Interpretation of Aave V4: Love and Hate with MakerDAO, Different Paths to the Same Goal

As one of the cornerstones of the DeFi ecosystem, any movement from Aave, the largest and most mature lending protocol, is closely followed 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 important iteration version - Aave V4.

Aave V4 is not just a simple regular upgrade, but a key milestone in Aave's long-term strategic roadmap for 2030. This upgrade was officially proposed in May 2024, with the core goal of systematically addressing the limitations exposed during the operation of version V3, particularly making breakthroughs in key areas such as scalability and risk management. Through this far-reaching update, Aave aims to fundamentally reshape the underlying architecture and core functions of the DeFi lending protocol, preparing for the future development of the protocol.

In this article, we will explore in detail what Aave V4 contains. We will review its evolution, analyze its new architecture, and interpret these changes in the context of broader Decentralized Finance industry trends.

📜 The Evolution of AAVE 📜

The journey of AAVE began with ETHLend, a P2P platform where lenders and borrowers needed to find counterparties. However, the process of finding matching counterparts was slow and filled with uncertainty. After deeply recognizing these fundamental flaws, the team upgraded the brand from ETHLend to Aave (i.e., AAVE V1) in September 2018, decisively shifting from the P2P model to a liquidity pool-based Point-to-Contract (P2C) model, where funds were pooled together for instant lending. Subsequently, Aave V2 further reduced transaction costs on the congested Ethereum network by optimizing smart contracts, allowing more people to access Decentralized Finance.

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 by users are highly correlated (for example, between stablecoins or between ETH and stETH), E-Mode allows users to unlock higher borrowing capacity (such as a higher LTV). This directly addresses the issue of inadequate capital efficiency for correlated assets in V2.
• Isolation Mode (Isolation Mode): Allows new, higher-risk assets to be launched in an "isolated" manner. The collateral provided under the isolation mode can only be used to borrow a set of governance-approved stablecoins, with a clear debt limit, and cannot be mixed with other collateral. This effectively "isolates" the risks of new assets, preventing risk contagion.

However, Aave V3 also exposes a deeper strategic limitation: a single entity architecture cannot flexibly respond to the demands of emerging markets and diversified 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 client wants to apply for a loan using their company's equity, patents, or even future accounts receivable. The bank will find that its existing "one-size-fits-all" processes are completely unable to handle these new types of assets with different risk profiles. The bank must either undergo a painful internal reform or abandon these new businesses.

Aave V3 faces a similar dilemma. Its core smart contracts are tailored for crypto native assets (such as ETH, WBTC, stablecoins). When the industry begins to introduce RWA—such as tokenized government bonds or private credit—as collateral, Aave V3's single architecture appears to be inadequate. RWA involves off-chain legal compliance, counterparty risk, and different liquidation logic, which cannot simply be integrated 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 capable of supporting countless financial scenarios.

🏦 AAVE V4: Modular New Architecture 🏦

Aave V4 introduces a brand new design called the "Liquidity Hub + Spoke" model. This architecture is a direct response to the limitations of a "single entity," which we can understand through a simple analogy from traditional finance: a central bank and its network of commercial banks.

• Liquidity Center: Aave's "Central Bank"

• On every blockchain network running Aave, there will be a unified Liquidity Hub that aggregates all assets supplied by users. 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 deep liquidity for the entire ecosystem. This model is expected to improve capital utilization, bring higher returns for lenders, and offer lower interest rates for borrowers.
  • Liquidity centers on different chains are not isolated, but can efficiently communicate and transfer liquidity with each other. This is mainly achieved through a mechanism known as the "Unified Cross-Chain Liquidity Layer (CCLL)", and the core technological support of this mechanism is the Chainlink's Cross-Chain Interoperability Protocol (CCIP).

• Spoke: Aave's "Specialized Commercial Bank". The liquidity center operates in the background, and users will interact with the protocol through various Spoke. Spoke is a user-facing, modular lending market, with each market designed for a specific purpose and connected to the central liquidity center. They function like specialized commercial banks. For example, there may be:

• Core Spoke: A general lending solution for handling low-risk, high-liquidity blue-chip crypto assets such as ETH and WBTC.
• E-Mode Spoke: Optimized specifically for stablecoins, LSTs, and other highly correlated currency pairs, providing the highest capital efficiency.
• RWA Spoke: Tailored for tokenized treasury bonds, real estate, and other real-world assets. This type of Spoke can integrate stricter access, custody, or compliance rules to meet institutional and regulatory requirements.
• A high-leverage trading Spoke, designed for professional traders seeking high risk and high returns, with specialized 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 Spoke. If a new Spoke design passes Aave's governance approval, it can obtain a line of credit from the liquidity hub, thereby leveraging 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 would be helpful to compare it with its main competitor, MakerDAO. MakerDAO recently underwent a rebranding, changing its name to Sky and launching its own "Endgame" plan. It can be said that "great minds think alike"; Sky also adopted a modular architecture, marking the entire industry’s shift towards a more flexible and scalable design.

Similar

The architecture of Sky can be described as "Sky Core + SubDAO".

