AAVE V4: A New Chapter in Decentralized Finance Lending

AAVE, as one of the largest and most mature lending protocols in the Decentralized Finance ecosystem, has always attracted significant attention from the industry. Recently, the founder of AAVE officially announced at the ETHCC conference that the team will launch the next major iterative version - AAVE V4.

This upgrade is not just a simple routine update, but a key milestone in the AAVE 2030 long-term strategic roadmap. The V4 was first proposed in May 2024, aiming to systematically address the limitations exposed during the operation of the V3 version, particularly making breakthroughs in core 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 DeFi lending protocol, laying the foundation for the future development of the protocol.

This article will delve into the specifics of AAVE V4, review its evolution, analyze the new architecture, and interpret these changes within the broader trends of the Decentralized Finance industry.

The Evolution of AAVE

The development of AAVE began with ETHLend, a P2P platform where lenders and borrowers needed to seek counterparties, but the matching process was slow and filled with uncertainty. After recognizing these fundamental flaws, the team upgraded the brand to Aave(, namely AAVE V1), in September 2018, decisively shifting from the P2P model to a liquidity pool-based P2C( contract model, enabling capital aggregation and instant lending. The subsequent Aave V2 further reduced transaction costs on the Ethereum network by optimizing smart contracts, allowing more people to access Decentralized Finance.

The current version AAVE V3 has made significant progress in capital efficiency and risk management. It introduces several key features:

• Efficient Mode ) E-Mode (: When the asset prices deposited and borrowed by the user are highly correlated, such as between stablecoins, or between ETH and stETH ), E-Mode allows users to achieve higher borrowing capacity. This directly addresses the issue of insufficient capital efficiency for correlated assets in V2.

• Isolation Mode (: Allows new, higher-risk assets to be launched in an "isolated" manner. Collateral provided under isolation mode can only be used to borrow governance-approved stablecoins, with a clear debt limit, and cannot be mixed with other collateral. This effectively "isolates" the risk of new assets, preventing risk contagion.

However, AAVE V3 also exposes deeper strategic limitations: the single entity architecture cannot flexibly respond to the demands of emerging markets and diversified scenarios. For example, when the industry begins to introduce RWA) such as tokenized government bonds or private credit( as collateral, the single architecture of AAVE V3 appears inadequate. RWA involves off-chain legal compliance, counterparty risk, and different liquidation logic, which cannot simply be integrated into the existing smart contract framework.

The core problem that AAVE V4 aims to fundamentally address is: how to evolve from a single rigid product to a flexible platform that can support countless financial scenarios.

AAVE V4: Modular New Architecture

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

• Liquidity Hub: AAVE's "central bank"

On each blockchain network running AAVE, there will be a unified liquidity center that consolidates all assets supplied by users. This center serves as the central liquidity source for the entire network, not providing "retail" services directly to end users, but focusing on macro liquidity management and risk control, providing stable and deep liquidity for the entire ecosystem. This model is expected to improve capital utilization, bring higher returns to lenders, and offer lower interest rates to borrowers.

Liquidity centers on different chains are not isolated but can efficiently communicate and transfer liquidity with each other. This is mainly achieved through the "Unified Cross-Chain Liquidity Layer" ( CCLL ) mechanism, whose core technological support is Chainlink's cross-chain interoperability protocol ( CCIP ).

• Spoke:AAVE's "specialized commercial bank"

The liquidity center operates in the background, allowing users to interact with the protocol through various Spokes. Spokes are user-facing, modular lending markets, each designed for a specific purpose and connected to the central liquidity center. They are like specialized commercial banks. For example:

• Core Spoke: A general lending platform for handling low-risk, highly liquid blue-chip crypto assets such as ETH and WBTC.

• E-Mode Spoke: Specifically optimized for stablecoins, LST, and other highly correlated currency pairs, providing the highest capital efficiency.

• RWA Spoke: Tailored for tokenized treasury bonds, real estate, and other real-world assets. This type of Spoke can integrate stricter access, custody, or compliance rules to meet institutional and regulatory requirements.

• High Leverage Trading Spoke: Designed for professional traders seeking high risk and high returns, with special interest rate models and risk control parameters.

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

Comparison: AAVE VS. SKY( before MakerDAO)

To fully understand AAVE's strategic direction, it is helpful to compare it with its main competitor SKY( and MakerDAO). SKY recently underwent a rebranding and launched its own "endgame" plan. Both have adopted a modular architecture, marking the industry's shift towards more flexible and scalable designs.

