Leveraged funds act as a double-edged sword, amplifying market cycles. During bull markets, they fuel price surges, while in downturns—like recent crypto crashes—they trigger cascading liquidations. OKX Cloud Chain data reveals that on June 14 alone, Aave and Compound saw $53.1M and $45.44M in liquidations, respectively.
This article dissects the risk management frameworks of three leading lending protocols: Maker, Aave, and Compound, focusing on their oracle systems, collateral ratios, liquidation thresholds, and emergency mechanisms.
Key Findings at a Glance
- Oracle Security: All three protocols employ robust oracle systems. Aave and Compound use Chainlink, while Maker built a custom solution with a 1-hour price delay.
- Stablecoin Support: USDC is widely accepted across protocols, whereas USDT—despite its market cap—is excluded as collateral.
- Capital Efficiency: Aave leads with higher Loan-to-Value (LTV) ratios and supports stETH, attracting billions in deposits.
- Emergency Protocols: Maker and Aave can mint additional tokens to cover deficits; Compound relies on governance for such scenarios.
- Borrowing Limits: Maker imposes per-Vault caps, Compound limits select assets, while Aave has no restrictions.
- Revenue Models: Maker burns MKR with surplus fees; Aave shares profits with stakers in its Safety Module; Compound distributes via governance.
Maker: The Pioneer of Decentralized Stablecoins
Oracle Mechanism
Maker’s oracle design pioneered decentralized medianizers and off-chain aggregation—later adopted by Chainlink. Here’s how it works:
- Feeds: Anonymous individuals or known entities submit price feeds from chosen exchanges.
- Medianizer: Aggregates prices, computes the median, and queues it via an Oracle Security Module (OSM) with a 1-hour delay to deter manipulation.
👉 Explore Maker’s oracle design
Collateralization & Liquidation
- Vault Types: ETH-A (145% collateral ratio), ETH-B (130%), and ETH-C (170%) offer tiered risk/return profiles.
- Liquidation: Triggered when collateral value falls below the set ratio (e.g., ETH-C liquidates at 170%). As of June 27, ETH-C’s average collateralization was 399%, indicating low systemic risk.
Auctions & Emergency Shutdown
- Collateral Auctions: Sell liquidated assets to cover debts.
- Debt Auctions: Mint new MKR to recapitalize during crises (e.g., March 2020’s $5M shortfall).
- Emergency Shutdown: Activated by MKR holders, allowing DAI redemptions at collateral value.
Aave: Capital Efficiency and Innovation
Oracle & LTV Ratios
- Uses Chainlink with a 0.5% price deviation or 1-hour update threshold.
- Loan-to-Value (LTV): USDC (86%), WETH (83%), WBTC (70%), and stETH (73%)—enabling high capital utilization.
Liquidation & Safety Module
- Thresholds: Slightly above LTV (e.g., USDC liquidates at 88%).
- Safety Module: Stakers insure the protocol, covering 30% of deficits. Excess liabilities trigger AAVE minting.
👉 Learn about Aave’s Safety Module
Compound: Governance-Centric Risk Management
Oracle & Collateral Factors
- Hybrid Model: Chainlink prices validated against Uniswap TWAPs ± a buffer.
- Collateral Factors: USDC (84%), ETH (82%), WBTC (70%). USDT is excluded due to perceived risks.
Liquidation & Governance
- Account Liquidity: Negative liquidity triggers liquidation.
- Upgradability: No predefined emergency measures, but governance can implement changes.
FAQs
Q1: Why does USDT face restrictions despite its market dominance?
A1: Protocols cite USDT’s opaque reserves and legal risks, favoring USDC’s transparency.
Q2: How does Maker’s 1-hour price delay enhance security?
A2: It mitigates flash loan attacks by reducing arbitrage opportunities from short-term price manipulation.
Q3: Which protocol offers the highest LTV for ETH?
A3: Aave permits 83% LTV for WETH, versus Maker’s 130–170% and Compound’s 82% for ETH.
Q4: Can users recover funds during Maker’s emergency shutdown?
A4: Yes, Vault owners reclaim excess collateral; DAI holders redeem at proportional collateral value.
Q5: How does Aave’s stETH integration boost deposits?
A5: By accepting stETH (with 73% LTV), Aave captured $1.56B in deposits, leveraging Ethereum’s staking demand.
Conclusion
Each protocol tailors risk controls to its ethos: Maker prioritizes stability with conservative collateral ratios, Aave optimizes capital efficiency, and Compound leans on governance flexibility. Understanding these mechanisms helps users navigate risks—whether minting DAI, leveraging stETH, or borrowing against WBTC.