• Sky Core plays the role of "central bank" in the Sky ecosystem, inheriting the function of issuing stablecoins from MakerDAO (currently USDS, formerly DAI). It establishes the most fundamental rules (for example: approving which SubDAOs can access the system, the total minting limit 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 a "commercial bank" for specific fields. The core functions of SubDAO are asset management and risk assessment. They are authorized by the Sky Protocol to receive specific types of collateral and initiate a request to mint USDS to Sky Core. For example, Spark Protocol is currently the only mature SubDAO in the Sky ecosystem, focusing on lending and is a direct competitor of 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 obvious: both recognize that a single entity cannot meet all market needs, and therefore adopt the model of "central bank + specialized commercial banks": the central bank formulates policies and provides liquidity, while specialized commercial banks are responsible for developing specific business scenarios.

Looking back at the grievances between the two projects AAVE and Sky (MakerDAO), Sky Spark was born by directly forking the open-source code of Aave V3. The two sides also had a fierce dispute over the profit-sharing protocol, with Aave accusing Spark of failing to pay the promised 10% profit share. Now AAVE V4 has merely "borrowed" Sky's mature modular design concept, which can be considered as "using the same method against the other."

different

Despite their similarities, AAVE and Sky also have significant differences in core business, economic models, and ecological sovereignty.

First, there is the liquidity type: Aave's Liquidity Hub aims to provide liquidity for a wide range of asset classes, including stablecoins, volatile assets (such as ETH), derivative assets (LSTs), and more. Sky inherits the genes of MakerDAO, with its core strategy always revolving 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 economic model and sovereignty: this is the fundamental distinction between the two. The Sky SubDAO is granted a high degree of economic sovereignty, with each SubDAO allowed to issue its own governance token (such as Spark's SPK token), enabling it to build an independent economic model, implement its own incentive plans, and directly capture the value created by its own business growth. This economic independence allows SubDAOs to evolve complex and powerful functional architectures. Taking Spark, the only mature example in the current Sky ecosystem, as an example, its operating model can be compared to a dual-layer financial system:

1. "Commercial Banks" Level ( Retail End ): It has a lending platform Spark Lend aimed at end-users. This part of the business directly serves individual users, functioning similarly to the commercial banks we are familiar with.
2. "Regional Reserve Bank" level ( wholesale end ): Spark also has a liquidity layer called Spark Liquidity Layer (SLL), which acts as a regional "liquidity hub". After obtaining liquidity (such as USDC/USDS) from Sky Core, SLL not only provides funding support to its own "commercial bank" Spark Lend, but also "wholesales" this liquidity to other DeFi protocols, such as Morpho, and even competitors like Aave.

Therefore, Spark is not just a simple lending application, but a liquidity engine that integrates both retail and wholesale business, deeply leveraging its SubDAO identity to create and distribute value 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 similar to different business units under a large group, operating under the unified Aave brand and economic framework, with the value they create also flowing back to the group headquarters.

🌍 Macroscopic Perspective 🌍

The architectural changes of Aave and Sky are not isolated events, but a direct response to the major trends shaping the future of Decentralized Finance.

Integrate RWA

The next frontier of DeFi growth is widely believed to be the tokenization of real-world assets, such as government bonds, real estate, and private credit. These assets come with unique legal and compliance requirements, making it difficult to manage them within a single, large protocol. Aave V4 and Sky's modular architecture is well-suited for this, allowing the protocol to create independent, customizable, and even permissioned "sandbox" environments (such as RWA Spoke or RWA SubDAO) specifically designed to hold and manage RWA while maintaining its core decentralized and permissionless features.

The Rise of Application Chains

A logical endpoint of this modular evolution is for major protocols to launch their own dedicated blockchains, known as "Appchain". Aave and Sky have both announced plans to develop in this direction, respectively launching Aave Network and NewChain.

Why are these already successful protocols converging on application chains? The answer lies in sovereignty and value capture. Having their own application chain means that protocols can fully control their execution environment, customize the fee market (such as paying Gas with GHO), capture MEV that would otherwise be taken by 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 merely collecting interest shares. This marks the transition of protocols from "tenants" (operating on Ethereum or L2) to "landlords" (owning their own sovereign platform).

Impact on Ethereum

Although these application chains may seem to be "leaving" Ethereum, in reality, their design relies 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 transition also poses severe challenges to Ethereum's economic model. Historical experience shows that when the activity of major protocols migrates to Layer 2, the transaction volume on the Ethereum mainnet decreases, leading to a reduction in fee income. The decrease in Base Fee burn will weaken the deflationary mechanism of ETH, putting it under inflationary pressure.

Therefore, in the face of the major Decentralized Finance protocols independently becoming chains, Ethereum must actively evolve and explore a new economic model that can effectively capture value from its new role as an "ecological security provider", thereby maintaining the healthy operation of the entire ecosystem.

🚀 Conclusion 🚀

Aave V4 is not just an upgrade, but a strategic repositioning. It is a thoughtful solution to the internal challenge of "a single entity cannot meet diverse needs" and a forward-looking response to external opportunities such as RWA and multi-chain landscape.

By transforming into a modular open platform, Aave is laying the groundwork to go beyond 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 movements of its main competitors and signifies that the DeFi industry is maturing, preparing for broader adoption and more complex financial integrations. The launch of Aave V4 will be a key event worth following, as it has the potential to set new standards in the DeFi lending space in the coming years.

This article is based on publicly available information and does not constitute investment advice. Cryptocurrency investment carries significant risks; please make decisions cautiously.