What you need to know about Aave V4

Author: Matt, Researcher at Castle Labs; Translated by: Jinse Finance Xiaozou

At the ETHCC conference, Aave founder Stani announced the upcoming release of Aave V4, the new version of the largest lending protocol in DeFi.

This article will focus on analyzing the implementation plan of new features in Aave V4, and how these improvements may reshape the protocol ecosystem, particularly regarding the new interest rate parameters and the GHO upgrade.

1. Innovations of Aave V4

Aave recently broke through a total locked value (TVL) of 25 billion USD for the first time, becoming the first protocol to reach this milestone. The development team is actively promoting the development of new features and driving continuous growth of the protocol through dynamic risk management. Here are the important upgrades announced last year that are set to be implemented:

Unified Liquidity Layer: Eliminates liquidity migration restrictions through modular design, adding innovative features such as cross-chain lending.

Fuzzy control interest rates: A new mechanism that automatically adjusts the interest rate curve and inflection points based on market conditions, replacing the governance voting model.

Liquidity Premium: The borrowing cost will be linked to the liquidity depth of each token. Benchmark assets like ETH will maintain a zero premium, while assets such as WBTC and wstETH will charge differentiated premiums based on liquidity conditions.

Aave V4 Lending Module: Exploring innovative features through smart accounts, such as lockable liquidity and the Aave treasury that disables collateral usage.

Dynamic Risk Allocation: The collateral rate will be locked based on the market conditions at the time the position is created, and subsequent market fluctuations will not affect the established position, providing users with greater stability.

Automated asset delisting

Automated Fund Management

Liquidation Engine V4: Aave's liquidation mechanism has undergone a major upgrade, including a variable liquidation coefficient and reward mechanism, as well as batch liquidation functionality.

Deep GHO Integration: GHO will be more deeply integrated into the Aave V4 ecosystem, with new innovative features such as soft liquidation mechanisms, paying stablecoin interest in GHO, and emergency redemption mechanisms.

Other improvements include gas fee optimization and the gradual phasing out of tokenized positions and fixed interest rate features. Next, we will focus on two major core changes: the unified liquidity layer and the GHO upgrade plan.

2. Unified Liquidity Layer

The Unified Liquidity Layer introduces a brand new, chain-agnostic, independent, and abstract liquidity supply infrastructure. The significant improvement of this modular system lies in its ability to directly connect to new lending modules and eliminate old ones without the need for liquidity migration.

This architecture supports the flexible addition or enhancement of lending features (such as isolation pools, RWA modules, and CDPs) without changing the overall system or clearing module. At the same time, it effectively addresses the liquidity fragmentation issues present in earlier versions of the protocol.

This liquidity layer supports both external deposits of assets and protocol-native minted assets, significantly enhancing the integration with GHO and other Aave native collateral assets.

The most influential is undoubtedly the cross-chain lending module, where users can deposit assets on one chain and borrow on another chain. This not only greatly enhances the platform's cross-chain liquidity capabilities but also opens up new opportunities for market growth.

3. GHO Upgrade

As an over-collateralized stablecoin by Aave, GHO's current market value has surpassed $220 million, with an increase of 53% since the beginning of 2025.

In addition to optimizations in native minting efficiency and other detailed improvements, the most striking feature is the introduction of a soft liquidation mechanism. This design draws on the innovative model of crvUSD (Curve USD) and optimizes the liquidation process through a lending-liquidation automated market maker (LLAMM).

The liquidation operation will be executed within a customizable range: guiding asset conversion to GHO during market downturns and supporting collateral buybacks when the market rebounds. Compared to crvUSD, Aave V4 has three major advantages: users can autonomously choose the type of collateral for their liquidation positions from the asset basket; they can select buyback targets across the entire Aave platform asset range (including non-original deposited assets); GHO holders can automatically earn interest income.

Another important change is that users in the stablecoin market can choose to receive interest in the form of GHO, which is expected to expand the supply of GHO by directly tokenizing the interest.

Aave V4 has also introduced an emergency redemption mechanism to address the long-term severe depegging risk of GHO: when triggered, it will utilize the new LLAMM architecture to gradually redeem the collateral of the lowest health factor positions for GHO and automatically repay the corresponding debts.

4. Conclusion

For protocols like Aave, which combine both scale and significance, risk minimization is crucial—especially when launching major features such as cross-chain lending.

By automating processes such as asset delisting and interest rate model adjustments, it can effectively reduce reliance on the slow decision-making process of the DAO, especially when responding to market-driven changes.

Aave remains confident in the growth of its stablecoin GHO, which has now undergone significant improvements and achieved deep integration with the protocol.

In the foreseeable future, Aave will still be the cornerstone of the DeFi space. The success of the entire ecosystem largely depends on its continued leading position, as no other project has been able to accumulate such a large TVL while maintaining the same level of security.