Aave V4: Major Upgrade of Decentralized Finance Lending Protocol

Aave, as a core component of the Decentralized Finance ecosystem, is closely watched by the industry with every move it makes. Recently, the founder of Aave officially announced at the ETHCC conference that the team will launch the next important iterative version, Aave V4.

This upgrade is not a simple routine update, but a key milestone in Aave's long-term strategy. It aims to systematically address the limitations exposed during the operation of the V3 version, especially achieving breakthroughs in critical 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.

The Evolution of Aave

Aave originated from ETHLend, a P2P lending platform. Due to the slow and uncertain matching process, the team upgraded it in September 2018 to a liquidity pool-based peer-to-peer contract model (P2C), achieving instant lending. The subsequent V2 version further reduced transaction costs by optimizing smart contracts.

The current V3 version has made significant strides in capital efficiency and risk management, introducing key features such as efficient mode and isolation mode. However, V3 also exposes the limitations of a single entity architecture that struggles to flexibly respond to diverse scenario demands. Especially when introducing real-world assets (RWA) as collateral, V3's architecture appears to be inadequate.

This is exactly the core issue that Aave V4 aims to fundamentally address: how to evolve from a single product into a flexible platform that can support countless financial scenarios.

Aave V4: Modular New Architecture

Aave V4 introduces the "Liquidity Hub + Spoke" ( model, which can be likened to the network of central banks and their commercial banks:

• Liquidity Hub: Serving as the "central bank" of Aave, it aggregates user assets across each network, focusing on macro liquidity management and risk control. Liquidity Hubs on different chains can efficiently communicate and transfer liquidity through cross-chain mechanisms.

• Spoke: Similar to specialized commercial banks, it is a modular lending market aimed at users. It may include:

  • Core Spoke: Handling low-risk, high-liquidity blue-chip crypto asset lending
  • E-Mode Spoke: Optimized for highly correlated currency pairs, providing maximum capital efficiency.
  • RWA Spoke: Customized for real-world assets, integrating stricter access and compliance rules
  • High Leverage Trading Spoke: Designed for professional traders, with special risk control parameters

The most important aspect of this design is its openness. Developers can build and propose their own Spoke, which can be integrated into Aave's liquidity network after governance approval, thus launching specialized markets. This transforms Aave from a single product into a foundational platform for financial innovation.

![Explaining Aave V4: A Love-Hate Relationship with MakerDAO, Different Paths, Same Destination])https://img-cdn.gateio.im/webp-social/moments-956fdc9027e6e121e459bc00001ff61a.webp(

Comparison with Sky) and MakerDAO(

Sky) recently underwent a rebranding and launched the "Endgame" plan. Its "Sky Core + SubDAO" architecture shares many similarities with Aave V4, reflecting the industry's shift towards more flexible and scalable design.

However, there are significant differences between the two in terms of core business, economic model, and ecological sovereignty:

• Types of Liquidity: Aave provides liquidity for a wide range of asset classes, while Sky mainly revolves around the USDS stablecoin.

• Economic Model and Sovereignty: Sky SubDAO has high economic sovereignty, allowing it to issue its own tokens and build an independent economic model. Aave's Spoke is more akin to a division under the group, with the value created flowing back to Aave DAO.

Macroeconomic Trends

The architectural shift of Aave and Sky reflects the major trends shaping the future of Decentralized Finance:

1. Integrating RWA: The modular architecture is beneficial for managing real-world assets with unique legal and compliance requirements.

2. The rise of application chains: Aave and Sky both plan to launch dedicated blockchains to gain greater sovereignty and value capture capabilities.

3. Ethereum's role transition: from the place where all activities occur to the foundational trust layer that provides security for the interconnected chain ecosystem. This also poses challenges to Ethereum's economic model.

Conclusion

Aave V4 is not just an upgrade, but a strategic repositioning. It is both a solution to internal challenges and a forward-looking response to external opportunities. By transforming into a modular open platform, Aave is laying the groundwork to become the next-generation on-chain financial infrastructure. This evolution marks a maturity phase for the DeFi industry, preparing for broader adoption and 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.