The Aave Protocol V2
It’s the moment we’ve all been waiting for… V2 of the Aave Protocol on mainnet!
The Aave Protocol V1 launched at the beginning of this year, with the goal of unlocking value in DeFi and improving the user experience. The protocol quickly grew to over $1B market size in less than 6 months, record growth for the DeFi space! V1 brought to market innovations like Flash Loans and aTokens as new ways to unlock previously locked capital in DeFi and provide a permissionless savings account.
The Aave Protocol took major steps toward becoming more decentralised with the handover of the Admin Keys to the community. The Aave ethos is that finance should be as you like it, and with a working governance and “Aavenomics”, the future of the protocol is in your hands.
This week the Aave Protocol hit another major milestone, with $1B in Flash Loans volume! Due to the 0.09% fee for Flash Loans, this has created an additional $906K going to reward depositors since the launch of V1.
Today, the Genesis Team is happy to introduce some Aavesome new features to unlock more value in DeFi and make the overall experience more seamless.
The Genesis Team is excited about this glow up, and your feedback throughout the V1 phase has been the inspiration for these updates. For more details on V2, feel free to read the Whitepaper.
What’s new with V2?
Yield & Collateral swap
In DeFi, assets that were being used as collateral were tied up, but now with V2 they are free to be traded. Users can trade their deposited assets, across all currencies supported in the Aave Protocol, even when they are being used as collateral. Collateral swapping can be a useful tool to avoid liquidations. If the price of your collateral starts to fall, for example, you can simply trade it for a stablecoin so you don’t have to worry about price fluctuations and potential liquidation. This feature also allows you to swap your assets to get the best yields on the market, essentially creating the first market for collateral and yield trading in DeFi.
Flash Loans Upgraded
Flash Loans were the first undercollateralised loan option to shake up the DeFi space, resulting in the creation of many innovative tools and “money legos”. Flash Loans continued to inspire ideas to make new features possible in Aave V2.
Repayment with collateral
Before V2, if a user wanted to use part of their collateral to repay a loan, they had to first withdraw the collateral, use it to buy the borrowed asset, and then finally repay the debt and unlock the deposited collateral. This requires at least 4 transactions across multiple protocols, costing time and money and making for an overall not-so-seamless experience. This new feature allows users to close their loan positions by paying directly with their collateral in just 1 transaction — smooth and simple.
Flash liquidations
Previously, a liquidator needed to have capital in their own wallet or source it from somewhere else in order to liquidate a position and get that liquidation bonus. Flash Loans are a great equaliser that make it possible for everyone to have access to liquidity so they can take advantage of the financial tools DeFi offers. With Aave V2, liquidators can utilise Flash Loans to flash borrow the capital from the Aave Protocol itself in order to execute a liquidation.
Batch Flash Loans
Flash Loans are getting more powerful. With V1, Flash-borrowers could only borrow one currency at a time. Batch Flash Loans let developers execute a Flash Loan with multiple assets inside the same tx. This means a Flash-borrower can access virtually all the Protocol liquidity.
Debt Tokenization
In V2, debt positions are tokenized, so borrowers will receive tokens that represent their debt. This debt tokenisation enables native Credit Delegation within the Aave Protocol and allows borrowers to manage their debt position from cold wallets.
Native Credit Delegation
Undercollateralised loans in DeFi have been an increasingly popular way to open up access to liquidity without needing existing capital, and Native Credit Delegation will expand on this with V2.
Credit Delegation was introduced back in July, and then the first Credit Delegation on Aave Protocol to DeversiFi happened over the summer, using OpenLaw to conclude the loan agreement. Credit Delegation received a lot of hype, and now Aave V2 makes it native! Credit Delegation is designed so that a borrower could be an institution, business, NGO, cryptocurrency exchange (like DeversiFi), and more, opening up DeFi as a source of liquidity to the rest of the financial world. CD enables delegators to earn extra yield on top of the yield they already earn from the protocol and borrowers to access an uncollateralized loan.
The next step will be to add Credit Delegation to the UI, but for now if you’re a developer, you can follow this tutorial and try it out for yourself.
Gas Optimisations
Anyone using Ethereum recently has probably noticed some network congestion and high gas prices for transactions. To help mitigate these costs, Aave V2 introduces gas optimisations, lowering the cost of protocol transactions up to 50% in some cases!
Stable & Variable Rate Borrowing
DeFi is all about giving you more options so you can get what you want from finance. With Aave V2, borrowers can have both a stable borrow position and a variable borrow position at the same time, with the same underlying asset, from the same wallet. This gives borrowers more options and flexibility for their loan position, and borrowers are still able to switch between the variable and stable rate at any time.
Decentralised Access to V2
In the spirit of decentralisation, you can access Aave V2 directly from:
You should decide what your finances look like, and that includes having access to Aave’s financial tools and services directly from your favourite wallets and platforms.
Migration of Liquidity to V2
Recently AIP-3 was passed to make the migration from V1 to V2 more seamless. By using a Flash Loan powered migration tool, users will be able to make the transition without having to close their V1 loan positions.
This migration tool will be introduced later, so if you have V1 positions, no need to close them.
Security & Audits
Security is the top priority at Aave. Formal verification was completed by Certora, and you can read the full report here.
Aave V2 has been audited by MixBytes; CertiK; ConsenSys Diligence; and PeckShield, which includes an additional audit report in Chinese. Aave is the first company in the industry to do this, thus appealing to the growing Chinese market. A 5th audit by Sigma Prime is coming soon, and that will also be available publicly.
In addition to the smart contract audits, Aave is working with Gauntlet to test the financial infrastructure of the protocol: resilience to attacks by bad actors as well as incentives for honest participants. A Market Risk Assessment Report will present the market and liquidity risks of Aave’s assets as well as their performance under extreme scenarios with optimised parameter suggestions. Further analysis will assess the Ethereum congestion risk and how to make Aave more resilient.
Reserve Factor and Parameters Changes
The DeFi space has witnessed incredible growth and battle testing leading to a risk reduction across the Aave Market. Furthermore, the Aave ecosystem is mature with an involved and educated community. V2 pushes some of Aave’s current borrowing limits with an optimisation of the risk parameters:
- Increased collateral capacity for USDC, BAT, LINK, UNI, WBTC and WETH
- Cheaper stablecoin borrowing rates below optimal utilisation
V2 also introduces a Reserve Factor to finance the long term sustainability of the DAO. The Reserve Factor allocates a share of the protocol’s income to the ecosystem reserve. This reserve is used to sustain the DAO and pay contributors. One of the key expenses of the DAO is to reward Safety Module Stakers who cover the risk of deficit. As such, the Reserve Factor is also a risk premium and so it is calibrated based on the overall risk of the asset.
Thank you for being part of the journey
Aave has partnered up with Coingecko for an epic contest:
- 5000 candies gets you an Aave Ultraswag pack with 1 backpack, 1 t-shirt, 1 beanie and a special NFT “Aave-Chan” (10 units)!
- 1500 candies gets you a special edition Aave-Chan NFT (490 units)
Additionally, to celebrate the launch of V2, the first 100 addresses to use V2 and deposit at least $100 worth of assets for at least 10 days will receive an extra-special “pioneers” NFT in partnership with POAP!
The Genesis Team can’t wait to hear what you think about V2! Feel free to join the Aave Discord server, follow Aave on twitter, and join the governance forum to learn about and discuss future protocol updates.
