Isolation Mode

Overview

Isolation Mode is a risk management feature that allows Aave to list new or volatile assets while limiting their impact on the protocol. Assets in Isolation Mode can only be used as collateral to borrow stablecoins, with specific debt ceilings limiting total protocol exposure.

Key Concepts

Isolation Characteristics

• Assets in Isolation Mo
• de are "isolated" from other collateral types
• Only stablecoin borrowing is permitted against isolated collateral
• Each isolated asset has its own debt ceiling
• Positions using isolated assets cannot use other collateral types simultaneously

Debt Ceiling

• Maximum amount of stablecoins that can be borrowed against an isolated asset
• Set per asset through governance
• Applies to total protocol borrowing, not individual users
• Can be adjusted based on risk assessment and market conditions

How Isolation Mode Works

Using Isolated Assets

1. User deposits an asset marked for Isolation Mode
2. Isolation Mode activates automatically for that user
3. User can only borrow stablecoins up to:
   • Their collateral-based borrowing power
   • The remaining debt ceiling capacity
   • Whichever is lower

Example Transaction

function supply(
    address asset,
    uint256 amount,
    address onBehalfOf,
    uint16 referralCode
) external;

Limitations

• Cannot mix isolated and non-isolated collateral
• Limited to stablecoin borrowing
• Must maintain position within debt ceiling
• One isolated asset per position

Risk Management

Protocol Benefits

• Controlled exposure to new assets
• Limited contagion risk
• Gradual asset integration
• Protected protocol solvency

User Considerations

• Limited borrowing options
• Potentially higher risk parameters
• No multi-collateral positions
• Debt ceiling constraints

Technical Implementation

Checking Isolation Status

function getReserveData(address asset) 
    external 
    view 
    returns (ReserveData memory);

Debt Ceiling Verification

function getDebtCeiling(address asset) 
    external 
    view 
    returns (uint256);

Management via Governance

Asset Management

• Governance can add/remove assets from Isolation Mode
• Debt ceilings adjusted through governance
• Risk parameters set per asset
• Regular review of isolated assets

Parameter Adjustment

• Collateral factors
• Liquidation thresholds
• Debt ceilings
• Eligible borrow assets

Best Practices

For Users

1. Monitor debt ceiling usage
2. Understand asset-specific risks
3. Maintain safe collateral ratios
4. Plan for potential ceiling changes

Risk Mitigation

1. Keep position well below maximum capacity
2. Monitor market conditions closely
3. Have exit strategy prepared
4. Understand liquidation risks

Use Cases

New Asset Integration

1. List new asset in Isolation Mode
2. Set conservative debt ceiling
3. Monitor performance and risk
4. Gradually adjust parameters

Volatile Asset Management

1. Place volatile assets in Isolation Mode
2. Limit exposure through debt ceilings
3. Restrict to stablecoin borrowing
4. Protect broader protocol

Market Impact

Protocol Security

• Reduced risk from new assets
• Protected main markets
• Controlled exposure growth
• Enhanced stability

User Opportunity

• Access to new assets
• Safer borrowing environment
• Clear risk parameters
• Transparent limitations

Note: All parameters mentioned are examples only. Current values should be checked directly through the Aave interface or smart contracts, as they can change through governance decisions.