The Aave protocol smart contracts (the “Aave Protocol”) were initially deployed on the Ethereum mainnet in 2019. The Aave Protocol’s first version allowed users to offer and obtain liquidity independently, as well as earn a return on any liquidity they gave to the protocol.
A second version of the Aave Protocol was released in December 2020, bringing new capabilities to the DeFi ecosystem’s liquidity provision and access. For example, credit delegation, the ability for users to choose between stable and variable interest rates on any borrow transaction, and several gas optimizations and improvements were all included in version 2 of the Aave Protocol.
Over the last two years, the Aave Ecosystem has evolved naturally, enabling the Aave Protocol’s successful, safe, and risk-aware operation. The Aave Protocol’s expansion from the Ethereum mainnet to the Polygon and Avalanche networks has been favourably received by the community.
Aave to get a V3
All indications point to Aave obtaining a V3 in the near future. Snapshot voting is now open, with well over 99.9% of votes in favour of the protocol’s next iteration being released.
The suggested improvements in V3 demonstrate how DeFi is becoming more cross-chain and focused at Ethereum Layer 2s. User safety and increased capital efficiency are also major themes. The feature “Portal,” which allows users of the lending protocol to shift their supplied liquidity across blockchains, is perhaps the most significant update in Aave’s V3.
Features of the Addition
In reality, getting a V3 means that users will burn aToken on one blockchain while minting them on another blockchain. Cross-chain solutions such as Hop Protocol, Connext, and others will be used to shift the underlying assets. Users will be able to readily relocate assets to where demand and yields are strongest, which should improve capital efficiency.
The second addition to V3 is High-Efficiency Mode, or eMode, which categorizes assets based on four specifications: loan-to-value, liquidation threshold, liquidation bonus, and an optional custom pricing oracle.
When enabled, eMode allows users who supply assets in a certain category to borrow assets from that group with a higher collateral factor, meaning they can borrow more and a reduced liquidation penalty.
Because the collateralized asset lowers in value, so does the borrowed asset, the protocol is able to boost borrowing power within a particular category. This results in a much more predictable ratio between the two. More capital efficiency will be possible as a result of this.
The third major feature of Aave’s V3 is the addition of new risk characteristics, the most notable of which is isolation mode, which can be activated when a token is accepted for listing as collateral for the first time.
Compatibility of V2 and V3 Codes
The V3 codebase consists of a separate and distinct set of smart contracts that are incompatible with the V2 codebase. However, once all audits are completed, the V3 code will be open-sourced, and a separate repository containing a retro-compatible version of V3 will be provided. If the community chooses, they will be able to update the V2 contracts thanks to this compatibility.
Once the V3 code has been battle-tested, it will be open-sourced, along with the main V3 repo, for deployment on the Ethereum, Avalanche, and Polygon networks.