Aave 2030 Proposal Overview

Ronnie_Chan
ZMQuant
Published in
5 min readMay 25, 2024

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Aave, a leading DeFi lending and borrowing platform, has unveiled its 2030 proposal, with Aave V4 as its centerpiece, scheduled for full release by mid-2025.

Despite Aave V3’s current dominance, the fast-paced DeFi landscape demands constant evolution. With EigenLayer securing a $100 million investment from a16z in February 2024 and soon surpassing Aave’s TVL, Aave’s need for innovation is crucial.

The Aave V4 proposal outlines several key improvements over its V3, including enhanced liquidity management, a new borrow module, liquidation engine V4, stronger GHO integration.

New Architecture and Liquidity Management

Unified Liquidity Layer

Unified Liquidity Layer, a generalized infrastructure for liquidity provisioning. It manages supply caps, interest rates, assets, and incentives, allowing the Aave DAO to add or remove borrow modules without migrating liquidity. This avoids fragmented liquidity and supports better integration with GHO and other Aave-native assets.

Fuzzy-controlled Interest Rates

Aave V4 features automated interest rates with adjustable slopes and kink points, optimized based on market demand using fuzzy logic. This model, developed with Chainlink, aims for the most capital-efficient interest rate models on-chain.

Liquidity Premiums

Liquidity Premiums introduce adjusted borrowing costs based on collateral risk, providing better rates for strong collaterals like ETH. This improves capital efficiency, offering higher yields to suppliers and lower fees to borrowers with low-risk collateral.

Aave V4 Borrow Modul

Aave V4 introduces a new Borrow Module that enhances user experience, risk management, and safety. Key features include:

Smart Accounts, which allow users to manage multiple positions using a single wallet, simplifying interactions.

Aave Vaults, allowing borrowing without supplying collateral to the liquidity layer, instead locking collateral in the smart account.

Dynamic Risk Configuration

Aave V4 addresses V3’s risk management limitations by proposing dynamic risk configurations. Users are hooked to the current asset configuration at the time of borrowing, and new configurations can be created without affecting existing users. This reduces the need for frequent governance changes and allows offloading risk management to external entities.

Automated Assets Offboarding

V4 introduces automated asset offboarding, simplifying the current governance-intensive process. When triggered, new configurations progressively reduce the asset’s liquidation threshold until it reaches zero, providing a predictable offboarding plan and reducing governance workload.

Other features

Additionally, V4 introduces automated treasury management with a reverse auction mechanism to automatically convert Reserve Factors to pre-configured assets. V4 also allows users to set up custom automatic actions in response to governance decisions.

Liquidation Engine V4

The Liquidation Engine in Aave V4 includes a variable Liquidation Factor to minimize borrower impact, a variable Liquidation Bonus with reverse Dutch auctions, and diverse Liquidation Strategies for different assets.

It also introduces Multiple Parallel Liquidations for efficiency and GHO soft liquidations. To protect against excess debt, Aave V4 will implement a mechanism to track insolvent positions and automatically limit borrowing power once a debt threshold is crossed.

Furthermore, a new oracle design in collaboration with Chainlink aims to reduce trust assumptions and detect outliers.

Stronger GHO Integration

Aave V4 introduces stronger GHO integration with features like native GHO minting for more efficient liquidity management and GHO soft liquidations using a Lending-Liquidating AMM. This mechanism allows users to choose which collateral to liquidate or buy back, with GHO automatically earning interest. Additionally, suppliers can opt to receive interest payments in GHO, enhancing protocol capital efficiency and stability.

To ensure stability during prolonged GHO depegging, V4 proposes an Emergency Redemption Mechanism that redeems collateral of low health factor positions to GHO, ensuring debt repayment. This, along with automated interest rates, soft liquidations, and GHO interest repayments, helps scale GHO while maintaining stability and reliability.

Deprecated V3 Features

Aave V4 plans to deprecate several older features to simplify and enhance system efficiency. Credit Delegation will move to V4 Smart Accounts, while the Stable Rate and native tokenization of positions will be deprecated in favor of more flexible borrow modules and optional ERC 4626 vault-based tokenization. The LTV parameter will be replaced by Dynamic Configuration, reducing the need for separate LTV settings. These changes, along with other technical innovations, are expected to lower gas fees by 30–50%.

Cross-Chain and Aave Network

Another significant aspect of the proposal is Aave’s plan to launch a unified cross-chain liquidity layer, aggregating liquidity from multiple networks within a single protocol.

While the cross-chain liquidity layer is still a hypothesis, Aave Labs will monitor the evolution of both L1 and L2 networks to help the DAO choose the best technology for this infrastructure. Key features under consideration include:

Using GHO for fees: Leveraging Validium on Aave Network for cost-effective micropayments and improved UX.

Network-level Aave V4 integration: Making Aave V4 the primary network liquidity hub, simplifying developer integration.

AAVE as the main staking asset: For decentralized validators and sequencers.

Governance control: Managing Aave Network interfaces to Ethereum via Aave Governance V3.

Extensive use of Account Abstraction.

Inheriting network security from Ethereum.

As Aave moves forward with these developments, its ability to adapt and innovate will be critical. The introduction of a cross-chain liquidity layer could position Aave for future growth and resilience, but it also presents risks and challenges that will need to be carefully managed. The broader adoption and impact on the DeFi landscape will be crucial in determining whether these ambitious plans can maintain Aave’s leading position or if they might face obstacles in a rapidly changing environment​.

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