At ETHCC, the founder of Aave, Stani, announced the imminent launch of Aave V4, the new iteration of the largest lending protocol in DeFi.

Today, my piece will focus on the new implementations of Aave V4 and how they could potentially reshape the protocol, especially regarding the new rate parameters and GHO upgrades.

What’s Aave V4

Aave recently surpassed $25B in TVL for the first time, a milestone no other protocol has achieved. The team is actively working to ship new features that can adjust risk and further fuel its growth.

Here are the new features announced last year that will soon be implemented:

• Unified Liquidity Layer: Introduces a set of modules that remove previous constraints related to liquidity migration, while adding new capabilities such as crosschain lending.
• Fuzzy-controlled Interest Rates: A new mechanism to automate interest rate curves and kink points based on market conditions, rather than relying on governance votes.
• Liquidity Premiums: Borrowing costs become more dependent on the liquidity conditions of each token. While assets like ETH remain premium-free and serve as benchmarks, others such as WBTC and wstETH will be subject to premiums based on their liquidity.
• Aave V4 Borrow Module: Smart Accounts are being explored to introduce features like Aave Vaults, which can lock liquidity, disable collateral usage, and more.
• Dynamic Risk Configuration: Collateral rates are tied to the moment a position is created and are not affected by subsequent market changes, offering users greater position stability.
• Automated Asset Offboarding
• Automated Treasury Management.
• Liquidation Engine V4: Aave’s liquidation engine is undergoing significant upgrades, including variable liquidation factors and bonuses, as well as batched liquidations.
• Stronger GHO Integration: GHO is being integrated more natively into Aave V4, with enhancements such as soft liquidations, stablecoin interest paid out in GHO, and a new emergency redemption mechanism.

Additional changes include gas optimizations and the deprecation of features like tokenized positions and stable rates.

Let’s now dive deeper into two major changes: the Unified Liquidity Layer and GHO upgrades.

Unified Liquidity Layer

The unified liquidity layer introduces a new chain-agnostic, independent, and abstracted infrastructure for liquidity provision.

A major improvement in this modular system is the ability to onboard new borrow modules and offboard old ones without requiring liquidity migration.

This architecture enables the addition or enhancement of borrowing features, such as isolation pools, RWA modules, and CDPs, without altering the overall system or the liquidation module. It also addresses the issue of fragmented liquidity seen in earlier versions of the protocol.

The liquidity layer supports both supplied and natively minted assets, improving integration with GHO and other collateralized Aave-native assets.

Crosschain lending is likely one of the most impactful modules, allowing users to deposit on one chain and borrow on another. This significantly enhances the platform’s liquidity capabilities across chains and provides new opportunities for market growth.

GHO Upgrades

GHO is Aave’s overcollateralized stablecoin, currently holding a market cap of over $220M, with a 53% increase since the beginning of 2025.

Beyond minor changes such as more efficient native minting, the standout upgrade is the introduction of soft liquidations. This mechanism draws inspiration from the model introduced by crvUSD (Curve USD), using a Lending-Liquidating AMM (LLAMM) to streamline the liquidation process.

Liquidations are managed in customizable ranges that guide the conversion to GHO during downturns and the repurchase of collateral during upturns. Compared to crvUSD, Aave V4 offers three main advantages: users can choose which collaterals to use for liquidating a position from a basket, select which collateral to repurchase from the entire set of assets available on Aave (even those not initially supplied), and benefit from GHO automatically earning interest.

Another notable change is the ability for users in stablecoin markets to receive interest payments in GHO, which could expand GHO’s supply through direct interest conversion into the token.

Aave V4 also introduces an Emergency Redemption Mechanism to address situations involving severe and prolonged depegging of GHO. When triggered, the collaterals of positions with the lowest health factor are gradually redeemed to GHO, and their debt is repaid, leveraging the new LLAMM design.

Conclusions

For a protocol of Aave’s size and importance, minimizing risk is essential, particularly when launching major features like crosschain lending.

Automating processes such as asset offboarding and interest rate model adjustments helps reduce reliance on slower DAO processes, especially in response to market-driven changes.

Aave remains confident in the growth of its stablecoin, GHO, which now benefits from significant improvements and deeper integration into the protocol.

Aave is poised to remain a cornerstone of DeFi for the foreseeable future. The success of the broader ecosystem heavily depends on its continued leadership, as no other project has amassed this level of TVL while maintaining the same level of security.

Just use Aave.

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1. This article is reprinted from [castle_labs]. All copyrights belong to the original author [mattdotfi]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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