Aave Rolls Out v3.3 Upgrade To Improve Protocol Security
In Brief
Aave has released the v3.3 upgrade, improving the protocol’s debt management and liquidation processes, while ensuring full compatibility with Umbrella.
Decentralized finance (DeFi) lending platform Aave recently announced the release of the Aave v3.3 upgrade, a new iteration of Aave V3. This update improves the protocol’s debt management and liquidation processes, while also ensuring full compatibility with the forthcoming Umbrella integration.
Aave v3.2 introduced Liquid eModes, which improved capital efficiency by allowing assets to participate in multiple eModes simultaneously. In contrast, Aave v3.3 shifts focus to enhancing the protocol’s bad debt management and liquidation processes.
The new bad debt management system enables the identification and accurate tracking of bad debt, which arises when liquidations leave accounts with no collateral but remaining debt. This situation poses potential financial risks to the protocol. Although the upcoming Umbrella upgrade (as outlined in the Umbrella Proposal) will address the bad debt, it is the responsibility of Aave v3 to track and log where and how much bad debt exists.
Additionally, liquidations in the past often left behind small residual debts that accumulated over time, making it uneconomical to clear them. This inefficiency created liabilities for the protocol. By refining the liquidation algorithm to reduce these residual “dust” debts, Aave v3.3 ensures that liquidations are more thorough and effective.
The upgraded bad debt management system works as follows: During liquidation, a new validation step is added to check both the total collateral and total debt of an account after liquidation. If an account ends up with zero collateral and non-zero debt, the remaining debt is burned (this is called bad debt cleanup), and the bad debt, referred to as a deficit, is recorded in a new data field on the reserve data.
Additionally, a new function, eliminateReserveDeficit(), is introduced to the pool, which is controlled by a permissioned UMBRELLA role. This role is managed by the core Umbrella smart contract, which handles slashing actions. The process enables two possible flows: one involves burning aTokens that were slashed from the Umbrella staking, while in the case of GHO on v3 Ethereum main, the burning occurs directly without using aTokens.
Bad debt, or deficit, is defined as having zero collateral in the reference currency of an Aave pool (e.g., USD). This definition is designed to be objective, avoiding any external subjectivity or reliance on outside oracles, providing a clearer and more granular approach to identifying bad debt.
For positions that already have existing bad debt, this upgrade does not provide a direct solution. Instead, the DAO is recommended to address these positions using a repayOnBehalf function. This approach simplifies the upgrade while still achieving the desired outcome.
Aave v3.3: Introducing Liquidations Optimization
Aave v3.3 introduces further improvements to the liquidation process. The protocol currently utilizes a “Close Factor” to determine the percentage of a debt position that can be repaid in a single liquidation. In Aave v2, this parameter was a fixed 50%, but in Aave v3, the logic has been enhanced to allow a range, with a default close factor of 50% and a maximum of 100%. The 100% close factor is applied when a user’s health factor falls below a certain threshold (0.95HF).
In Aave v3.3, this Close Factor is adjusted to apply to the entire position, meaning that a full debt, such as 3,000 GHO/USDC or DAI, can be liquidated in a single transaction, improving efficiency.
Additionally, to address the issue of accumulating small debt positions, a new mechanism is introduced. Liquidations are now permitted up to the 100% close factor if the total principal or total debt of the user for the specific reserve being liquidated falls below a defined MIN_BASE_MAX_CLOSE_FACTOR_THRESHOLD.
Additionally, a new mechanism has been introduced to prevent any debt or collateral from falling below the MIN_LEFTOVER_BASE threshold after a liquidation. If, after the liquidation, either the debt or collateral would fall below this threshold, but neither value is exactly zero, the transaction will revert.
In order to implement this, MIN_LEFTOVER_BASE is defined as MIN_BASE_MAX_CLOSE_FACTOR_THRESHOLD / 2. This ensures that within the range [0, MIN_BASE_MAX_CLOSE_FACTOR_THRESHOLD], a full liquidation (using the 100% close factor) can be completed. In contrast, for liquidations at a 50% close factor in the range [MIN_BASE_MAX_CLOSE_FACTOR_THRESHOLD, Infinity], at least MIN_BASE_MAX_CLOSE_FACTOR_THRESHOLD / 2 will remain, ensuring that small debt or collateral positions are avoided.
What Is Aave v3?
Aave operates as a non-custodial liquidity market protocol, allowing users to participate as either liquidity suppliers or borrowers. As suppliers, users provide funds to the platform and earn passive income through the interest accrued from loans. Borrowers, on the other hand, can access funds via mechanisms like perpetual borrowing or one-block liquidity, offering flexibility and decentralization.
Aave v3 introduces several key improvements aimed at increasing the platform’s efficiency and security. These include enhancements in capital efficiency, stronger security features, and cross-chain compatibility. Notable features include the isolation mode, which allows Aave Governance to list new assets with specific debt ceilings, and the efficiency mode (E-mode), which optimizes capital usage when the collateral and borrowed assets share closely correlated prices. These features strengthen the platform’s decentralization and improve overall user experience.
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About The Author
Alisa, a dedicated journalist at the MPost, specializes in cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a keen eye for emerging trends and technologies, she delivers comprehensive coverage to inform and engage readers in the ever-evolving landscape of digital finance.
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Alisa, a dedicated journalist at the MPost, specializes in cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a keen eye for emerging trends and technologies, she delivers comprehensive coverage to inform and engage readers in the ever-evolving landscape of digital finance.
