Aave V4: A love-hate relationship with MakerDAO, but a similar outcome

As one of the cornerstones of the DeFi ecosystem, any movement of Aave, the largest and most mature lending protocol, has attracted much attention in the industry. Recently, at the highly anticipated ETHCC conference, Aave founder Stani officially announced that the team is about to launch its next important iteration version - Aave V4.

Aave V4 is not a simple regular upgrade, but a key milestone in Aave's 2030 long-term strategic roadmap. The upgrade plan was first officially proposed in May 2024. Its core goal is to systematically solve the limitations exposed in the operation of the V3 version, especially 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 and prepare 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 the broader DeFi industry development trend.

? The Evolution of AAVE?

AAVE's journey began with ETHLend, a P2P platform where lenders and borrowers need to find each other's counterparties, but the process of finding matching counterparties is slow and full of uncertainty. After the team deeply realized these fundamental flaws, they upgraded the brand from ETHLend to Aave (i.e. AAVE V1) in September 2018, decisively shifting from the P2P model to a point-to-contract (P2C) model based on liquidity pools, where funds are pooled and instant lending is achieved. The subsequent Aave V2 further reduced transaction costs on the congested Ethereum network by optimizing smart contracts, allowing more people to access DeFi.

The current version, Aave V3 , has taken a significant step forward in capital efficiency and risk management compared to 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 (such as between stablecoins, or between ETH and stETH), E-Mode allows users to unlock higher borrowing power (such as higher LTV). This directly solves the problem of insufficient capital efficiency of correlated assets in V2.

• Isolation Mode: Allows new, riskier assets to be listed in an “isolated” manner. Collateral provided in Isolation Mode can only be used to borrow a set of governance-approved stablecoins with a clear debt ceiling and cannot be mixed with other collateral. This effectively “isolates” the risks of new assets and prevents risk contagion.

However, Aave V3 also exposes a deeper strategic limitation: a single entity architecture cannot flexibly respond to the needs of emerging markets and diversified scenarios . Imagine that a traditional bank initially only accepted real estate as collateral. All of its forms, processes, and risk assessment models are designed around real estate. Now, a customer wants to apply for a loan with his company's equity, patents, or even future accounts receivable. The bank will find that its original "one-size-fits-all" process is completely unable to handle these new assets with different risk characteristics. Banks either have to make drastic internal reforms or give up 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 began to introduce RWAs - such as tokenized treasuries or private credit - as collateral, Aave V3's single architecture became inadequate. RWAs involve off-chain legal compliance, counterparty risks, and different liquidation logics, which cannot be simply stuffed into the existing smart contract framework.

This is the core problem that Aave V4 aims to fundamentally solve: how to evolve from a single rigid product to a flexible platform that can support countless financial scenarios.

? AAVE V4: A Modular New Architecture?

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

• Liquidity Hub: Aave’s “Central Bank”

  • On each blockchain network Aave runs, there will be a unified liquidity center (Liquidity Hub) that brings together all user-supplied assets. This center 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 to lenders, and provide lower interest rates for borrowers.

  • Liquidity centers on different chains are not isolated islands, but can communicate and transfer liquidity with each other efficiently . This is mainly achieved through a mechanism called "Unified Cross-Chain Liquidity Layer" (CCLL), and the core technical support of this mechanism is Chainlink's Cross-Chain Interoperability Protocol (CCIP) .

• Spoke: Aave’s “specialized merchant bank” . The liquidity hub operates in the background, and users will interact with the protocol through various Spokes . Spokes are user-facing, modular lending markets, each designed for a specific purpose and connected to a central liquidity hub. They are like specialized merchant banks. For example, there may be:

  • Core Spoke : Used to handle general lending of low-risk, high-liquidity blue-chip crypto assets such as ETH and WBTC.

  • E-Mode Spoke : Specially optimized for strongly correlated currency pairs such as stablecoins and LST, providing the highest capital efficiency.

  • RWA Spoke : Tailored for tokenized real-world assets such as treasury bonds, real estate, etc. This type of Spoke can integrate stricter access, custody or compliance rules to meet institutional and regulatory needs.

  • A high leverage trading Spoke designed for professional traders seeking high risk and high return, with a special interest rate model and risk control parameters.

The most important aspect of the design is its openness . Aave V4 will allow developers to build and propose their own Spokes. If a new Spoke design passes Aave's governance approval, it can obtain a line of credit from the liquidity center, thereby leveraging Aave's vast liquidity network to launch a new, professional market. This completely transforms Aave from a mere product to a foundational platform for financial innovation.

⚔️ COMPARISON: AAVE VS. SKY (Formerly MAKERDAO) ⚔️

To fully understand Aave’s strategic direction, it’s helpful to compare it to its main competitor, MakerDAO, which also recently rebranded to Sky and launched its own “Endgame” plan. As the saying goes, “great minds think alike,” Sky also adopts a modular architecture, which is a sign of the industry’s overall move towards more flexible and scalable designs.

resemblance

Sky's architecture can be described as "Sky Core + SubDAO" .

