Aave V3 officially launches, featuring four important new characteristics.

Original Title: "What's New in Aave V3 Deployed on Ethereum Mainnet?"

Source: Aave

Translated by: DeFi Road

On January 27th, DeFi lending protocol Aave announced that its V3 version has been deployed on the Ethereum mainnet. The Ethereum network is the first and largest market for Aave deployment. V3 is the most important upgrade to the Aave protocol to date, and is the result of the Aave community's relentless pursuit of security, capital efficiency, and risk management.

V3 was first deployed in six networks in March 2022, including Polygon, Avalanche, Arbitrum, and Optimism. After being tested on these networks, this week Aave Governance voted to deploy V3 on the Ethereum mainnet.

Aave V3 is what?

Aave V2 was launched in December 2020, building on its predecessor V1. The exponential growth of the DeFi ecosystem prompted the Aave team to focus on Aave V3, introducing important new risk mitigation features and improving capital efficiency. In just over two years since its launch, the Aave protocol has a TVL of approximately $6.5 billion across the Aave V2 and V3 markets (as of January 27, 2023).

V3's design adopts a flexible architecture to improve composability and make it possible to build various innovative features on top of the protocol, such as new risk management tools that provide additional security and stability. Examples include supply and borrowing limits, as well as risk and list managers. Aave V3 also improves capital efficiency and decentralized liquidity while reducing gas fees by 25%.

Efficient Mode

This mode is also known as "E-mode". When the collateral provided by the user is related to the assets they have deposited and borrowed, the user can obtain higher borrowing capacity, thereby allowing the user to maximize the use of collateral and improve capital efficiency.

When the volatility of the supply asset and the borrowing asset are related, especially when the two assets belong to the same category, such as stablecoins pegged to the US dollar, this is where E-Mode comes in handy. Let's take an example:

If a user supplies collateralized ETH (stETH) and wants to borrow ETH, because they are the same asset, volatility is correlated. In Aave V2, the user's current loan-to-value ratio is 82.5%. In V3, users can access E-Mode, allowing them to have up to 97% borrowing power when assets are linked.

Isolation Mode

Assets listed in this mode are isolated from the main asset liquidity. These assets can be used as collateral to borrow stablecoins and unlock the listing of assets with lower liquidity without affecting the main market. Liquidity risk can be isolated because the isolation mode allows more assets to be listed as collateral on Aave while maintaining the security of the protocol.

Borrowers who provide isolated assets as collateral cannot provide other assets as collateral (although they can still supply them to earn yield). Borrowers using isolated collateral can only borrow stablecoins that Aave governance allows to be borrowed in isolation mode, up to the specified debt ceiling.

Gas Optimization

All Gas costs for all functions have been reduced by around 25%! The protocol upgrade has brought significant logical improvements, making the code more readable, modular, and optimized. Additionally, it has added a new simplified version of the flashLoan feature, allowing users to borrow a single asset with minimal gas costs. This optimization ultimately benefits users, allowing for lower-cost interactions with the Aave protocol.

For more detailed information about Aave V3 functionality, please read the technical paper or the developer documentation. The Aave Ethereum V3 address list can be found here.

V3 Migration Tool

If you want to move your assets from Aave V2 to Aave V3, you can now use the V3 migration tool!

This migration tool helps and guides you to transfer your position from V2 to V3 with one transaction on the V2 dashboard.

Your task is to:

Select the supply and borrowing you want to migrate.

Approve trades for each position signed.

Submit migration transaction

If you have open positions, the migration tool will notify you of the new Health Factor on V2 and V3. Please pay attention to this new Health Factor to mitigate liquidation risk.

Each supply position needs to migrate the contract approval before transferring aTokens, and each lending position needs credit delegation approval to migrate the contract before representing your lending in V3. Both approvals can be executed through signed messages or approval transactions.

Complex operations on the Ethereum blockchain can come at a high cost. If you have a large amount of borrowed assets on the mainnet and deposited them into V2, you can migrate them in batches. However, it is recommended to migrate no more than 5 assets in a single migration transaction.

If you don't want to, you don't need to migrate your V2 assets. The V2 contract is always running and will remain accessible in the future.

The migration tool combines credit delegation and flash loans to migrate positions. The tool retrieves assets, borrowed positions, amounts, and debt types provided by users from Aave V2. By using flash loans and credit delegation, the debt is repaid on V2 and the user borrows the same position and amount on V3, leaving the debt on V3.

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