Aave V3 reported zero non-performing loans in 2024, according to a Bank of Canada study. The decentralized finance platform achieved this by transferring risk to borrowers, utilizing over-collateralization and automated liquidation mechanisms to protect lenders. The study, covering data from January 2023 to May 2025, highlighted that Aave V3 liquidates positions before collateral values drop below outstanding debt, ensuring lender security. However, this approach reduces capital efficiency compared to traditional lending systems and increases borrower risk. Recursive leverage, where borrowed assets are used as new collateral, constitutes over 20% of borrowing volume, heightening borrower exposure during market downturns. Liquidation events are concentrated, with WETH, wstETH, WBTC, and weETH making up 90% of total liquidation value.
Aave V3 Achieves Zero Bad Loans in 2024 by Shifting Risk to Borrowers
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