Aave V3 Lending/Borrowing
Overcollateralized lending — $24.8B TVL, algorithmic liquidation. Aave Horizon adds institutional KYC layer.
CTR (USD 10,000+)TRAVEL-RULE (USD 3,000+)ENHANCED-DUE-DILIGENCE (USD 50,000+)
Step 1 · Supplier WalletPolicy-EnforcedBlockchain-Native
Depositor in traditional bank. Supplies collateral, earns variable interest on supplied assets.
User self-custody wallet supplies collateral (ETH, USDC, DAI, etc.) to Aave V3 lending pool. On Aave Horizon (institutional variant), supplier address must be whitelisted and subject to KYC/AML. On permissionless Aave V3, anyone can supply — no identity layer. Enforcement is policy-level (frontend geo-blocking and asset-level freezes like USDC) rather than protocol-enforced. Supply action mints aTokens (interest-bearing tokens) to supplier wallet.
Step 2 · Oracle Price FeedCode-EnforcedBlockchain-Native
Real-time market data feed. Determines collateral valuation for borrowing power.
Chainlink oracle (primary) or Aave Lens oracle (secondary) pushes current market prices for supplied collateral. Health factor calculation depends on oracle price—if price drops, health factor approaches liquidation threshold (1.0). No jurisdiction sensitivity; oracle feed is global market data. Code-enforced via smart contract logic.
Step 3 · Borrow ExecutionCode-EnforcedBlockchain-Native
Loan issuance. Borrower receives stablecoins or assets; Aave accrues interest algorithmically.
Borrower initiates borrow transaction against supplied collateral. Aave V3 algorithm checks health factor: (collateral value × LTV) / borrowed amount. If health factor > 1, borrow succeeds. Interest rate is set by utilization curve (determined by governance) — no human underwriting, no credit committee. Aave IS the lender; borrowed amount is minted debt tokens (variableDebtToken). Code-enforced via smart contract; no approval or discretion.
Step 4 · Liquidation EngineCode-EnforcedBlockchain-Native
Automated collateral seizure. Traditional finance counterpart: forced sale to recoup lender losses.
Aave Health Factor Monitor tracks: (collateral value × LTV) / borrowed amount. When health factor < 1, collateral is underwater. Any liquidator bot can call liquidateCall() to seize collateral and repay borrower debt, earning a liquidation bonus (typically 5-10% of seized collateral). This is permissionless and code-enforced — no discretion, no human approval. Liquidation is the compliance center of gravity in Aave: algorithmic risk management replaces traditional credit committees.
Step 5 · Borrower PositionCode-EnforcedBlockchain-Native
Borrower outstanding debt. Must repay to reclaim collateral, or face liquidation.
Borrower's variableDebtToken balance represents outstanding borrowed amount. Borrower must repay debt (principal + accrued interest) to recover supplied collateral. Repayment burns debt tokens and reduces collateral lockup. If repayment is not made and health factor falls below 1, liquidator can seize collateral without borrower consent. All logic is code-enforced via smart contract.
Resolved 5 steps across 1 chain(s). 3 threshold(s) triggered. Frameworks: Bank Secrecy Act, GENIUS Act, OFAC Sanctions Program, FATF Recommendation 16 (Travel Rule), Common Reporting Standard / FATCA.