Aave, the largest lending protocol in the DeFi space, is preparing to change the way money flows in DeFi with its upcoming V4. The latest version of Aave creates a system in which all deposited funds can be shared across different credit markets, a liquidity structure that the developers describe as “The Operating System of DeFi.”
In the latest research note from Aave’s developers, they explained that the V4 upgrade, reportedly scheduled for Q4, will introduce a modular ‘hub-and-spoke’ architecture, where ‘Hubs’ centralize liquidity, while ‘Spokes’ are specialized credit markets that connect to these Hubs. Each Spoke can implement its own lending rules and risk parameters, allowing for customized borrowing and lending experiences, the developers wrote.
“This approach allows the broader DeFi community to build on Aave rather than compete with it. Service providers and integrators can create specialized experiences while gaining access to deep liquidity, expanding innovation within the Aave ecosystem rather than fragmenting it across individual markets,” the article said.
Aave’s TVL across chains. Source: DefiLlama
Aave, which has more than $45 billion in total value (TVL) across 19 chains according to DefiLlama data, is positioning V4 as a new infrastructure layer for DeFi, and plans to eliminate the bootstrapping problem that “forces any new market to compete with existing successful markets for the same deposits.”
Uniform liquidity infrastructure
The approach addresses a fundamental problem from older versions of the protocol, where liquidity was split into many small, separate pools. But under V4, different markets will be able to use the same larger shared pool, instead of all having to start from scratch.
For example, a market for PENDLE could borrow USDC from the shared pool, while a market for Uniswap’s UNI could borrow ETH, and a stablecoin market like Ethena’s sUSDe could also draw from that same shared liquidity pool – all three would use the same funds instead of separate pools for each pair.
Other DeFi protocols have also taken a more modular approach, but not in quite the same way as Aave V4. For example, Euler V2 – the tenth largest decentralized lending protocol – gives builders a kit to create vaults, with each vault containing its own funds unless additional links are added. Compound’s Comet also manages single-asset markets, which is a simpler modular approach, although it doesn’t give many different markets direct access to one shared pool, according to Nansen.
Aave calls its V4 design – which allows many markets to draw from the same liquidity pool from day one – “The operating system of DeFi,” referring to a system that allows new markets to connect without building their own liquidity infrastructure.
Aave’s original asset, AAVE, is trading around $274, up 94% in the past year, but still more than 58% below its all-time price above $661 in 2021.
