Aave Network is filled with the stubborn taste of the old DeFi, which seems to be a decision that even the team itself hasn't figured out.

Author: @cmdefi

Regarding Aave v4, a brief summary, many issues should have been addressed long ago, and some of the plans seem to be stubbornly old DeFi. Should every major protocol launch its own chain?

1. Unified Liquidity Layer

• Centralizing the management of all fund supplies and borrowings to prevent liquidity from being dispersed across different modules.
• Allowing the protocol to easily add or remove functional modules in the future without the need to migrate liquidity, providing convenience for long-term expansion.

The biggest benefit is that there will be no need to switch back and forth between Aave V2/V3/V4 tabs, and there will be no need to manually migrate funds from V2 to V3 as was the case during the V3 upgrade.

2. Blurred Control Interest Rate Function

Aave V4 proposes to adopt fully automatic interest rates, which can adjust the slope of the interest rate curve. The current setting is controlled by the governance mechanism, which not only increases governance burden but also reduces capital efficiency. The blurred interest rate design is used to actively control the inflection points of the interest rate curve, dynamically adjusting it according to market conditions. The base interest rate will rise or fall based on market demand, optimizing the interest rates for suppliers and borrowers.

This is something that should have been optimized long ago. The cumbersome interest rate model and lengthy governance process have made Aave very difficult. In the previous malicious shorting of $CRV, Fraxlend had already taken the lead in controlling interest rates algorithmically, prioritizing the repayment of the interest rate model in a healthier way when the borrowing utilization rate was too high.

3. Liquidity Premium Mechanism

V4 introduces the concept of "liquidity premium," dynamically adjusting borrowing rates based on the risk status of collateral assets (such as centralization level, market risk, etc.). Faced with higher-risk collateral, the cost of borrowing is relatively increased, while lower risk helps to reduce borrowing costs.

This is a relatively good risk management feature, as many altcoins still have borrowing demand on the chain, and risk grading is a viable strategy.

4. Introduction of Smart Account and Vault

Significantly improving user experience, allowing users to manage multiple positions with a single wallet. Smart accounts aim to address a major user experience issue in V3: managing positions using e-mode or isolated asset borrowing requires managing multiple wallets.

With the introduction of smart accounts, users can create multiple sub-accounts with a single wallet, greatly simplifying protocol interaction. Smart accounts also realize the highly requested "vault" function by users. Users can borrow against collateral assets in smart accounts, where the collateral is locked but does not enter the liquidity pool, reducing risk overflow.

This is also a very good and long-overdue user experience upgrade.

5. Dynamic Risk Parameter Configuration

Support for creating independent risk configurations for individual assets, reducing liquidation risk. Introducing automated asset delisting mechanism to simplify governance processes.

The adjustment of risk parameters in V3 (especially the liquidation threshold) affects all users, and lowering the threshold may trigger unnecessary liquidations, resulting in high governance costs. V4 introduces dynamic configuration functionality, where new borrowings use new configurations, while existing users continue to use the original configurations. It also introduces an automated asset delisting mechanism, where the governance layer gradually lowers the liquidation threshold of assets until it reaches zero, effectively rendering the asset unable to complete lending operations, equivalent to manual delisting but simplifying the governance process.

6. Introduction of Excess Debt Protection Mechanism to Prevent Bad Debt Spread

One drawback of the shared liquidity model is that the accumulation of excess debt can spread. V4 introduces a new mechanism to track accumulated excess debt positions, automatically calculating the accumulated excess debt. When the excess debt exceeds a certain threshold, the related assets automatically lose borrowing capability, preventing the spread of bad debts.

7. Providing Native Integration with GHO Stablecoin

• Support for native minting of GHO in the liquidity layer.
• Introduction of GHO "soft liquidation" AMM, similar to crvUSD.
• Introduction of GHO emergency redemption mechanism to address extreme unpegging situations.
• Allowing depositors to choose to receive interest in the form of GHO, with the protocol converting interest into GHO collateral, enhancing GHO stability.

8. Aave Network

Aave plans to launch a new network layer as the core hub for GHO stablecoin and Aave lending protocol.

• Using GHO to pay fees.
• Serving as the hub for Aave V4.
• $AAVE as the primary staking asset for decentralized validators/sorters.
• Controlled by the community through Aave Governance V3, with interfaces and interactions with Ethereum.
• Widely using account abstraction.
• Inheriting network security from Ethereum.

Aave Labs stated that it will continue to monitor the development of layer one and layer two networks to choose the most suitable technical solutions for the Aave community.

Regarding Aave Network being filled with the stubborn taste of the old DeFi, from the current information and status, it seems that even the team itself hasn't figured out whether to go for L1 or L2. How to do it? Is it really necessary? I have doubts about these questions.

In fact, the only thing that seems clear is that Aave is always going to stabilize the stablecoin market in the future, and all the plans are creating scenarios for GHO.

Due to the lack of innovation in this round of application layer, it seems to be a bull market for infrastructure. Every project is embarrassed to raise funds without a "Layer." With a "Layer," the valuation suddenly goes up. However, whether it is really necessary for DeFi protocols to go for their own chain after they grow larger seems a long way off. From my perspective, Ethereum seems to be the financial center on the chain, not that it's impossible to leave here, but for some projects that do not overly rely on performance, leaving Ethereum to create their own chain seems to provide no additional benefits for users of the product, and may even reduce security in the early stages.

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