Aave V4 Unveils Advanced Liquidation Engine With Target Health Factor And Bonus System
In Brief
Aave’s V4 upgrade introduces a redesigned liquidation engine that enables precise debt repayment, variable bonuses, and full clearing of dust debt to enhance efficiency and protocol stability.
Decentralized finance (DeFi) lending protocol Aave has launched a new liquidation engine in its V4 upgrade, featuring a redesigned mechanism that improves upon the system used in V3. This update changes how liquidations are executed and aims to make the process more precise and efficient.
In V4, liquidations no longer rely on repaying a fixed portion of a borrower’s debt. Instead, liquidators can repay only the amount necessary to restore the borrower’s health factor to a predetermined level known as the Target Health Factor. This target is set through governance for each Spoke, giving the protocol greater control over liquidation procedures. When a liquidation occurs, the protocol calculates the exact debt repayment needed to reach the Target Health Factor. Typically, liquidators repay only this calculated amount, avoiding over-liquidation and enabling more efficient action.
The V4 engine also introduces a variable liquidation bonus. The reward for liquidators adjusts according to the borrower’s health factor, increasing as the health factor decreases. This creates a Dutch-auction-style system where the incentive to liquidate rises with the level of risk, encouraging liquidators to address the most precarious positions promptly and enhancing the overall stability of the protocol.
Several parameters guide this process behind the scenes. The maxLiquidationBonus sets the upper limit for bonuses that a liquidator can receive for a particular collateral type. The healthFactorForMaxBonus specifies the health factor at which the maximum bonus applies. The liquidationBonusFactor defines the minimum bonus awarded at the liquidation threshold. Together, these parameters establish the connection between health factor and bonus, allowing governance to fine-tune the liquidation mechanism.
Moreover, one challenge in liquidation systems is handling dust debt, which refers to small remaining debt positions that are not economically practical to liquidate. In Aave V3, dust is managed through complex rules based on thresholds for amounts before and after a liquidation. While this prevents accumulation of dust, it can also leave positions only partially liquidated.
Aave V4 addresses this differently. If the remaining debt or collateral after a liquidation falls below the DUST_LIQUIDATION_THRESHOLD, and the liquidator chooses to repay the entire position, the protocol dynamically adjusts the maximum debt that can be liquidated. This ensures that the position is fully cleared, preventing dust from accumulating.
Aave V4 Introduces Smarter, More Efficient Liquidation System To Enhance Stability And User Protection
Overall, V4 introduces a more precise and efficient liquidation process. Whereas V3 typically limits repayment to a fixed percentage of the debt, V4 calculates the repayment needed to return the borrower to the Target Health Factor set by governance. This approach avoids over-liquidation and ensures only the necessary debt is repaid.
The liquidation bonus is also restructured. In V3, the bonus is fixed and does not vary with the borrower’s health factor, requiring governance intervention for changes. In V4, the bonus adjusts according to the health factor, increasing as the borrower’s risk rises. This incentivizes liquidators to address the riskiest positions promptly, enhancing the protocol’s resilience.
The new V4 engine makes the protocol more user-friendly and capital-efficient. Borrowers are protected from excessive liquidation, as liquidators can only repay what is necessary to restore a healthy position. At the same time, the variable bonus encourages timely action on high-risk positions, reducing the likelihood of bad debt accumulation.
The simplified treatment of dust debt improves reliability, as small leftover positions are now easier to fully clear. Additionally, V4 is more gas-efficient, reducing the cost of liquidations compared with V3. These changes collectively create a more flexible, fair, and risk-aligned system. Given the scale of Aave’s liquidations, which can total hundreds of millions of dollars each month, these improvements are expected to enhance the protocol’s stability and 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.
