Aave V4 Architectural Innovation: Lending Protocol Moves Towards a Modular Future

Aave V4: The Evolution of Decentralized Finance Lending Protocol

As one of the cornerstones of the DeFi ecosystem, any movement of Aave, the largest and most mature lending protocol, is closely watched by the industry. Recently, at the ETHCC conference, the founder of Aave officially announced that the team is about to launch its next major iterative version - Aave V4.

Aave V4 is not just a simple conventional upgrade, but a key milestone in Aave's 2030 long-term strategic roadmap. This upgrade was officially proposed for the first time in May 2024, with the core goal of systematically addressing the limitations exposed during the operation of version V3, particularly making breakthroughs in critical 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 take a detailed look at what Aave V4 includes. We will review its evolutionary journey, 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 need to find their counterparty. However, the process of finding matching counterparties was slow and fraught with uncertainty. After the team deeply recognized these fundamental flaws, they upgraded the brand to Aave (i.e., Aave V1) in September 2018 and decisively shifted from the P2P model to a Point-to-Contract (P2C) model based on liquidity pools, pooling funds to enable 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 asset prices being deposited and borrowed are highly correlated (for example, between stablecoins or between ETH and stETH), E-Mode allows users to unlock greater 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 ceiling, and cannot be mixed with other collateral. This effectively "isolates" the risk of new assets, preventing risk contagion.

However, Aave V3 has also exposed a deeper strategic limitation: a single entity architecture cannot flexibly respond to the needs of emerging markets and diversified scenarios. Imagine a traditional bank that initially accepts only real estate as collateral. All of 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 abandon 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 starts introducing RWAs—such as tokenized government bonds or private credit—as collateral, the single architecture of Aave V3 becomes inadequate. RWAs involve off-chain legal compliance, counterparty risks, and different liquidation logic, which cannot simply be plugged 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 that can support 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 from 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 liquidity source for the entire network. It does not provide "retail" services directly 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, bring higher returns for lenders, and offer lower interest rates for borrowers.

    • Liquidity centers on different chains are not isolated islands; they 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 hub operates in the background, and users will interact with the protocol through various Spokes. Spokes are user-facing, modular lending markets, each designed for specific purposes and connected to the central liquidity hub. They are like specialized commercial banks. For example, there might be:

    • Core Spoke: A general lending platform for handling low-risk, high-liquidity blue-chip crypto assets like ETH and WBTC.

    • E-Mode Spoke: Optimized specifically 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.

    • 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 obtain 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 has launched its own "Endgame" plan. It can be said that "great minds think alike"; Sky has also adopted a modular architecture, which indicates that the entire industry is moving towards a more flexible and scalable design direction.

similar

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

  • Sky Core plays the role of a "central bank" in the Sky ecosystem, inheriting the function of issuing stablecoins from MakerDAO (now USDS, formerly DAI). It establishes the most fundamental rules (such as: approving which SubDAOs can access the system, the total minting limit 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 mint USDS to the Sky Core. For example, Spark Protocol is currently the only mature SubDAO in the Sky ecosystem, focusing on lending and is a direct competitor to 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, and therefore 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. The two parties had intense disputes over the profit-sharing protocol, 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 concept, which can be seen as "using the same methods against them."

different

Despite their similarities, Aave and Sky also have significant differences in their 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 (such as ETH), derivative assets (LSTs), and more. Sky inherits the genes of MakerDAO, and its core strategy has always revolved around the issuance, stabilization, and promotion of its native stablecoin USDS (formerly known as DAI). The main task of its SubDAO is to create more application scenarios and demand for USDS, deepening its liquidity moat.

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 allowed to issue its own governance token (such as Spark's SPK token), enabling it to build an independent economic model, implement its own incentive programs, and directly capture the value created by its business growth. This economic independence allows SubDAOs to evolve 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. On the "commercial bank" level ( retail end ): It has a lending platform called Spark Lend aimed at end-users. This part of the business directly serves individual users, functioning similarly to the commercial banks we are familiar with.

  2. At the level of "Regional Reserve Banks" ( 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 competitors like Aave.

Therefore, Spark is not just a simple lending application, but a liquidity engine that integrates retail and wholesale businesses, making full use of 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. Spokes are similar to different departments under a large group, operating under a unified Aave brand and economic framework, with the value they create also flowing back to the group headquarters.

Interpretation of Aave V4: Love and Kill with MakerDAO, Different Paths to the Same Goal

Macroscopic 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.

Integration of 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 that are difficult to manage within a single, large protocol. The modular architecture of Aave V4 and Sky is well-suited for this, allowing protocols to create independent, customizable, and even permissioned "sandbox" environments (such as RWA Spoke or RWA SubDAO) that are specifically designed to handle and manage RWAs while maintaining their core decentralized and permissionless characteristics.

View Original
This page may contain third-party content, which is provided for information purposes only (not representations/warranties) and should not be considered as an endorsement of its views by Gate, nor as financial or professional advice. See Disclaimer for details.
  • Reward
  • 4
  • Share
Comment
0/400
RektCoastervip
· 11h ago
New Year, New Atmosphere
View OriginalReply0
FlashLoanPrincevip
· 11h ago
Can't wait to see the new version.
View OriginalReply0
WalletsWatchervip
· 11h ago
Looking forward to the development of version 4.
View OriginalReply0
OnchainDetectiveBingvip
· 11h ago
The new version is worth looking forward to.
View OriginalReply0
Trade Crypto Anywhere Anytime
qrCode
Scan to download Gate app
Community
English
  • 简体中文
  • English
  • Tiếng Việt
  • 繁體中文
  • Español
  • Русский
  • Français (Afrique)
  • Português (Portugal)
  • Bahasa Indonesia
  • 日本語
  • بالعربية
  • Українська
  • Português (Brasil)