Aave V4: Major Upgrade of the Decentralized Finance Lending Protocol

Aave, as one of the largest and most mature lending protocols in the Decentralized Finance ecosystem, attracts significant attention from the industry with any of its movements. At the recent ETHCC conference, Aave’s founder officially announced the upcoming launch of the next major iteration, Aave V4.

This upgrade is not just a simple routine update, but a key milestone in Aave’s 2030 long-term strategic roadmap. It is scheduled to be proposed for the first time in May 2024 and aims to systematically address the limitations exposed during the operation of the V3 version, particularly making breakthroughs in key areas such as scalability and risk management. Through this far-reaching update, Aave hopes to fundamentally reshape the underlying architecture and core functions of the Decentralized Finance lending protocol, preparing for future development.

This article will explore the content of Aave V4 in detail, review its evolution, analyze the new architecture, and interpret these changes in the context of broader trends in the Decentralized Finance industry.

The Evolution of Aave

Aave started with ETHLend, a P2P platform where lenders and borrowers needed to find counterparties, but the process was slow and uncertain. Recognizing these flaws, the team upgraded the brand to Aave( in September 2018, transitioning from the P2P model to a liquidity pool-based point-to-contract )P2C( model, enabling instant lending. The subsequent V2 version further reduced transaction costs on the Ethereum network by optimizing smart contracts, allowing more people to access Decentralized Finance.

The current V3 version has made significant strides in capital efficiency and risk management, introducing several key features:

• Efficient Mode ) E-Mode (: Allows for higher borrowing capacity when the prices of the assets deposited and borrowed are highly correlated.

• 隔离模式)Isolation Mode(: Allows new high-risk assets to be launched in an “isolated” manner, only for borrowing specific stablecoins, and with a clear debt limit.

However, V3 also exposes deeper strategic limitations: a single entity architecture cannot flexibly respond to the needs of emerging markets and diversified scenarios. When the industry begins to introduce RWA) such as tokenized government bonds or private credit( as collateral, the single architecture of V3 seems inadequate.

This is precisely the core issue that V4 aims to fundamentally address: how to evolve from a single rigid product into a flexible platform that supports countless financial scenarios.

Aave V4: Modular New Architecture

V4 introduces a brand new “Liquidity Hub + Spoke” ) model. This architecture is a direct response to the limitations of a “single entity” and can be compared to the network of central banks and commercial banks in traditional finance.

• Liquidity Hub: Aave’s “central bank”

On every blockchain network running Aave, there is a unified liquidity center that aggregates all user-supplied assets. It focuses on macro liquidity management and risk control, providing stable and deep liquidity for the entire ecosystem. The liquidity centers on different chains can communicate and transfer liquidity efficiently through the “Unified Cross-Chain Liquidity Layer” (CCLL).

• Spoke:Aave’s “specialized commercial bank”

Spoke is a user-oriented modular lending market, with each market designed for a specific purpose and connected to a central liquidity hub. There may be:

1. Core Spoke: General lending for low-risk, high-liquidity blue-chip crypto assets such as ETH and WBTC.

2. E-Mode Spoke: Optimized for stablecoins, LST, and other highly correlated currency pairs, providing maximum capital efficiency.

3. RWA Spoke: Customized for tokenized treasury bonds, real estate, and other real-world assets, capable of integrating stricter access, custody, or compliance rules.

4. High Leverage Trading Spoke: Designed for professional traders, featuring a special interest rate model and risk control parameters.

The most important aspect of this design is its openness. V4 will allow developers to build and propose their own Spoke. If the new Spoke design is approved, it can obtain credit from the liquidity hub to launch new specialized markets using Aave’s liquidity network. This fundamentally transforms Aave from a mere product into a foundational platform for financial innovation.

Comparison: Aave VS. Sky( First MakerDAO)

To fully understand Aave’s strategic direction, it is helpful to compare it with its main competitor Sky( and MakerDAO). Sky has also recently undergone a rebranding and launched the “Endgame” plan. Both adopt a modular architecture, marking the industry’s development towards a more flexible and scalable design direction.

( similarities

The architecture of Sky can be described as “Sky Core + SubDAO”:

• Sky Core plays the role of a “central bank”, inheriting the function of issuing stablecoins. It sets core rules, maintains the stability of USDS, and serves as the ultimate credit and security guarantee.

• SubDAO is a semi-independent specialized organization that plays the role of a “commercial bank” aimed at specific fields. They are responsible for asset management and risk assessment, and are authorized to receive specific collateral and initiate USDS minting requests to Sky Core.

The similarities between Aave’s “Liquidity Hub + Spoke” and Sky’s “Sky Core + SubDAO” are obvious: both adopt the “central bank + specialized commercial bank” model, where the central bank formulates policies and provides liquidity, while specialized commercial banks are responsible for developing specific business scenarios.

) differences

Despite their similarities, Aave and Sky have significant differences in core business, economic models, and ecological sovereignty:

1. Types of Liquidity: Aave’s Liquidity Hub provides liquidity for a wide range of asset classes, including stablecoins, volatile assets, derivatives, and more. Sky focuses on the issuance, stabilization, and promotion of its native stablecoin USDS.

2. Economic Model and Sovereignty: This is the most fundamental difference. Sky SubDAO is granted high economic sovereignty, allowing it to issue its own governance tokens and build an independent economic model. The independence of Spokes in Aave V4 is weaker, as it cannot issue its own tokens, and the value generated will flow back to Aave DAO.

![Interpretation of Aave V4: Love and Hate with MakerDAO, Different Paths Leading to the Same Destination]###https://img-cdn.gateio.im/webp-social/moments-956fdc9027e6e121e459bc00001ff61a.webp###

Macro Perspective

The architectural shift of Aave and Sky is a direct response to shaping the major trends of the future of Decentralized Finance:

1. Integrating RWA: The next frontier of DeFi growth is considered to be the tokenization of real-world assets. A modular architecture allows protocols to create independent, customizable environments to manage RWA while maintaining core decentralized characteristics.

2. The Rise of Application Chains: It has become a trend for major protocols to launch their own exclusive blockchains. Aave and Sky have both announced related plans, namely Aave Network and NewChain. This marks a transition from the identity of “tenant” to that of “landlord.”

3. Impact on Ethereum: Although application chains seem to “leave” Ethereum, they actually rely on it as the final security and settlement layer. This reflects the transformation of Ethereum’s role, from the place where all activities occur to the foundational trust layer that provides security for the interconnected chain ecosystem.

Conclusion

Aave V4 is not just an upgrade, but a strategic repositioning. It is a solution to internal challenges and a proactive response to external opportunities. By transforming into a modular open platform, Aave is laying the groundwork to become the next generation of on-chain financial infrastructure. The “Liquidity Hub + Spoke” model brings higher capital efficiency to users and provides unprecedented flexibility for developers. This evolution marks the maturing of the DeFi industry, preparing for broader adoption and more complex financial integration. The launch of Aave V4 will be a key event to watch, with the potential to set new standards in the DeFi lending space in the coming years.