( Similarities

The architecture of SKY can be described as "Sky Core + SubDAO".

• Sky Core plays the role of "central bank" in the SKY ecosystem, inheriting the function of issuing stablecoins from MakerDAO, now USDS, previously DAI. It establishes core rules, maintains the stability of USDS, and serves as the ultimate credit and security guarantee.

• SubDAO is a semi-independent specialized organization operating within the SKY ecosystem, playing the role of a "commercial bank" focused on specific domains. The core functions of SubDAO are asset management and risk assessment. They are authorized by Sky Protocol to receive specific types of collateral and to initiate requests to Sky Core for the minting of USDS.

The similarities between AAVE's "Liquidity Hub + Spoke" and SKY's "Sky Core + SubDAO" are evident: both recognize that a single entity cannot satisfy all market demands, and thus adopt the "central bank + specialized commercial bank" model.

) differences

Despite their similarities, AAVE and SKY also have significant differences in core business, economic models, and ecological sovereignty.

First, let's talk about the types of liquidity: AAVE's Liquidity Hub aims to provide liquidity for a wide range of asset classes, including stablecoins, volatile assets, derivatives, and more. SKY inherits the genes of MakerDAO, with its core strategy revolving around the issuance, stability, and promotion of the native stablecoin USDS.

Secondly, the economic model and sovereignty: this is the most fundamental difference between the two. The SKY SubDAO is granted a high degree of economic sovereignty, with each SubDAO able to issue its own governance tokens, build independent economic models, implement its own incentive plans, and directly capture the value created by business growth. In contrast, the independence and autonomy of the Spokes in AAVE V4 are weaker, and they currently cannot issue their own tokens. They are extensions of the AAVE core protocol, and the value generated will flow back to the AAVE DAO.

Macroscopic Perspective

The architectural transformation of AAVE and SKY is not an isolated event, but a direct response to the major trends shaping the future of Decentralized Finance.

Integrating RWA

The next frontier of DeFi growth is widely believed to be the tokenization of real-world assets. The modular architecture of AAVE V4 and SKY is very suitable for this, as it allows protocols to create independent, customizable, and even permissioned "sandbox" environments specifically designed to accommodate and manage RWA while maintaining core decentralized and permissionless characteristics.

( The Rise of Application Chains

One logical endpoint of this modular evolution is for major protocols to launch their own exclusive blockchains. AAVE and SKY have both announced plans to develop in this direction, with Aave Network and NewChain respectively set to launch.

Having its own application chain means that the protocol can fully control its execution environment, customize the fee market, capture MEV, and provide users with a smoother, more integrated experience. More importantly, using the native token as Gas and staking assets creates a more powerful and direct value capture flywheel.

The impact of ) on Ethereum

Although these application chains seem to be "leaving" Ethereum, in reality, their design relies on Ethereum. This reflects the transformation of Ethereum's role—from the place where all activities occur to a foundational trust layer providing security for the vast interconnected chain ecosystem.

However, this transition also poses challenges to Ethereum's economic model. As the activity of major protocols shifts to Layer 2, the transaction volume on the Ethereum mainnet may decrease, leading to reduced fee income. The reduction in Base Fee burning will weaken ETH's deflationary mechanism, exposing it to inflationary pressures.

Therefore, in the face of the major trend of DeFi protocols independently becoming chains, Ethereum must proactively evolve and explore new economic models that can effectively capture value from its new role as an "ecosystem security provider," thereby maintaining the healthy operation of the entire ecosystem.

Conclusion

AAVE V4 is not just an upgrade, but a strategic repositioning. It is a thoughtful solution to the internal challenge of "a single entity cannot meet diverse needs," and a forward-looking response to external opportunities such as RWA and multi-chain landscapes.

By transforming into a modular open platform, AAVE is laying the foundation to go beyond simple lending applications and become the infrastructure for the next generation of on-chain finance. The "Liquidity Hub + Spoke" model brings users higher capital efficiency and provides developers with unprecedented flexibility. This evolution echoes the movements of its main competitors and signifies that the DeFi industry is maturing, preparing for broader adoption and more complex financial integration. The launch of AAVE V4 will be a key event to watch, as it has the potential to set new standards in the DeFi lending space in the coming years.