Some thoughts on Aave v4: Should every major protocol launch a chain?

Author: Chen Mo, founder of BV DAO Source: X, @cmdefi

About Aave v4, a little summary, many problems have been corrected long ago, and some plans seem to be the stubbornness of old DeFi. Should every major protocol launch a chain?

1. Unified liquidity layer

• All fund supply and lending are centrally managed so that liquidity is not scattered in different modules.

• Allows the protocol to easily add or remove functional modules in the future without migrating liquidity, which facilitates long-term expansion.

The biggest benefit is that you don't have to switch back and forth between the Aave V2/V3/V4 tabs, and you don't need to manually migrate funds from V2 to V3 like when V3 was upgraded.

2. Fuzzy control interest rate function

Aave V4 proposes a fully automatic interest rate that can adjust the slope of the interest rate curve. The current setting is controlled by the governance mechanism, which not only increases the governance burden but also reduces capital efficiency. The fuzzy interest rate is designed to actively control the turning point of the interest rate curve so that it can be dynamically adjusted according to market conditions. The base interest rate will rise or fall according to market demand to optimize the interest rates of suppliers and borrowers.

This should have been optimized long ago. The cumbersome interest rate model and lengthy governance process have made Aave miserable. In the previous $CRV malicious shorting incident, Fraxlend was already far ahead with algorithmic control of interest rates. When the capital was borrowed and the utilization rate was too high, Fraxlend loans with a healthier interest rate model were repaid first.

3. Liquidity premium mechanism

V4 introduces the concept of "liquidity premium" to dynamically adjust the borrowing interest rate according to the risk status of the collateral assets (such as centralization, market risk, etc.). In the face of higher-risk collateral, the borrowing cost is relatively higher. Conversely, lower risk helps to reduce the borrowing cost.

This is a relatively good risk management function. Many altcoins still have lending needs on the chain, and risk grading is a desirable strategy.

4. Launch Smart Account and Vault

Greatly improve the user experience, allowing users to manage multiple positions with a single wallet. Smart Accounts are designed to solve a major user experience problem in V3: when using e-mode or segregated asset borrowing, multiple wallets are required to manage positions.

After the introduction of Smart Accounts, users can create multiple sub-accounts with one wallet, greatly simplifying protocol interactions. Smart Accounts can also implement the "Vault" function that users have been calling for. Users can borrow assets with collateral in Smart Accounts. The collateral is locked but will not enter the liquidity pool, reducing risk spillover.

This is also a very good experience upgrade that should have appeared long ago.

5. Dynamic risk parameter configuration

Supports the creation of independent risk configurations for individual assets to reduce liquidation risks. Introduces an automated asset delisting mechanism to simplify the governance process.

• V3's risk parameter adjustments (especially liquidation thresholds) affect all users. Lowering the threshold may trigger unnecessary liquidations, and the governance cost is high.

• V4 introduces a dynamic configuration function. New loans use new configurations, and existing users still use the original configurations.

• The automatic asset delisting mechanism is introduced. After the governance layer triggers it, the system gradually lowers the liquidation threshold of the asset until it returns to zero. The effect is equivalent to that the asset can no longer complete the lending business, which is equivalent to manual delisting but simplifies the governance process.

6. Introduce excess debt protection mechanism to prevent the spread of bad debt

One ​​of the drawbacks of the shared liquidity model is that the accumulation of excess debt in assets will be contagious. V4 introduces a new mechanism to track insolvent positions and automatically calculate the accumulated excess debt. When the excess debt exceeds the established threshold, the relevant assets automatically lose the ability to borrow money to prevent the spread of bad debts.

7. Provide native integration with GHO stablecoin

• Support native minting of GHO in the liquidity layer.

• Introduce GHO "soft liquidation" AMM, modeled after crvUSD.

• Introduce GHO emergency redemption mechanism to deal with extreme depegging situations.

• Allow depositors to choose to receive interest in the form of GHO, and the protocol converts interest into GHO collateral to enhance GHO stability.

8. Aave Network

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

• Pay fees with GHO.

• Use Aave V4 as the hub.

• $AAVE is the main staking asset for decentralized validators/sorters.

• The community controls the network's interface and interaction with Ethereum through Aave Governance V3.

• Extensive use of account abstraction

• Inheriting network security from Ethereum.

Aave Labs said it will continue to pay attention to the development of the first and second layer networks and choose the most suitable technical solutions for the Aave community.

Aave Network is full of the stubborn flavor of the old DeFi. Judging from the information and status currently released, this seems to be a decision that even the team itself has not thought about. Should we do L1 or L2? How to do it? Is it really necessary? I have question marks for these questions.

In fact, the only clear thing is that Aave will always have to fight the tough battle in the stablecoin market in the future, and all plans are creating scenarios for GHO.

Due to the lack of innovation in the application layer this time, it seems to be a bull market for infrastructure. Every project is embarrassed to raise funds without a Layer. With a "Layer", the valuation goes up all of a sudden. After the DeFi protocol becomes bigger, whether it is really necessary to build a chain for everyone is still a long way off. From my point of view, Ethereum seems to be the financial center on that chain. It's not that it can't leave here, but for some projects that are not overly dependent on performance, it seems that leaving Ethereum and building a chain by yourself will not improve users of the product except to make yourself "look more useful", but it may reduce security in the early stage.