Aave V4: Major Upgrade of Decentralized Finance Lending Protocol

Aave, as one of the cornerstones of the Decentralized Finance ecosystem, has garnered significant attention with the launch of its latest version, Aave V4. This upgrade is a key milestone in Aave's 2030 long-term strategy, aimed at addressing the limitations of the V3 version in terms of scalability and risk management.

The Evolution of Aave

Aave originated from ETHLend and later transformed into a liquidity pool-based model. The V2 version optimized smart contracts and reduced transaction costs. The current V3 version introduces innovative features such as efficient mode and isolated mode, enhancing capital efficiency and risk management capabilities.

However, the single architecture of V3 proves inadequate in addressing emerging markets and diversified scenarios, especially when handling new types of collateral such as real-world assets ( RWA ).

Aave V4: Modular New Architecture

Aave V4 introduces the "Liquidity Hub + Spoke" model:

• Liquidity Hub: As the central source of liquidity, responsible for macro liquidity management and risk control.
• Spoke: A user-oriented modular lending market, including general lending, stablecoin trading, RWA, and other specific scenarios.

The openness of this design allows developers to build custom Spokes, transforming Aave into a financial innovation platform.

Aave VS. Sky( before MakerDAO)

Sky also adopts a modular architecture, called "Sky Core + SubDAO". Both recognize that a single entity struggles to meet all market demands, thus adopting a similar central bank + specialized commercial bank model.

The main difference is:

• Types of Liquidity: Aave offers a variety of assets, while Sky focuses on the USDS stablecoin.
• Economic Model and Sovereignty: Sky SubDAO has greater economic autonomy, while Aave Spoke is more dependent on the core protocol.

Macroeconomic Trends

The architectural transformation of Aave and Sky reflects several key trends in Decentralized Finance:

1. Integration of RWA: Modular design is beneficial for managing RWA with specific 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 transformation: from a venue for all activities to a foundational trust layer, but facing challenges in its economic model.

Conclusion

Aave V4 represents a significant advancement in the Decentralized Finance lending protocol, paving the way for broader adoption and complex financial integration. It not only addresses internal challenges but is also prepared to tackle external opportunities, with the potential to set new standards in the DeFi lending space in the coming years.