DeFi Platform Aave Lauches Version 3 With Cross-Chain Swaps Front and Center
The latest version of the Aave protocol focuses on risk management and capital efficiency.
One of the largest lending platforms in decentralized finance (DeFi) is taking a step forward Wednesday with the launch of a third iteration, or “v3.”
The Aave Companies announced the launch of Aave v3 across six different blockchains, with a seventh – Ethereum mainnet – forthcoming at an unspecified date.
The release follows a series of votes in Aave’s governance forums concerning on which chains the new protocol would launch, as well as a December vote on a business license for the protocol designed to prevent forks.
According to Aave founder Stani Kulechov, v3 will feature a range of new functionalities and mechanisms designed to improve user experience, risk management and capital efficiency.
The upgrades may help further cement Aave as a leading money market. According to DefiLlama, Aave is currently the second-largest lender with over $11 billion in total value locked (TVL), trailing only the Terra blockchain-based Anchor with over $13 billion.
Headlining the new features are cross-chain “portals,” isolated markets that will allow the protocol to better compete with permissionless counterparts and a “high efficiency” mode enabling high loan-to-value borrowing on select assets.
Currently, Aave is live on Avalanche, Ethereum and Polygon, with dozens of assets featuring variable borrow and interest rates on each chain.
Along with interest rates, liquidity demand can vary significantly between the chains, and Kulechov expects those returns and demand fluctuations to “flatten” as a new cross-chain “portals” feature goes live.
Portals is a feature that allows cross-chain bridges to mint and burn atokens – tokens representing deposits into Aave. Bridges will mint Aave’s “aTokens” on one chain and burn them on another, maintaining accounting between the different chains while allowing users to pursue yield arbitrage and other strategies.
“You could deposit in [Ethereum] mainnet, but borrow from Polygon and repay on Avalanche – all under the hood,” said Kulechov.
In addition to greater capital mobility, v3 also makes it significantly easier to onboard new forms of collateral, albeit with stripped down utility.
“V3 is mostly about two things: risk awareness/mitigation, and capital efficiency,” said Kulechov. “In terms of risk mitigation, we can actually reduce the risk of new collaterals coming into the ecosystem, and still get them listed but with limited exposure.”
Aave is facing increasing pressure from lending platforms like Euler, Kashi and Rari that can better cater to long-tail or exotic assets with permissionless lending pools.
As a result, v3 introduces “isolated markets” – effectively a pipeline for allowing Aave governance to list assets as collateral faster than the current process, but only as a single source of collateral, and not as a bundle.
Additionally, isolated markets will have supply caps controlled by the DAO governance.
“Over time, as that asset matures you can increase the ceilings, and eventually turn the isolation model for particular assets off. So it kind of allows asset scalability,” added Kulechov.
Finally, the feature about which Kulechov said he was most excited is the forthcoming “high efficiency mode.”
This feature will allow users to leverage extremely high loan-to-value ratios so long as they take loans in the same asset that they deposit as collateral – in some instances, even up to 98% LTV.
A screenshot of a dashboard for the feature included ether (ETH) and staked ETH derivatives, wrapped bitcoin (BTC) like wBTC and renBTC and stablecoins.
“The main idea here is that once we have different kinds of stablecoins – euro stablecoins, pound stablecoins – then you can essentially have FX trading on-chain,” Kulechov said.
However, one area in which v3 will not have an impact is in Aave’s institution-focused compliant implementation, Aave Arc.
“The nature of the Aave Arc market, it should be the most boring market out there. The participants, they don’t want to see changes. They want to see boring, everything working fine. Once v3 becomes more proven, then we can bring the v3 infrastructure to Arc,” said Kulechov.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.
Learn more about Consensus 2023, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.