According to Cointelegraph, a working paper published by the Bank of Canada reveals that Aave V3 achieved zero non-performing loans in 2024, with its mechanisms protecting lenders from losses by shifting losses to borrowers. The study, based on transaction data from January 27, 2023, to May 6, 2025, found that Aave V3 effectively prevented lender losses by liquidating positions before collateral values fell below outstanding debt, relying on over-collateralization and automated liquidation mechanisms. However, this model comes at the expense of borrowers and exhibits lower capital efficiency compared to traditional lending systems. The paper also notes that recursive leverage—repeatedly borrowing against collateral and using the borrowed assets as new collateral—accounts for over 20% of total borrowing volume and 8.2% of all loan transactions, increasing borrowers’ exposure during market downturns. Liquidation events are highly concentrated, with WETH, wstETH, WBTC, and weETH collectively representing 90% of the total value of all liquidations.
Aave V3 Achieves Zero Bad Loans in 2024 by Shifting Risk to Borrowers
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Summary
Aave V3 achieved zero bad loans in 2024 by shifting risk to borrowers, according to a Bank of Canada working paper cited by TechFlow. Over-collateralization and liquidation mechanisms prevented lender losses by closing positions before collateral values fell below debt levels. Borrowers experienced reduced capital efficiency and higher risk, particularly due to recursive leverage, which accounted for over 20% of borrowing volume. Liquidations were concentrated in WETH, wstETH, WBTC, and weETH, which represented 90% of total liquidation value. Traders monitoring altcoins should evaluate how shifts in risk appetite impact leveraged positions.
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