Aave avoided bad debt by shifting risk to borrowers: Bank of Canada study

Written by Ezra Reguerra, Staff WriterReviewed by Bryan O’Shea, Staff EditorAave avoided bad debt by shifting risk to borrowers: Bank of Canada study4 hours agoA Bank of Canada staff paper found Aave V3 avoided bad debt in 2024, but said the model pushed losses onto borrowers during liquidations.       Listen0: 00 Cointelegraph in your social feed           A Bank of Canada staff paper found that Aave V3 reported zero non-performing loans in 2024, with overcollateralization and automated liquidations helping prevent lender losses in its Ethereum lending market. Using transaction-level data from Jan. 27, 2023, to May 6, 2025, the study found that positions were typically liquidated before collateral values fell below outstanding debt, helping contain lender losses across the sample. But the model came with a tradeoff, the paper said. While it protected lenders from unrecovered losses, it also shifted risk onto borrowers and constrained capital efficiency compared with traditional lending systems. According to the paper, Aave V3’s design relies on automated risk controls rather than traditional underwriting, requiring borrowers to post more collateral than they borrow and liquidating positions when they breach risk thresholds. Recursive leverage fueled borrowing demandAccording to the paper, Aave V3’s lending activity was not driven solely by users seeking liquidity.