Comparing Major Lending Protocols: Aave vs. Compound

Detailed Instructions

Both Aave and Compound manage risk through a set of configurable on-chain parameters. The primary parameters include the Loan-to-Value (LTV) ratio, which defines the maximum borrowing power against collateral; the Liquidation Threshold, the LTV level at which a position becomes eligible for liquidation; and the Liquidation Penalty, a fee applied during liquidation. Additionally, protocols set Reserve Factors (a fee on interest sent to a protocol treasury) and Supply/Borrow Caps to limit exposure to any single asset.

• Sub-step 1: For Aave, query the LendingPoolConfigurator contract for an asset's parameters using its address (e.g., USDC: 0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48).
• Sub-step 2: For Compound, query the Comptroller contract and the specific cToken market (e.g., cUSDC: 0x39AA39c021dfbaE8faC545936693aC917d5E7563) for its collateralFactorMantissa (equivalent to LTV).
• Sub-step 3: Compare the values. For instance, Aave v3 Ethereum might set USDC LTV to 80%, while Compound v3 might set its USDC collateral factor to 75%.

Tip: These parameters are asset-specific and can differ significantly between stablecoins, volatile assets (like ETH), and newer altcoins, reflecting their perceived market risk.

Detailed Instructions

The governance frameworks for Aave and Compound are decentralized but differ in structure and speed. Aave uses a delegated voting model with AAVE token holders and Guardians. Proposals are executed via the Aave Governance V2 smart contracts after a voting and timelock delay. Compound employs a Comptroller-administered system where changes are proposed by COMP token holders and must pass a 3-day voting period and a 2-day timelock before execution via the _setCollateralFactor or _setReserveFactor functions.

• Sub-step 1: For Aave, locate a recent Aave Improvement Proposal (AIP) on Snapshot (e.g., AIP-XXX) and trace its on-chain execution via the Executor contract.
• Sub-step 2: For Compound, find a passed Proposal (e.g., Proposal 123) and verify its execution transaction calling the Comptroller.
• Sub-step 3: Compare the typical timeframes: Aave proposals can take ~1 week from snapshot to execution, while Compound's process is slightly shorter but has a fixed 2-day timelock for all actions.

Tip: Both systems have emergency mechanisms (e.g., Aave's Guardian, Compound's Pause Guardian) that can disable markets without a full vote in critical situations.

Detailed Instructions

Liquidation engine logic is critical for risk management. You must calculate the Health Factor (Aave) or Account Liquidity (Compound) for a given position. For Aave, a Health Factor below 1.0 triggers liquidation. For Compound, an account with negative liquidity (calculated using (sumCollateral * collateralFactor) - sumBorrows) is undercollateralized. Use these formulas to simulate price drops and identify the liquidation threshold price for a specific borrowing position.

• Sub-step 1: For a user with 10 ETH collateral (price: $3,000) borrowing 15,000 USDC on Aave v3 (LTV 80%, Liquidation Threshold 82.5%), calculate Health Factor: HF = (Collateral in USD * Liquidation Threshold) / Total Borrow in USD.
• Sub-step 2: Simulate an ETH price drop. Solve for the price where HF = 1.0: 1.0 = (10 * P * 0.825) / 15000. This gives a liquidation price of ~$1,818.
• Sub-step 3: Perform a similar calculation for Compound using its getAccountLiquidity view function on the Comptroller.

javascriptCopy
// Example Aave Health Factor calculation snippet
const collateralEth = 10;
const ethPrice = 3000;
const borrowUsdc = 15000;
const liquidationThreshold = 0.825; // 82.5%
const healthFactor = (collateralEth * ethPrice * liquidationThreshold) / borrowUsdc;
console.log(`Health Factor: ${healthFactor}`);

Tip: Always account for the liquidation penalty (e.g., 5-10%) which increases the debt during liquidation, making positions riskier than the raw threshold suggests.

Detailed Instructions

Oracle configurations are the bedrock of risk management, as they provide the price data that determines collateral values and liquidation triggers. Aave primarily uses Chainlink Aggregators as its primary oracle, with a fallback mechanism. Compound v2 uses a Chainlink-based Open Price Feed managed by the UniswapAnchoredView contract, while Compound v3 uses Chainlink directly. You must monitor the oracle addresses and understand the consequences of price feed staleness or manipulation.

• Sub-step 1: For Aave v3 on Ethereum, find the price oracle address via LendingPoolAddressesProvider.getPriceOracle() (e.g., 0x54586bE62E3c3580375aE3723C145253060Ca0C2).
• Sub-step 2: For Compound v2, query the Comptroller.oracle() function to get the UniswapAnchoredView address.
• Sub-step 3: Use a block explorer or subgraph to check the latest price updates for critical assets (e.g., ETH/USD). A significant deviation or stale timestamp could indicate a problem.
• Sub-step 4: Compare the oracle update frequency and heartbeat. Chainlink oracles often have a heartbeat of 1 hour, but critical pairs update more frequently.

Tip: In stress events, the difference in oracle design can lead to varying liquidation behavior. Aave's multi-source fallback may provide more robustness compared to Compound v2's design.

Detailed Instructions

Interest rate models are dynamic risk parameters that control borrowing costs based on pool utilization. A sharp increase in rates can trigger deleveraging. Aave typically uses a variable rate model with kinked slopes, where rates jump sharply at an optimal utilization rate (e.g., 80-90%). Compound uses a jump rate model with a similar kink. You must analyze the model's constants: base rate, slope1 (before kink), slope2 (after kink), and the optimal utilization point.

• Sub-step 1: Fetch the current utilization for a market: (Total Borrows) / (Total Supply).
• Sub-step 2: Retrieve the interest rate model address. For Aave: call LendingPool.getReserveData(assetAddress).interestRateStrategyAddress. For Compound: call cToken.interestRateModel().
• Sub-step 3: Query the model's constants. For a typical Aave v3 model, you might see: baseVariableBorrowRate=0, optimalUtilizationRate=8000 (80%), variableRateSlope1=400 (4%), variableRateSlope2=7500 (75%).
• Sub-step 4: Calculate the current borrow APY using the model's calculateInterestRates function logic.

Tip: A model with a very high slope2 can cause a "rate shock" if utilization crosses the kink, potentially making positions instantly unprofitable and triggering mass exits or liquidations.