DeFi lending giant Aave unveils V4 protocol overhaul

Aave Labs, the firm behind the decentralized finance (DeFi) lending protocol Aave has outlined a proposal for an upgrade and evolution of its protocol as part of a five-year roadmap.

On May 1, the DeFi lending platform introduced a governance proposal to get community feedback on upgrading the protocol to its next-generation version 4.

The proposal also includes “major upgrades and expansions,” to the Aave Network, a cross-chain liquidity layer, non-Ethereum Virtual Machine (EVM) layer-1 deployments, and a “fresh new visual identity,” the team stated.

Aave V4 would be built on a “completely new architecture” and include a “Unified Liquidity Layer” to enable better integration of features like isolation pools, risk modules, and its native stablecoin GHO.

Other proposed features are interest rates that can automatically adjust on the fly based on market conditions and using Chainlink data oracles.

Also suggested were Liquidity Premiums to adjust borrowing costs based on collateral risk profiles and vaults and smart accounts for simplified user management of positions.

Part of the proposal focused on Aave’s algorithmic stablecoin GHO which was launched in July 2023 but is a minnow compared to its competitors such as Tether (USDT $1.00) and USD Coin (USDC $1.00) with a market capitalization of $49 million.

GHO-related suggestions include improvements to the liquidation engine such as variable liquidation bonuses and “soft” liquidations, along with better integration of GHO such as options to earn interest.

An emergency redemption mechanism for GHO depegging scenarios was also proposed as part of the big upgrade.

The proposal is currently in the “temperature check” phase which provides a signal on community sentiment prior to moving toward an on-chain vote.

It outlines a development timeline stretching from research completion in Q2, 2024 to a full V4 release by mid-2025.

Aave Labs is requesting a grant with a budget of 15 million GHO and 25,000 stkAAVE, worth around $17 million combined for the execution of the first year of the three-year plan.

Aave is the third largest DeFi protocol with a total value locked of around $10 billion, according to DefiLlama.

Its native Aave (AAVE $83.20 ) token was trading at $82.35 at the time of writing having lost 9% over the past week. It remains down 87.6% from its all-time high of $660 three years ago. 

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