I am a newbie in the blockchain/Web3 space and trying to understand the AAVE protocol.
Suppose a borrower deposits 1 ETH whose value is 500 DAI Tokens(500$) as collateral to borrow 100 DAI Tokens(100$) on Aave (the Stable APY and the time the loan is borrowed for is more than enough to repay the lender with Interest.).
The Borrower Takes the Loan.
In this time if the value of ETH falls to 50DAI (50$), the collateralization ratio and Health Factor decreases, and the borrower's collateral is liquidated to cover the outstanding debt. However, the liquidation of the collateral is not sufficient to cover the outstanding debt, and Aave incurs a loss of 50$.
How does AAVE Counters this scenario?
Things I have thought of :-
Overcollateralization : the Stable APY and the time the loan is borrowed for is more than enough to repay the lender with Interest but still it lost 50$.
Liquidation : still looses 50$.
what can AAVE possibly do in this situation?