Aave V3 reported zero non-performing loans in 2024, according to a Bank of Canada staff paper. The protocol’s automated liquidation system and strict overcollateralization requirements prevented lender losses by liquidating positions before collateral values fell below debt levels.
Daily lending earnings, circulating supply, and borrowing volumes (USD) on Aave V3. Source: Bank of Canada
However, this model shifted risk squarely onto borrowers. Recursive leverage-repeatedly borrowing against collateral-accounted for over 20% of total borrowed volume. Four assets dominated liquidations: Wrapped Ether (WETH), Wrapped Staked Ether (wstETH), Wrapped Bitcoin (WBTC), and Wrapped eETH (weETH).
Liquidation fees ranged from 5% to 10%, but combined losses-including missed price recoveries-reached 10% to 30% in severe events. The design eliminated bad debt by prioritizing lender safety over borrower capital efficiency.