Aave V4 protocol is about to be launched, the leader in lending is building a moat again.

Recently, the founder of Aave announced the upcoming release of the new protocol Aave V4 at the Ethereum community conference. As the largest lending protocol in the DeFi space, this iteration has garnered significant attention from the market.

This article will focus on the functional updates of the Aave V4 protocol, particularly how the new interest rate parameters and GHO stablecoin upgrades are reconstructing the protocol ecosystem. These innovative measures could profoundly change the capital efficiency model, with the liquidity pool adopting a dynamic interest rate mechanism, allowing borrowing rates to be driven by the market for the first time; while the cross-chain enhancement module of GHO will not only improve the utility of the stablecoin but also optimize on-chain liquidation of debt positions, building a new financial infrastructure for the entire protocol.

Main Features of Aave V4

Aave's total locked value has surpassed the $25 billion mark for the first time, making it the first lending protocol to reach this milestone in the DeFi space. Its development team is actively advancing new feature development, aiming to further drive platform growth through risk parameter adjustments.

The upcoming new features include:

1. Unified Liquidity Layer: Introduce a series of modules to remove the original limitations on liquidity migration, while adding new functions such as cross-chain lending.

2. Fuzzy control interest rate: This mechanism automatically adjusts the interest rate curve and inflection points based on market conditions, rather than relying on governance voting.

3. Liquidity Premium: The cost of borrowing will increasingly depend on the liquidity conditions of each token. Assets like ETH remain in a no-premium state, serving as the benchmark currency, while other assets such as WBTC and wstETH will adopt corresponding premium mechanisms based on their liquidity conditions.

4. Lending Module: The team is exploring the use of smart accounts to support features such as Aave vaults, which can lock liquidity, disable collateral functions, etc.

5. Dynamic Risk Allocation: The collateral ratio is linked to the market conditions at the time of position establishment, rather than subsequent market fluctuations, providing users with greater stability in their positions.

6. Automated Asset Delisting and Fund Management

7. Liquidation Engine V4: Aave's liquidation mechanism is undergoing a major upgrade, including variable liquidation parameters and reward mechanisms, while also supporting batch liquidation functionality.

8. Deeper GHO Integration: GHO will achieve deeper native integration in Aave V4, including upgrades to the soft liquidation mechanism, paying stablecoin interest in GHO, and the addition of an emergency redemption mechanism among other optimization features.

9. Other upgrades include Gas fee optimization and the deprecation of tokenized positions and stable interest rate features.

Unified Liquidity Layer

The Unified Liquidity Layer has launched a brand new chain-agnostic, independent, and abstracted liquidity infrastructure. A significant improvement of this modular system is that new lending modules can be deployed or old lending modules can be taken offline without the need to migrate liquidity.

This architecture supports the addition or optimization of lending functions (such as isolated liquidity pools, physical asset modules, and collateral debt positions) without changing the overall system and settlement module. It also effectively addresses the liquidity fragmentation issue present in the early versions of the protocol.

The liquidity layer simultaneously supports user-provided assets and natively minted assets, thereby improving the integration with GHO and other cryptocurrencies collateralized by native assets of the Aave protocol.

Cross-chain lending may be one of the most influential feature modules, allowing users to deposit on one chain and borrow on another. This not only significantly enhances the platform's cross-chain liquidity potential but also creates new opportunities for market growth.

GHO Upgrade

GHO is an over-collateralized stablecoin launched by Aave, with a current market value of over $220 million, and has increased by 53% since the beginning of 2025.

In addition to subtle improvements such as enhancing the efficiency of native minting, the most notable upgrade is the introduction of the flexible clearing mechanism. This mechanism draws on the innovative model of crvUSD, streamlining the clearing process through the automation of lending clearing market makers (LLAMM).

The liquidation operation is conducted within a customizable range. This mechanism guides the system to convert assets into GHO when the market declines and to repurchase collateral when it rises. Compared to crvUSD, Aave V4 has three major advantages: users can autonomously choose collateral from the asset basket for liquidation positions; they can freely select collateral for repurchase from all available assets on the Aave platform (including assets initially not provided); and they can also enjoy the benefits of automatic interest income generated by GHO.

Another notable change is that users in the stablecoin market can receive interest payments in the form of GHO, a mechanism that can expand the supply of GHO by directly converting interest into tokens.

Aave V4 introduces an emergency redemption mechanism to address extreme situations of severe and prolonged de-pegging of GHO. Once this mechanism is triggered, the platform will gradually convert the collateral assets of positions with the lowest health factor into GHO tokens based on the innovative LLAMM design, in order to repay user debts.

Summary

For a protocol as large and important as Aave, risk minimization is crucial, especially when launching major features such as cross-chain lending.

Automating processes such as asset delisting and interest rate model adjustments helps reduce reliance on slow governance processes, especially when responding to market-driven changes.

Aave is confident in the growth of its stablecoin GHO, which has recently seen significant improvements and achieved deeper integration within the protocol.

In the foreseeable future, Aave is expected to continue maintaining its cornerstone position in the DeFi space. The success of the broader ecosystem highly depends on its ongoing leadership. After all, no other project can accumulate a total locked value at this level while maintaining the same level of security.