As one of the cornerstones of the DeFi ecosystem, any movement from Aave, the largest and most mature lending protocol, is closely watched by the industry. Recently, at the highly anticipated ETHCC conference, Aave founder Stani officially announced that the team is about to launch its next-generation significant iterative version—Aave V4.
Aave V4 is not just a simple routine upgrade; it is a key milestone in Aave 2030's long-term strategic roadmap. This upgrade was first proposed officially in May 2024, with the core goal of systematically addressing the limitations exposed during the operation of version V3, particularly making breakthroughs in scalability, risk management, and other key areas. Through this significant update, Aave aims to fundamentally reshape the underlying architecture and core functions of DeFi lending protocols, preparing for the future development of the protocol.
In this article, we will explore in detail what Aave V4 entails. We will review its evolution, analyze its new architecture, and interpret these changes within the broader trends in the DeFi industry.
? The Evolution of AAVE ?
AAVE's journey began with ETHLend, a P2P platform where lenders and borrowers needed to find their counterparts, but the process of finding matching counterparts was slow and fraught with uncertainty. Recognizing these fundamental flaws, the team upgraded the brand from ETHLend to Aave (i.e., AAVE V1) in September 2018, decisively shifting from a P2P model to a liquidity pool-based point-to-contract (P2C) model, pooling funds for instant lending. The subsequent Aave V2 further reduced transaction costs on the congested Ethereum network by optimizing smart contracts, making DeFi accessible to more people.
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 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 higher LTV). 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 a set of stablecoins approved by governance, with a clear debt limit, and cannot be mixed with other collateral. This effectively 'isolates' the risks of new assets, preventing contagion.
However, Aave V3 also exposes a deeper strategic limitation: a single entity architecture cannot flexibly respond to the demands of emerging markets and diverse 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 customer wants to apply for a loan using their company's equity, patent rights, or even future receivables. The bank will find that its original 'one-size-fits-all' process cannot handle these new assets with different risk characteristics. The bank either has to undergo a painful internal reform or simply abandon these new businesses.
Aave V3 faces a similar dilemma. Its core smart contracts are tailored for crypto-native assets (like ETH, WBTC, stablecoins). When the industry begins to introduce RWAs—such as tokenized government bonds or private credit—as collateral, Aave V3's single architecture becomes inadequate. RWA involves off-chain legal compliance, counterparty risk, and different liquidation logic, which cannot simply be stuffed 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 new design called the 'Liquidity Hub + Spoke' model. This architecture is a direct response to the limitations of a 'single entity', which can be understood through a simple analogy from traditional finance: a central bank and its network of commercial banks.
Liquidity Hub: Aave's 'central bank'
On every blockchain network where Aave operates, there will be a unified liquidity hub (Liquidity Hub) that aggregates all user-supplied assets. 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 ample liquidity for the entire ecosystem. This model is expected to improve capital utilization, yield higher returns for lenders, and offer lower interest rates for borrowers.
Liquidity centers on different chains are not isolated islands; they can communicate and transfer liquidity to each other efficiently. This is primarily achieved through a mechanism known as the 'Unified Cross-Chain Liquidity Layer' (CCLL), which is supported by the core technology of Chainlink's Cross-Chain Interoperability Protocol (CCIP).
Spoke: Aave's 'specialized commercial bank'. Liquidity centers operate 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 center. They function like specialized commercial banks. For example, there may be:
Core Spoke: General lending for low-risk, high-liquidity blue-chip crypto assets like ETH and WBTC.
E-Mode Spoke: Optimized for highly correlated currency pairs like stablecoins and LSTs, providing maximum capital efficiency.
RWA Spoke: Custom-tailored for tokenized treasury bonds, real estate, and other real-world assets. Such Spokes can integrate stricter access, custody, or compliance rules to meet institutional and regulatory needs.
A high-leverage trading Spoke designed for professional traders seeking high-risk, high-reward opportunities, featuring 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 Spokes. If a new Spoke design passes Aave's governance approval, it can obtain a credit line from the liquidity center, thereby utilizing 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 is 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 'heroes see alike'; Sky also adopts a modular architecture, marking a shift towards more flexible and scalable designs in the entire industry.
Similar
Sky's architecture can be described as 'Sky Core + SubDAO'.
Sky Core plays the role of 'central bank' within the Sky ecosystem, inheriting MakerDAO's function of issuing stablecoins (now USDS, formerly DAI). It establishes the core rules (such as 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 'commercial banks' for specific fields. The core work of SubDAOs is asset management and risk assessment. They are authorized by the Sky Protocol to accept specific types of collateral and initiate a request to Sky Core to mint USDS. For example, Spark Protocol, currently the only mature SubDAO in the Sky ecosystem, focuses 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 thus both adopt the model of 'central bank + specialized commercial banks': the central bank formulates policies and provides liquidity, while specialized commercial banks are responsible for exploring specific business scenarios.
