The crypto market reaches a turning point as Aave announces V4 plans

Recently, the crypto market has continued to decline, mainly due to a lack of clear macro direction. Altcoins have also performed poorly, with the correlation between crypto assets nearing its highest point this year. The current macro uncertainty validates our viewpoint from April: the macro economy will continue to dominate Bitcoin's performance, the inflow of U.S. spot ETFs is gradually decreasing, and the market is starting to look for other catalysts beyond Bitcoin halving.

Despite institutions such as the European Central Bank reiterating plans for interest rate cuts in the summer, higher-than-expected inflation data from the United States has raised concerns in the market about the Federal Reserve delaying interest rate cuts. Expectations of a delayed interest rate cut in the United States have led to a stronger dollar, which in turn has put pressure on the crypto market.

However, after the Federal Reserve meeting, the momentum of the US dollar has stalled. After the non-farm payroll data on May 3rd came in weaker than expected, market expectations for the first rate cut shifted from November to September 2024. The initial jobless claims on May 9th were higher than expected, further increasing the likelihood of accelerated rate cuts.

Nevertheless, we believe that the current change in the unemployment rate in the United States at 3.9% ( will not become the focus of the Federal Reserve in the short term, as it remains close to historical lows. We still believe that the U.S. economy will be supported by technological advancements and government spending, and will not enter a contraction period. At the next Federal Open Market Committee meeting, we expect the Federal Reserve to continue to focus on inflation indicators, highlighting the importance of the PPI and CPI data to be released on May 14 and 15, especially if they are above expectations.

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Additionally, in the first two days after a certain Bitcoin trust fund transitioned to an open-ended fund, there was an influx of capital. Although the sources of this capital inflow remain unclear, it marks the completion of a structural capital rotation. We believe that the early outflows of capital were primarily related to bankruptcy proceedings, realization of discount trading profits, and a shift towards low-fee products. Looking ahead, we do not expect the flow data to exhibit structural distortions.

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At the same time, Aave recently announced the fourth iteration of its protocol )V4( plan, as part of the Aave 2030 long-term roadmap. V4 includes architectural improvements such as a unified liquidity layer, blurred interest rates, and liquidity premiums. V4 also focuses on enhancing the use of its GHO stablecoin and incorporates other improvements such as enhanced risk management and liquidation engines.

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Although the mainnet is scheduled to launch in the second quarter of 2025, we believe this announcement reflects the maturity of DeFi protocols in their core functionalities. This may set a precedent for new protocols in terms of decentralization, long-term token utility, and functional iteration.

Expanding the functionality of DeFi protocols is a technical challenge. Successful DeFi protocols rarely expand their initial architecture in a way that is transparent to users; instead, they deploy new versions and incentivize liquidity migration. These cross-version liquidity migrations are a daunting task, as users need to actively convert. We expect that the adoption cycle of Aave V4 may also experience a similar process.

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Despite significant improvements in the new version's features, the cautious migration of liquidity highlights the importance of the Lindy effect in the DeFi market. The adversarial environment of decentralized technology means that time is often the most reliable method for determining the security of a protocol. We believe this underscores the characteristic of immutability in smart contracts and the financialization of web3 products. Therefore, the long-term adoption cycle of encryption products may differ from that of the web2 market.

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The Aave 2030 roadmap seems to be in competition with Maker's Endgame, especially in the area of stablecoins. Aave and Maker's TVL are $10.5 billion and $8.2 billion respectively, both being significant sources of loans in the field. However, Maker borrowers are limited to DAI, while Aave supports a wider range of assets for lending.

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Interestingly, Aave seems to be focusing on the decentralized stablecoin space, even though this area has been shrinking relative to centralized stablecoins. With DAI demand pausing, Aave surpassed Maker in early 2024 to become the largest lending DeFi protocol. However, we are still in the early stages of web3. While the long-term plans of Maker and Aave provide a vision for the future of these protocols, we believe that these developments may be overlooked by the market in the short term, as the macro environment remains the focal point.

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