Aave launches V4 on Ethereum to scale on-chain lending

Aave launched Aave V4 on the Ethereum mainnet on Monday, introducing a major protocol upgrade aimed at scaling on-chain lending and improving capital efficiency.

Aave V4’s core upgrade is its new 'Hub and Spoke' architecture, which restructures liquidity management across the protocol.

Aave introduces shared liquidity model to improve capital efficiency

Under this model, a central Liquidity Hub holds user-supplied assets, while connected Spokes operate with their own collateral types, risk parameters, and liquidation rules. When users supply assets through a Spoke, the capital is pooled into the central Hub and made accessible across all connected markets.

The structure allows liquidity to move efficiently across multiple lending environments, including institutional-grade markets, ETH liquid staking e-Modes, and customized partner deployments.

Users will be able to supply and borrow assets from a range of major issuers and protocols, including Circle, Ethena, Tether, Ether.fi, Lido Finance, Lombard Finance, Frax Finance, Ripple, Global Dollar and Pendle, among others.

The design also enables developers to launch new lending markets that can tap into Aave’s existing liquidity from the outset, reducing fragmentation and lowering barriers to entry for new products. The upgrade includes improvements to risk pricing, liquidation mechanisms, and governance tools, allowing for more precise parameter management across markets, Aave noted in a statement.

The team initially set conservative supply and borrow caps as part of a security-first approach, with limits expected to increase gradually as the system matures.

User interaction with the new system will primarily take place through Aave Pro, a dedicated interface that provides a unified view of assets, interest rates, health factors and cross-market positions.

Commenting on the upgrade, DeFi analyst Ignas said in an X post that the new system adjusts borrowing costs based on the risk profile of the collateral provided.

“You pay higher borrowing rate if your collateral is riskier (on top of base rate),” he noted, adding that safer assets such as wETH and USDC attract lower borrowing costs, while more volatile assets are priced higher.

The rollout comes amid internal governance challenges. The Aave ecosystem has been under weeks of serious tension, with concerns over governance rights, including allegations of concentrated voting power, poor transparency and revenue allocation.

Several key contributors have also stepped back. In February, BGD Labs, a major contributor to Aave V3, announced plans to cease operations after its contract expires on April 1, citing strategic differences over the protocol’s direction. 

Earlier this month, the Aave Chan Initiative (ACI), led by Marc Zeller, said it would wind down operations over the next four months, transitioning its tools to open source while maintaining limited involvement throughout the process.