Looking back at the entanglement between AAVE and Sky (MakerDAO), Sky Spark was born by directly forking the open-source code of Aave V3, and both sides had fierce disputes over profit-sharing agreements, with Aave accusing Spark of failing to pay the promised 10% profit share. Now, AAVE V4 merely 'draws on' Sky's mature modular design concept, which can also be seen as 'returning the favor'.
Different
Despite their similarities, AAVE and Sky also have significant differences in core business, economic models, and ecological sovereignty.
First is the type of liquidity: Aave's Liquidity Hub is designed to provide liquidity for a wide range of asset classes, including stablecoins, volatile assets (like ETH), derivative assets (LSTs), etc. Sky, inheriting the genes of MakerDAO, has always centered its core strategy 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 most fundamental difference between the two. Sky SubDAOs are granted a high degree of economic sovereignty, allowing each SubDAO to issue its governance tokens (such as Spark's SPK token), enabling 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 complex and powerful functional architectures. Taking the only mature example in the current Sky ecosystem, Spark, its operating model can be likened to a dual-layer financial system:
On the 'commercial bank' 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.
On the 'regional reserve bank' level (wholesale end): Spark also has a liquidity layer called Spark Liquidity Layer (SLL), acting as a regional 'liquidity hub'. After receiving 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 DeFi 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 operations, fully leveraging its SubDAO identity to create and distribute value both 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 extensions of the Aave core protocol, and the value they generate (such as interest income) will flow back to the Aave DAO. Spokes are akin to different divisions under a large group, operating under a unified Aave brand and economic framework, with the value created also flowing back to the group's headquarters.
? Macroscopic Perspective ?
The architectural shifts of Aave and Sky are not isolated events but direct responses to major trends shaping the future of DeFi.
Integrating RWA
The next frontier of DeFi growth is widely regarded as 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. Aave V4 and Sky's modular architecture are well-suited for this, allowing protocols to create independent, customizable, and even permissioned 'sandbox' environments (like RWA Spoke or RWA SubDAO) specifically designed to accommodate and manage RWAs while maintaining their core decentralized and permissionless characteristics.
The Rise of Application Chains
A logical endpoint of this modular evolution is that major protocols launch their exclusive blockchains, known as 'Appchains'. Aave and Sky have both announced plans to develop in this direction, launching Aave Network and NewChain, respectively.
Why are these already successful protocols converging towards application chains? The answer lies in sovereignty and value capture. Having its own application chain means that a protocol can fully control its execution environment, customize fee markets (for example, using GHO to pay Gas), capture MEV that would otherwise go to public chain miners or validators, and provide users with a smoother, more integrated experience. More importantly, using native tokens as Gas and staking assets creates a value capture flywheel that is more powerful and direct than simply collecting interest shares. This marks a shift for the protocol from 'tenant' (running on Ethereum or L2) to 'landlord' (owning its sovereign platform).
Impact on Ethereum
Although these application chains may seem like they are 'leaving' Ethereum, their designs actually depend on Ethereum. Aave Network and NewChain both plan to use Ethereum as their ultimate security and settlement layer. This reflects a broader shift in Ethereum's role—from a place where all activities occur to a foundational trust layer that provides security for a vast interconnected chain ecosystem.
However, this shift also posed a severe challenge to Ethereum's economic model. Historical experience shows that when major protocols shift activities to Layer 2, the transaction volume on the Ethereum mainnet declines, leading to reduced fee income. The decrease in base fee burning can weaken Ethereum's deflationary mechanism, putting it under inflationary pressure.
Therefore, in the face of the major trend of leading DeFi protocols becoming independent chains, Ethereum must proactively evolve and explore new economic models that can effectively capture value from its new role as an 'ecosystem security provider' to maintain the healthy operation of the entire ecosystem.
? Conclusion ?
Aave V4 is not just an upgrade; it is a strategic repositioning. It is a thoughtful solution to the internal challenge of 'a single entity cannot meet diverse needs', as well as a proactive response to external opportunities like RWA and the multi-chain landscape.
By transforming into a modular open platform, Aave is laying the groundwork to transcend 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 resonates with the moves of its primary competitors, marking a maturation of the DeFi industry, preparing for broader adoption and more complex financial integrations. The launch of Aave V4 will be a key event worth watching, with the potential to set new standards in the DeFi lending space in the coming years.
This article analyzes publicly available information and does not constitute investment advice. Cryptocurrency investments involve significant risks; please make cautious decisions.
