Since its launch in 2020, Aave has been a leader in innovation in the DeFi ecosystem. However, the protocol wasn’t immune to the woes of operating in a multi-chain environment and has been impacted by the congestion and high latency Ethereum has long suffered from.
But, all of this has come to an end with the launch of Aave’s latest version, which set out to solve not just the technical limitations the protocol faced, but the problems users experienced as well.
Aave’s V3 set out to improve four key areas: capital efficiency, protocol safety, decentralization, and user experience. Aave’s development team saw these areas as ripe for improvement and has devoted months to overhauling the protocol.
1/ Aave V3 is here!
The most powerful version of the Aave Protocol to date, V3 brings groundbreaking new features than span from increased capital efficiency to enhanced decentralization. Read what's new in V3 in the thread belowor visit https://t.co/H3jTyKRqNs to dive in! pic.twitter.com/LXzn7660nA
— Aave (@AaveAave) March 16, 2022
More yield, more security, better everything
The primary goal for V3 was to enable the protocol to generate more yield for liquidity providers. This is a rather ambitious task, given that the total liquidity of Aave across multiple networks is close to $20 billion.
The largest percentage of that liquidity currently sits idle in Aave’s smart contracts, generating yield to liquidity providers from the borrowing activity on the protocol. And while this is a financial jackpot as the yield is constant and secure, there is room to improve.
Aave’s V3 set out to increase this yield by implementing new user-facing functionalities that reuse the idle capital. This is done without increasing the solvency contingencies and doesn’t require reallocating the assets to other protocols, drastically reducing the smart contract risk.
Called Isolation Mode, the feature was inspired by the MakerDAO approach for exposure management, and it enables Aave governance to vote on assets to be listed as “isolated.” Borrowers supplying an isolated asset as collateral can’t add other assets to their collateral, can only borrow a set basket of stablecoins and is subject to a debt ceiling.
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