How will the veteran lending protocol Aave V4 become the operating system of Decentralized Finance?

Author: Aave

Compiled by: Felix, PANews

The latest version V4 of the DeFi lending protocol Aave aims to enhance scalability, modularity, and capital efficiency through innovative architecture, making Aave the operating system of DeFi, with plans to launch in the fourth quarter of this year. Aave V4 adopts a "Hub and Spoke" architecture, separating liquidity storage from market logic by introducing Hubs and Spokes.

Liquidity Hub serves as a unified liquidity center, centrally managing asset supply and lending authorization, ensuring that the total borrowing does not exceed the supply; Spokes are dedicated markets for user interaction, supporting customizable risk rules and asset types. Regarding the workings of V4, Aave's official recent publication provides an explanation; the following are the content details.

Currently, Aave V3 operates independent markets that cannot share liquidity with each other. The core market holds approximately $60 billion and is the main market on Ethereum, featuring the richest asset selection. The Prime market holds around $2 billion and serves the lower end of the risk curve. However, each market operates independently, which means that users of the Prime market cannot borrow the billions of USDC stored in the core market, even though they are the same type of asset.

This is because the system closely links the risk allocation of the market with its liquidity. This presents a "which came first, the chicken or the egg" dilemma for new markets.

Although Aave has hundreds of billions of assets in other markets, each niche market still needs to build its own liquidity from scratch. V4 addresses this issue by connecting dedicated Spokes to the shared liquidity center (Liquidity Hub), allowing new markets to access Aave's existing liquidity depth from day one.

V4 How to solve this problem

V4 separates the storage of liquidity from market logic by introducing the asset-holding center (Hub) and executing specialized lending rules through Spoke. Multiple Spokes can allocate funds from the same Hub based on the demands and credit limits set by governance. Therefore, when constructing a Spoke, you are connecting to existing liquidity rather than starting from an empty pool.

Imagine the possibilities created by this: a Pendle market that accepts Principle tokens (PT) as collateral, allowing users to borrow USDC from the same Hub that serves "core" market users. A dedicated Uniswap LP Spoke can access ETH liquidity that is simultaneously available to other markets. Each Spoke implements its unique functions and risk parameters while sharing the underlying liquidity depth, making Aave DeFi the preferred lending network.

This eliminates the startup challenge for each new market to compete for the same deposits as existing successful markets.

Spokes functionality

This architecture makes it possible for markets that were simply impossible to implement in version V3. Customized markets can serve assets such as sUSDe from Ethena and related Pendle PTs, while not diluting Aave's overall liquidity. Institutional users can achieve the collateral isolation they need while still benefiting from the lending capabilities of the shared center.

This flexibility extends to a whole new set of financial primitives. When Spokes can customize how assets are handled, the secondary market for debt positions becomes viable. Credit lines for AMM positions can dynamically track the composition and volatility of the pools, allowing for appropriate adjustments to the loan-to-value ratio. Fixed-term credit markets can match supply and borrowing intentions based on terms, while allowing unmatched liquidity to continue earning yields from the underlying Hubs.

For builders, creating a Spoke allows them to focus on innovation rather than the acquisition of infrastructure and liquidity. Developers define their market parameters, implement specialized functions, and connect to the appropriate Hubs. They inherit Aave's proven liquidation system, governance framework, and risk management mechanisms without having to rebuild these components or accumulate deposits from scratch.

This approach enables a broader DeFi community to build on Aave rather than compete with it. Service providers and integrators can create specialized experiences while accessing deep liquidity, allowing for the expansion of innovation within the Aave ecosystem instead of dispersing it across different markets.

Why is this evolution crucial

As more and more Spokes connect to the shared Hub, the entire system will become more efficient. Liquidity is better utilized across different use cases. Users can access professional features without having to spread their assets across multiple isolated markets. Innovation takes place on a validated infrastructure rather than repeatedly starting from scratch. Each successful Spoke makes the platform more attractive to the next builder, creating a positive feedback loop rather than zero-sum competition.

V4 makes it possible to provide services for specific communities without dispersing liquidity or forcing each new market to compete with existing successful markets for the same users and deposits.

This marks the natural evolution of Aave from multiple isolated markets to a unified liquidity infrastructure. The protocol is able to meet specialized needs while maintaining its capital efficiency and security.

For developers looking to create lending experiences for specific communities, V4 provides the foundation. The infrastructure and development tools are nearly ready, and a new era of DeFi innovation is about to begin.

Related reading: A Detailed Explanation of Aave V4: How the Lending Leader Reinforces Its Moat?