Aave V4: Reshaping the Future of Decentralized Finance Lending Protocols

As one of the important pillars of the DeFi ecosystem, any movements of Aave, the largest and most mature lending protocol, attract significant attention from the industry. Recently, at the ETHCC conference, Aave founder Stani officially announced that the team is about to launch its next-generation important iteration version - Aave V4.

Aave V4 is not just a simple regular upgrade, but a key milestone in Aave's long-term strategic roadmap for 2030. This upgrade was first officially proposed in May 2024, and its core objective is to systematically address the limitations exposed during the operation of version V3, particularly making breakthroughs in key areas such as scalability and risk management. Through this far-reaching update, Aave aims to fundamentally reshape the underlying architecture and core functions of the Decentralized Finance lending protocol, preparing for the future development of the protocol.

In this article, we will explore in detail what Aave V4 contains. We will review its evolution, analyze its new architecture, and interpret these changes within the broader trends of the Decentralized Finance industry.

The Evolution of Aave

Aave's journey began with ETHLend, a P2P platform where lenders and borrowers needed to find their counterparties, but the process of finding matching counterparties was slow and fraught with uncertainty. After the team deeply recognized these fundamental flaws, they upgraded the brand from ETHLend to Aave (i.e., Aave V1) in September 2018, decisively transitioning from the P2P model to a Point-to-Contract (P2C) model based on liquidity pools, where funds were pooled together for instant lending. The subsequent Aave V2 further reduced transaction costs on the congested Ethereum network by optimizing smart contracts, thereby allowing more people to access Decentralized Finance.

The current version Aave V3 has made significant strides in capital efficiency and risk management compared to version V2. It introduces several key features, such as:

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

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

However, Aave V3 has also exposed a deeper strategic limitation: a single entity architecture cannot flexibly respond to the demands of emerging markets and diversified scenarios. Imagine a traditional bank that initially only accepts real estate as collateral. All its forms, processes, and risk assessment models are designed around real estate. Now, a client wants to apply for a loan using their company's equity, patents, or even future accounts receivable. The bank will find that its original "one-size-fits-all" process is completely unable to handle these new types of assets with different risk characteristics. The bank must either undergo a significant internal reform or give up these new businesses.

Aave V3 faces a similar dilemma. Its core smart contracts are tailored for crypto-native assets (such as ETH, WBTC, and stablecoins). When the industry began to introduce RWA—such as tokenized government bonds or private credit—as collateral, the single architecture of Aave V3 proved to be insufficient. RWA involves off-chain legal compliance, counterparty risk, and different liquidation logic, which cannot simply be squeezed into the existing smart contract framework.

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

Aave V4: Modular New Architecture

Aave V4 introduces a brand new design called the "Liquidity Hub + Spoke" model. This architecture is a direct response to the limitations of a "single entity," which we can understand through a simple analogy in traditional finance: a central bank and its network of commercial banks.

• Liquidity Center: Aave's "central bank"

  • On every blockchain network running Aave, there is a unified Liquidity Hub that aggregates all assets supplied by users. This hub serves as the central source of liquidity for the entire network. It does not directly provide "retail" services to end users. Instead, it focuses on macro liquidity management and risk control, providing stable and deep liquidity for the entire ecosystem. This model is expected to improve capital utilization, bringing higher returns to lenders and 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 a mechanism known as the "Unified Cross-Chain Liquidity Layer" (CCLL), which is fundamentally supported by Chainlink's Cross-Chain Interoperability Protocol (CCIP).

• Spoke: Aave's "specialized commercial bank". The liquidity center operates in the background, and users will interact with the protocol through various Spokes. Spoke is a user-facing, modular lending market, with each market designed for a specific purpose and connected to the central liquidity center. They function like specialized commercial banks. For example, there may be:

  • Core Spoke: A general lending solution for handling blue-chip crypto assets with low risk and high liquidity, such as ETH and WBTC.

  • E-Mode Spoke: Specifically optimized for stablecoin, 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.

  • A high-leverage trading Spoke, designed for professional traders seeking high risk and high returns, featuring a special interest rate model 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 a new Spoke design passes Aave's governance approval, it can receive a line of credit from the liquidity hub, thereby leveraging Aave's vast liquidity network to launch a new, specialized market. This fundamentally transforms Aave from a mere product into a foundational platform for financial innovation.

