Aave is one of the oldest and best-known DeFi protocols on the market. It is a lending protocol that pays interest on deposits and enables loan taking against collateral. About 10 billion dollars of liquidity is currently locked in the protocol, making Aave the third-largest DeFi app.
The latest version of the Aave protocol is V3, launched in 2022. Aave Labs, responsible for the development work, announced the V4 roadmap and the Aave 2030 vision this week, which includes many exciting updates.
Introducing Aave 2030 pic.twitter.com/ZncA5YqHaT
— Aave Labs (@aave) May 1, 2024
You can read the official post from the Aave forum by clicking his link. Aave Labs announced that the project’s budget is about 17 million dollars (15 million GHO and 25,000 stkAAVE tokens).
Aave was launched on the Ethereum platform, but today, the protocol has already expanded to 12 different EVM-compatible blockchains. The goal of Aave is to become a blockchain-agnostic protocol. V4’s new unified liquidity layer and Chainlink’s CCIP protocol make this possible.
With the adoption of CCIP, the concept of superchains, and V4’s Unified Liquidity Layer feature, Aave can soon scale to become a fully cross-chain liquidity protocol. This will allow borrowers to access instant liquidity across all supported networks.
Let’s go through some of the updates that Aave V4 brings.
- New architecture: V4 will technically differ from the previous version as it will be built on an entirely new architecture.
- Unified Liquidity Layer: V4 combines the liquidity of Aave’s different modules into one pool, which users can also access regardless of the blockchain they are using.
- New interest rates: Interest rates are at the core of lending operations. In the future, they will be regulated more efficiently, taking into account the changing conditions of the market. Aave uses the term “fuzzy-controlled interest rates”.
- Liquidity premiums: Liquidity premiums allow Aave to set a premium for different token versions. For example, ETH is a less risky token than weETH or stETH, even though their exchange rates theoretically move in a 1:1 ratio.
- Dynamic risk management: In the future, Aave can dynamically change the parameters of loanable assets as the market situation changes. Thanks to this change, new borrowers can get different loan parameters than existing borrowers.
- Soft liquidation: If the price of ETH, which serves as collateral (as an example), falls, a portion of the collateral can be converted into Aave’s GHO stablecoin. This is known as soft liquidation.
The new version also includes many other features, which you can read more about in the Aave V4 forum post. Based on current information, the V4 will be launched in Q1-Q2 2025.
Many updates are related to the GHO stablecoin in an attempt to increase its demand. Aave launched the GHO in July 2023. It is technically similar to the DAI stablecoin, i.e., the collateral is cryptocurrencies instead of dollars. GHO has not received much popularity so far. Its current market cap is only 50 million dollars.
Aave is currently well-positioned in its category. Although Ethereum’s staking services have risen past it in the overall DeFi rankings, Aave has about 34 percent market share in the lending services category (source: defillama.com). Roughly speaking, Aave has as much liquidity as its three biggest competitors combined.
AAVE is the governance token of the Aave protocol, which can be also staked for earning yield. You do not need the AAVE token to use the Aave app. Transaction fees are paid with the native token of the blockchain where you use the app. For example, if you use Aave on the Ethereum platform, you pay for transactions with ETH.
If you want to buy the AAVE token, check out this article: How to Buy AAVE. It provides step-by-step instructions on how to buy AAVE from Binance.