• Sky Core plays the role of "central bank" in the Sky ecosystem, inheriting the function of MakerDAO to issue stablecoins (currently USDS, formerly DAI). It formulates the most core rules (such as: which SubDAOs can be approved to access the system, what is the total coinage limit of each SubDAO, emergency shutdown mechanism, 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, acting as a "commercial bank" for specific fields. The core work of SubDAO is asset management and risk assessment . They are authorized by Sky Protocol to receive specific types of collateral and initiate a request to Sky Core to mint USDS . For example, Spark Protocol is currently the only mature SubDAO in the Sky ecosystem. It is a SubDAO focused on lending and is a direct competitor of Aave. Other SubDAOs may focus on RWA assets or other market segments.

The similarities between Aave’s “ Liquidity Hub + Spoke ” and Sky’s “ Sky Core + SubDAO ” are obvious: both realize that a single entity cannot meet all market needs , so they both adopt the “ central bank + specialized commercial bank ” model: the central commercial bank formulates policies and provides liquidity, while specialized commercial banks are responsible for developing specific business scenarios.

Looking back at the feud between 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 agreement, with Aave accusing Spark of not paying the promised 10% profit share. Now AAVE V4 has only "borrowed" Sky's mature modular design ideas, which can be regarded as " treating others with their own way ".

different

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

First of all, the types of liquidity : 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), etc. Sky has inherited the genes of MakerDAO, and its core strategy has always been around the issuance, stabilization and promotion of its native stablecoin USDS (formerly DAI). The main task of its SubDAO is to create more application scenarios and demands for USDS and deepen its liquidity moat.

The second is the economic model and sovereignty : this is the most fundamental difference between the two. Sky SubDAO is endowed with a high degree of economic sovereignty, and each SubDAO is allowed to issue its own governance tokens (such as Spark's SPK tokens), which enables it to build an independent economic model, implement its own incentive plan, and directly capture the value created by its own business growth. This economic independence allows SubDAO to evolve a complex and powerful functional architecture. Taking Spark, the only mature example in the Sky ecosystem, as an example, its operating model can be likened to a two-tier financial system:

1. "Commercial Bank" level (retail end) : It has Spark Lend, a lending platform for end users. This part of the business directly serves individual users and its functions are similar to those of 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 plays the role of a regional "liquidity hub" . After SLL obtains liquidity (such as USDC/USDS) from Sky Core, it not only provides financial support for its own "commercial bank" Spark Lend, but also "wholesale" this liquidity to other DeFi protocols, such as Morpho, and even competitor Aave.

Therefore, Spark is not a simple lending application, but a deeply integrated liquidity engine that combines retail and wholesale businesses, making full use of 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 an extension of the Aave core protocol, and the value they generate (such as interest income) will flow back to Aave DAO. Spokes are similar to different business units under a large group. They operate under the unified Aave brand and economic framework, and the value they create also flows back to the group headquarters.

? Macro perspective?

These architectural shifts by Aave and Sky are not isolated events, but rather a direct response to major trends shaping the future of DeFi.

Integrate RWA

The next frontier in DeFi growth is widely considered to be the tokenization of real-world assets, such as treasuries, real estate, and private credit. These assets come with unique legal and compliance requirements that are difficult to manage in a single, monolithic protocol. The modular architecture of Aave V4 and Sky is well suited for this, allowing protocols to create independent, customizable, and even permissioned "sandbox" environments (such as RWA Spoke or RWA SubDAO) specifically for hosting and managing RWAs while maintaining their core decentralized and permissionless features.

The rise of application chains

A logical endpoint to this modular evolution is for major protocols to launch their own dedicated blockchains, or “Appchains.” Both Aave and Sky have announced plans to move in this direction, with the launch of Aave Network and NewChain , respectively.

Why do these already successful protocols all move towards application chains? The answer lies in sovereignty and value capture . Owning your own application chain means that the protocol has full control over its execution environment, can customize the fee market (such as paying Gas with GHO), capture MEV that was originally taken away by public chain miners or validators, and provide users with a smoother and more integrated experience. More importantly, using native tokens as Gas and pledged assets creates a more powerful and direct value capture flywheel than simply collecting interest sharing. This marks the transformation of the protocol from a "tenant" (running on Ethereum or L2) to a "landlord" (owning its own sovereign platform).

Impact on Ethereum

While these application chains may seem like they are "leaving" Ethereum, they are actually designed to rely on Ethereum. Both Aave Network and NewChain plan to use Ethereum as their final security and settlement layer. This reflects a broader shift in Ethereum's role - from a place where all activities take place to a base trust layer that provides security for a large ecosystem of interconnected chains.

However, this shift also poses a severe challenge to Ethereum's economic model. Historical experience shows that when the activities of major protocols migrate to Layer 2, the transaction volume of the Ethereum mainnet will decline, resulting in a decrease in handling fee income. The reduction in the amount of Base Fee burned will weaken ETH's deflation mechanism and expose it to inflationary pressure.

Therefore, in the face of the general trend of major DeFi protocols becoming independent chains, Ethereum must actively evolve and explore a new economic model that can effectively capture value from its new role as an "eco-security provider" to maintain 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 diversified 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 foundation for going beyond simple lending applications and becoming the infrastructure for the next generation of on-chain finance. The " Liquidity Hub + Spoke " model brings greater capital efficiency to users and unprecedented flexibility to developers. This evolution, echoing the moves of its main competitors, marks that the DeFi industry is maturing and ready for broader adoption and more complex financial integration. The launch of Aave V4 will be a key event to watch, and it has the potential to set new standards in the DeFi lending space in the coming years.

This article is based on public information analysis and does not constitute investment advice. Cryptocurrency investment involves high risks, so please make your decision with caution.