Bank of Canada: The cost of zero bad loans in Aave V3 is transferring all losses to borrowers

Odaily reports that a working paper released by the Bank of Canada shows Aave V3 achieved zero bad loans in 2024, but its risk control mechanism essentially shifts all losses onto borrowers to protect lenders' interests, according to BOC. The study, based on transaction data from January 27, 2023 to May 6, 2025, found that Aave V3 relies on over-collateralization and automatic liquidation mechanisms, closing positions before collateral value falls below outstanding debt, effectively curbing lender losses. However, this model compromises borrower interests and has lower capital efficiency compared to traditional lending systems.

The paper also pointed out that recursive leverage (i.e., repeatedly borrowing against collateral and then using borrowed assets as new collateral in a cycle) accounts for more than 20% of total borrowing volume and 8.2% of borrowing transactions, increasing borrowers’ risk exposure in market downturns. Liquidation events are highly concentrated, with WETH, wstETH, WBTC, and weETH accounting for 90% of total liquidation value. (Cointelegraph)