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 from 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 a simple routine 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 by the V3 version during operation, 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 includes. We will review its evolution, analyze its new architecture, and interpret these changes in the context of the broader DeFi industry development trend.

Aave's Evolution

AAVE's journey began with ETHLend, a P2P platform where lenders and borrowers needed to find each other's counterparties, but the process of finding matching counterparts was slow and full of 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 a P2P model to a point-to-contract (P2C) model based on liquidity pools, where funds were pooled and instant lending was achieved. The subsequent Aave V2 further reduced transaction costs on the congested Ethereum network by optimizing smart contracts, making DeFi accessible to more people.

Current version, Aave V3, is a significant step forward in capital efficiency and risk management compared to V2. It introduces several key features, such as:

• Efficient Mode (E-Mode): E-Mode allows users to unlock higher borrowing power (such as higher LTV) when the prices of assets deposited and borrowed by users are highly correlated (such as between stablecoins, or between ETH and stETH). This directly addresses the problem of insufficient capital efficiency of correlated assets in V2.

• Isolation Mode:  Allows new, riskier assets to go online in an "isolated" manner. The 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: The single entity architecture cannot flexibly respond to the needs of emerging markets and diversified scenarios. Imagine a traditional bank that 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 using 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, and stablecoins). When the industry began to introduce RWA - such as tokenized treasuries or private credit - as collateral, Aave V3's single architecture became inadequate. RWA involves off-chain legal compliance, counterparty risk, and different clearing logic, 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: 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 Center: Aave's "Central Bank"

• On each blockchain network running Aave, 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 to provide 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 to 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 "Professional Commercial Bank"  . The liquidity center operates in the background, and users will interact with the protocol through various Spokes. Spokes are user-oriented, modular lending markets, each designed for a specific purpose and connected to the central liquidity center. They are like professional commercial banks. For example, there may be: Core Spoke: General lending for low-risk, high-liquidity blue-chip crypto assets such as ETH and WBTC. E-Mode Spoke: Optimized specifically for strongly correlated currency pairs such as stablecoins and LST to provide the highest capital efficiency.

• RWA Spoke: Tailored for tokenized real-world assets such as treasuries, real estate, etc. Such Spokes can integrate stricter access, custody or compliance rules to meet institutional and regulatory needs.

• AHigh Leverage Trading Spoke, designed for professional traders seeking high risk and high returns, with a special interest rate model and risk control parameters.

The most important aspect of this design is itsopenness. Aave V4 will allow developers to build and propose their own Spokes. If a new Spoke design passes Aave’s governance approval, it can then receive a line of credit from the liquidity hub, thereby leveraging Aave’s vast liquidity network to launch a new, specialized 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. MakerDAO 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 that the entire industry is moving towards more flexible and scalable designs.

Similar

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 (now USDS, the original 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, the emergency shutdown mechanism, etc.), maintains the stability of USDS, and serves as the ultimate credit and security guarantee. .

• SubDAOis 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, can receive specific types of collateral, and initiate a request to Sky Core to mint USDS. For example, Spark Protocol is the only mature SubDAO in the Sky ecosystem, a SubDAO focused on lending and 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 thata single entity cannot meet all market needs, so 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 being far from paying the promised 10% profit share. Now AAVE V4 has only "borrowed" some of Sky's mature modular design ideas, which can be regarded as "treating others with their own way".

Different

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

First, 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 inherited the genes of MakerDAO, and its core strategy has always revolved 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.

Second, 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. Each SubDAO is allowed to issue its own governance token (such as Spark's SPK token), 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-layer financial system:

1. "Commercial Bank" Level (Retail End): It has a lending platform for end users, Spark Lend. 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): 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 the 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.

Integrating 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 to this, allowing the protocols to create independent, customizable, and even permissioned “sandbox” environments (such as RWA Spokes or RWA SubDAOs) specifically for hosting and managing RWAs, while maintaining their core decentralized and permissionless nature.

The Rise of Appchains

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 are these already successful protocols moving towards Appchains at the same time? The answer lies in sovereigntyandvalue capture. Having your own application chain means that the protocol has full control over its execution environment, is able to customize the fee market (such as paying for Gas with GHO), capture MEV that would otherwise be 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 pledge assets creates a more powerful and direct value capture flywheel than simply collecting interest sharing. This marks a change in the identity of the protocol from a "tenant" (running on Ethereum or L2) to a "landlord" (having its own sovereign platform).

Impact on Ethereum

While these application chains look like they are "leaving" Ethereum, they are actually designed to rely on Ethereum. Both Aave Network and NewChain plan to use Ethereum as their ultimate security and settlement layer. This reflects a broader shift in the role of Ethereum - from a place where all activities take place to a basic 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 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 also 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 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 movements of its main competitors, is a sign 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 a new standard in the DeFi lending space in the coming years.