Comparison: Aave VS. Sky (formerly MakerDAO)

To fully understand Aave's strategic direction, it would be helpful to compare it with its main competitor MakerDAO. MakerDAO has recently undergone a rebranding, changing its name to Sky and launching its own "Endgame" plan. It can be said that "great minds think alike," as Sky has also adopted a modular architecture, marking a shift in the entire industry towards more flexible and scalable design.

similar

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 (currently USDS, originally DAI). It establishes the most fundamental rules (for example: approving which SubDAOs can access the system, the total minting cap for each SubDAO, emergency shutdown mechanisms, etc.), 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, serving as a "commercial bank" for specific fields. The core work of SubDAO is asset management and risk assessment. They are authorized by the Sky Protocol to receive specific types of collateral and initiate a request to Sky Core for minting USDS. For example, Spark Protocol is currently the only mature SubDAO in the Sky ecosystem, focusing on lending and is a direct competitor of Aave. Other SubDAOs may focus on RWA assets or other niche markets.

The similarities between Aave's "Liquidity Hub + Spoke" and Sky's "Sky Core + SubDAO" are evident: both recognize that a single entity cannot meet all market demands, so they adopt the model of "central bank + specialized commercial banks": the central bank formulates policies and provides liquidity, while specialized commercial banks are responsible for developing specific business scenarios.

Looking back at the grievances between Aave and Sky (MakerDAO), Sky Spark was born from directly forking the open-source code of Aave V3. Both parties had fierce disputes over profit-sharing agreements, with Aave accusing Spark of failing to pay the promised 10% profit share. Now, Aave V4 has merely "drawn inspiration" from Sky's mature modular design approach, which can be considered as "using the same method to return the favor."

different

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 categories, including stablecoins, volatile assets (such as ETH), and derivative assets (LSTs), among others. Sky inherits the genes of MakerDAO, and its core strategy has always revolved around the issuance, stability, and promotion of its native stablecoin USDS (formerly DAI). The main task of its SubDAO is to create more application scenarios and demand for USDS, deepening its liquidity moat.

Secondly, there is the economic model and sovereignty: this is the fundamental difference between the two. The Sky SubDAO is endowed with a high degree of economic sovereignty, and each SubDAO is allowed to issue its own governance tokens (such as Spark's SPK token), which enables them to build independent economic models, implement their own incentive plans, and directly capture the value created by their business growth. This economic independence allows SubDAOs to evolve into complex and powerful functional architectures. Taking Spark, the only mature example in the current Sky ecosystem, as an example, its operating model can be likened to a dual-layer financial system:

1. "Commercial Banks" level ( retail end ): It has a lending platform for end users called Spark Lend. This part of the business directly serves individual users, functioning similarly to the commercial banks we are familiar with.

2. At the "Regional Reserve Bank" level ( wholesale end ): Spark also has a liquidity layer called Spark Liquidity Layer (SLL), which acts as a regional "liquidity hub." After obtaining liquidity (such as USDC/USDS) from Sky Core, SLL not only provides funding support for its own "commercial bank" Spark Lend, but also "wholesales" this liquidity to other Decentralized Finance protocols, such as Morpho, and even competitor Aave.

Therefore, Spark is not just a simple lending application, but a deeply integrated liquidity engine that combines retail and wholesale business, fully utilizing its SubDAO identity to create and distribute value within and outside the Sky ecosystem.

In contrast, the independence and autonomy of Spokes in Aave V4 are much weaker. Currently, Spokes cannot issue their own tokens. They are an extension of the Aave core protocol, and the value they generate (such as interest income) will flow back to the Aave DAO. A Spoke is similar to different divisions under a large group; they operate under the unified Aave brand and economic framework, and the value created also flows back to the group's headquarters.

Macro Perspective

The architectural changes of Aave and Sky are not isolated events, but rather a direct response to the major trends shaping the future of Decentralized Finance.

Integrate RWA

The next frontier of DeFi growth is widely considered to be the tokenization of real-world assets such as government bonds, real estate, and private credit. These assets come with unique legal and compliance requirements, making it difficult to manage them within a single, large protocol. Aave V4 and Sky's modular architecture are well-suited for this, allowing protocols to create independent, customizable, and even permissioned "sandbox" environments (such as RWA Spoke or R.