Opinion: Aave avoids bad debt by transferring risk to borrowers, thereby achieving zero non-performing loans in 2024.

Deep Tide TechFlow message. On April 3, according to Cointelegraph, a job paper released by a Canadian bank shows that Aave V3 achieved zero bad loans in 2024, but its mechanism protects lenders from losses by shifting losses to borrowers.

The study is based on trading data from January 27, 2023 to May 6, 2025, and found that Aave V3 relies on overcollateralization and automated liquidation mechanisms to close positions before the value of the collateral falls below the outstanding debt, effectively curbing lenders’ losses. However, this model comes at the expense of borrowers’ interests, and its capital efficiency is also lower than that of traditional lending systems.

The paper also notes that recursive leverage (i.e., repeatedly borrowing against collateral and then looping the borrowed assets as new collateral) accounts for more than 20% of the total borrowing volume and 8.2% of the number of borrowing transactions, exacerbating borrowers’ risk exposure during market downturns. Liquidation events show a concentrated surge pattern, with four asset types—WETH, wstETH, WBTC, and weETH—together accounting for 90% of the total liquidation value.