A recent Bank of Canada staff analysis revealed that the Ethereum-based lending market Aave V3 reported no unrecovered lender losses in 2024. The study, which examined data from early 2023 through May 2025, found automated liquidations typically occurred before collateral values fell below debt levels. Consequently, this design successfully prevented bad debt for lenders during the sample period.

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However, the paper noted this model came with a significant tradeoff. It shifted financial risk onto borrowers and constrained capital efficiency compared to traditional systems. The protocol’s reliance on automated controls required borrowers to post more collateral than they borrowed.

Meanwhile, recursive leverage strategies fueled borrowing demand on the platform. This practice accounted for over 20% of total borrowed volume and amplified user exposure when markets turned. Liquidations on Aave V3 tended to occur in concentrated waves, with four assets accounting for 90% of the total liquidated value.

The paper estimated borrower losses during major liquidation events could be significant. Liquidation fees ranged from 5% to 10%, and missed gains from price recoveries pushed combined losses to about 10% to 30% in some cases. Ultimately, the design protected lenders by exposing borrowers to abrupt losses during sharp price declines.

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