Aave Unveils Exciting v3.3 Upgrade to Boost Protocol Security

The decentralized finance (DeFi) lending platform Aave Aave recently shared the exciting news of its upgraded v3.3, a new iteration that streamlines debt management and liquidation processes, alongside ensuring full compatibility with the anticipated Umbrella integration. 

Aave v3.2 introduced Liquid eModes This update notably refines capital efficiency, enabling assets to engage in various eModes concurrently. However, Aave v3.3 shifts focus towards refining the management and liquidation of bad debt.

The revamped bad debt management system allows for the precise identification and monitoring of bad debt scenarios, which arise when liquidations leave accounts without collateral but still burdened with debt. Addressing this issue is crucial as it poses a potential risk to the entire protocol. Although the forthcoming Umbrella upgrade aims to remedy bad debt, Aave v3 is dedicated to monitoring and recording its occurrences.

In the past, liquidations typically resulted in leftover small debts that piled up over time and turned into liabilities for the protocol, rendering it impractical to clear them. By refining the liquidation algorithm to effectively mitigate these 'dust' debts, Aave v3.3 is making liquidations more thorough and efficient. 

The new bad debt management process operates by adding a validation step during liquidation, checking both the total collateral and debt associated with an account. If an account ends up with no collateral but still holds a debt, that remaining debt will be cleared (this process is known as bad debt cleanup), and the bad debt—which is recognized as a deficit—will be diligently recorded in a new data field within the reserve data.

Moreover, Aave v3.3 introduces a new function, eliminateReserveDeficit(), administered by a designated UMBRELLA role. The core Umbrella smart contract manages this role and executes slashing actions. This mechanism allows for two distinct flows: one involves the incineration of aTokens removed from Umbrella staking, while in the case of GHO on the v3 Ethereum main, the burning is executed directly, bypassing the use of aTokens.

Defining bad debt, or deficit, involves having zero collateral in the reference currency of an Aave pool (e.g., USD). This definition aims to be objective, providing a clearer and more detailed strategy for identifying bad debt without reliance on external subjectivity or outside oracles.

For users who already possess existing bad debt, this upgrade does not serve as a direct fix. Instead, it is recommended that the DAO addresses such positions using the repayOnBehalf function. This strategy makes the upgrade smoother while still delivering the intended results. 

Aave v3.3: Unveiling Liquidation Optimizations 

The latest version, v3.3, introduces enhancements to the liquidation mechanism. Currently, the protocol employs a 'Close Factor' to specify what percentage of a debt position can be settled in a single liquidation event. In Aave v2, this figure stood firmly at 50%. However, v3 has refined this, allowing for a variable range with a default close factor of 50%, expanding to a maximum of 100% when the user's health factor falls beneath a specified level (0.95 HF).

In this upgraded version, the Close Factor is now applied to the entirety of a position, enabling the liquidation of a full debt—like 3,000 GHO, USDC, or DAI—in one single transaction, thus enhancing efficiency.

To further tackle the lingering issue of minor debt amounts, a new system has been introduced. Now, liquidations can reach the 100% close factor if the user's total principal or total debt for the specific reserve drops below a defined MIN_BASE_MAX_CLOSE_FACTOR_THRESHOLD.

Additionally, a new safeguard is in place to prevent any debt or collateral from dipping below the MIN_LEFTOVER_BASE threshold post-liquidation. If either value risks falling below this benchmark—and neither reaches zero—the liquidation transaction will revert. 

For clarity, MIN_LEFTOVER_BASE is established as MIN_BASE_MAX_CLOSE_FACTOR_THRESHOLD divided by 2. This ensures that within the limits [0, MIN_BASE_MAX_CLOSE_FACTOR_THRESHOLD], a complete liquidation (at the 100% close factor) can be conducted. Conversely, for liquidations set at a 50% close factor within the range [MIN_BASE_MAX_CLOSE_FACTOR_THRESHOLD, Infinity], at least MIN_BASE_MAX_CLOSE_FACTOR_THRESHOLD / 2 will remain intact, making sure that small debt or collateral amounts are avoided.

What Is Aave v3?

Aave functions as a non-custodial liquidity market protocol, providing an opportunity for users to engage as either liquidity providers or borrowers. As liquidity providers, users contribute funds and enjoy passive income through accrued loan interest. Conversely, borrowers can tap into liquidity via methods like perpetual borrowing or one-block liquidity, promoting flexibility and decentralization.

Aave v3 This latest iteration brings several pivotal upgrades geared towards bolstering both efficiency and security on the platform. These enhancements focus on capital optimization, heightened security features, and cross-chain functionality. Among the noteworthy features is the isolation mode, enabling Aave Governance to list new assets with particular debt ceilings, alongside the efficiency mode (E-mode) which optimizes capital utilization when the collateral closely mirrors the prices of borrowed assets. These enhancements strengthen the platform’s decentralized nature and elevate overall user experience.