Introduction

Isolation Mode in Aave V3 is a feature designed to safely introduce new or volatile assets into the protocol by limiting how they can be used as collateral. When an asset is designated as an "Isolated Collateral Asset," it can only be used to borrow specific stablecoins that have been approved by Aave Governance. This setup helps to contain the risk associated with these assets. In the Aave Labs interface, assets that can only be supplied in Isolation Mode are clearly marked with an isolated icon and description, making it easy for users to identify them.

Supplying an Isolated Asset

When you supply an Isolated Asset, it may be used as collateral under certain conditions. If it's the first asset you’re supplying or if you don’t have any other assets enabled as collateral, you can use the Isolated Asset to borrow approved stablecoins. However, if you already have other assets enabled as collateral, the Isolated Asset can still be supplied, but it won’t be eligible as collateral. This means you can earn interest on it, but you can’t use it to borrow unless it’s your only collateralised asset.

Borrowing in Isolation Mode

When using an Isolated Asset as collateral, you are limited to borrowing only the stablecoins that are approved for Isolation Mode. This restriction helps manage the risk associated with these assets. Additionally, while in Isolation Mode, you cannot enable any other assets as collateral, including other Isolated Collateral Assets. This enforces that the borrowing risks remain contained within the guidelines set by Aave Governance.

Exiting Isolation Mode

If you decide to exit Isolation Mode, the process requires that you first repay any outstanding debt associated with the Isolated Asset. Once the debt is cleared, you can disable the Isolated Asset as collateral, allowing you to revert to the standard borrowing options available in the protocol.