Aave Empire's New Chapter: From App Innovation to V4 Modularized DeFi Infrastructure Road

On-Chain Banking Breakthrough

Aave is rewriting the rules of DeFi lending with two major upgrades. The launch of the Aave App this week and the upcoming V4 version mark the transformation of this lending leader from a single protocol to an on-chain capital market infrastructure. This is not just a functional iteration but a strategic move to break into mainstream user markets.

To date, Aave maintains the top position in the lending market with a TVL of $54 billion, more than five times higher than the second-place Morpho (approximately $10.8 billion). This scale gap is no accident but the result of first-mover advantage, continuous innovation, and multi-chain deployment.

User-Friendly Aave App Arrives

The Aave App is the most “breakout” product in this upgrade. It brings high-threshold DeFi yield opportunities directly to ordinary users—offering up to 6.5% annualized yield while safeguarding balances up to $1 million.

This seemingly simple app actually breaks down the barriers between DeFi and traditional finance users. Compared to traditional bank deposits and bond yields, a 6.5% APY is highly attractive. The Aave App also launches on-chain and off-chain services simultaneously, further lowering the entry barrier, allowing users unfamiliar with wallet operations to participate easily.

V4’s Modular Ambitions: Balancing Liquidity Integration and Edge Innovation

Aave V3 introduced a dual-market structure to balance efficiency and security:

• Prime markets focus on capital efficiency, supporting blue-chip assets. In high-performance mode, borrowing power for highly correlated assets like wstETH and WETH can reach 95%, with a liquidation threshold of 96.5%, currently totaling about $1.17 billion.

• Core markets cover a broader scope (scale of $42 billion), using isolation mode to limit high-risk asset exposure. Borrowing power ratios are usually below 85%, prioritizing risk control.

This layered design is necessary but also introduces liquidity fragmentation—funds are siloed and cannot flow across markets. V4 is designed to address this pain point.

Liquidity Hub: The “Nexus” of Liquidity

The core innovation of V4 is the Liquidity Hub, which aggregates liquidity from Prime and Core markets into a single central pool. Funds are no longer locked in isolated markets but dynamically flow to where they are needed most based on real-time demand, greatly improving system efficiency and reducing idle deposit costs.

The accompanying Spokes design allows specialized market instances to operate independently. Each Spoke can be customized—supporting long-tail assets, setting supply and borrow limits—while the Liquidity Hub ensures the overall system’s safety boundaries are maintained. This design protects the core system’s robustness while providing ample space for edge innovation.

Aave’s Moat: Scale, Liquidity, and Institutional Trust

Aave’s market leadership rests on three pillars:

First is scale advantage. A TVL of $54 billion not only indicates a large user base but also means deep liquidity capable of supporting large transactions without triggering rate spikes. This is crucial for institutional investors—Ethereum Foundation’s deposit of 30,800 ETH into Aave in February 2025 is a direct vote of confidence in its liquidity and security.

Second is the robustness of multi-chain deployment. Although Aave is on 19 chains, over 80% of liquidity remains on Ethereum, followed by Layer 2 networks like Polygon (Arbitrum being the most prominent, then Linea and Base). This “main chain-centric, Layer 2 supporting” strategy ensures security while gradually embracing emerging ecosystems.

Third is refined risk management. Each lending position is monitored in real-time via a health factor, calculated as: Health Factor = (Collateral Asset Value × Liquidation Threshold) / Borrowed Value. When the health factor drops below 1, liquidation is triggered. For example, with $1,000 worth of ETH collateral, an 88% liquidation threshold, and an $800 USDC loan, the health factor is 1.1; if ETH falls to $900, the health factor drops to 0.99, triggering liquidation. This mechanism maintains protocol solvency and creates arbitrage opportunities for liquidators.

RWA Expansion: Bridging to Traditional Finance

Aave’s Horizon market marks its entry into real-world asset lending, currently reaching $600 million. By accepting tokenized assets issued by entities like Superstate and Centrifuge as collateral, Aave is becoming a conduit between traditional institutions and DeFi, channeling institutional funds into the on-chain ecosystem.

The Future Is Set, The Future Is Here

Aave is undergoing an identity transformation—from a single lending protocol to an on-chain capital market infrastructure. The modular design of V4 leaves room for innovation over the coming years, while the launch of the Aave App directly targets mainstream users.

While more protocols will emerge in the lending space, some already establishing footholds in niche markets, Aave’s advantages in scale, liquidity depth, and continuous iteration make its market leadership difficult to challenge in the foreseeable future. As institutions, whales, and retail investors seek stablecoin storage solutions on-chain, Aave has become the standard answer.