk management etc.
Check out eMode for more technical details.
​Isolation Mode​
New assets can be listed as isolated in Aave protocol V3. Borrowers supplying an isolated asset as collateral cannot supply other assets as collateral (though they can still supply to capture yield). Borrowers using an isolated collateral can only borrow stablecoins that have been permitted by the Aave governance to be borrowable in isolation mode, up to a specified debt ceiling.
Risk Management
Aave V3 brings a greatly improved set risk parameters and new features to protect the protocol from insolvency.
​Supply and Borrow Caps​
The Aave governance can now configure Borrow and Supply Caps.
Borrow Caps: allow to modulate how much of each asset can be borrowed, which reduces insolvency risk.
Supply Caps: allow to limit how much of a certain asset is supplied to the Aave protocol. This helps reducing exposure to a certain asset and mitigate attacks like infinite minting or price oracle manipulation.
Granular Borrowing Power Control
In Aave V3, it will be possible to lower the borrowing power of any asset to as low as 0% without any impact on existing borrowers (it’s still possible to use the old approach - liquidating existing users - if deemed necessary)
Risk Admins
Aave V3 introduces the ability for the Aave Governance to grant entities permission to update the risk parameters with going through governance vote for every change. These entities can be DAOs or automated agents (eg. RiskDAO, Gauntlet) that can build on top of this feature to react automatically in case of unanticipated events.
Aave Governance will have the ability to revoke access to existing Risk Admins or add new Risk Admins.
Price Oracle Sentinel
The Sentinel feature introduces a grace period for liquidations and disables borrowing under specific circumstances.
This feature has been specifically designed for L2s to handle eventual downtime of the sequencer (but can be extended to handle other cases, even on L1s, in the future).
Variable Liquidation Close Factor
In V3, the liquidation mechanism has been improved to allow the position to be fully liquidated when it approaches insolvency i.e. HF < 0.95 (previously only half of the position could be liquidated at any point).
Decentralisation
Aave V3 introduces a new system role - ASSET_LISTING_ADMIN_ROLE - that can be granted by the Aave Governance to allow admins to create and set custom asset listing strategies for each asset listing.
Multiple Rewards Tokens
Aave Protocol V3 offers the option to have multiple rewards per token. Now, it is possible for an asset listing to enable additional incentives denominated in native protocol tokens. It is also possible for user to claim multiple reward types per asset in single transaction. Read more in Multiple Rewards section.