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Title: Aave V4 to Feature Unified Liquidity Layer for DeFi Protocol Upgrade
Aave, the leading DeFi protocol, is actively pushing forward with the development of its V4 version, which will include a Unified Liquidity Layer (ULL). Based on the previously disclosed information, Aave V4 aims to aggregate liquidity from multiple networks within a single protocol.
According to The Defiant’s earlier report, Aave plans to begin prototype design for the V4 protocol in Q4 of this year and aims to complete the code by Q2 of next year. In a recent statement, Aave founder Stani Kulechov confirmed and even shortened this expectation, stating that Aave Network will be launched after the V4 version and will be realized next year, or even earlier, in response to a community question about timing.
The core upgrade of Aave V4, the Unified Liquidity Layer, is an extension of the Portal concept in the Aave V3 version. The Portal was originally designed as a cross-chain feature within Aave V3, but most users were unaware of or did not use this functionality. Let’s now analyze how the Portal has evolved into the Unified Liquidity Layer.
The Portal was designed to enable cross-chain bridging of supplied assets on different blockchains covered by Aave. This feature allows whitelisted bridging protocols to burn aTokens on the source chain and instantly mint aTokens on the target chain.
For example, if Alice has 10 aETH on Ethereum and wants to move them to Arbitrum, she can submit the transaction to a whitelisted bridging protocol. The bridging protocol will then execute the following steps:
1. Mint 10 “underlying asset unsupported” aETH on the target chain (Arbitrum), which means the underlying assets haven’t actually been transferred yet.
2. The bridging protocol transfers the 10 aETH to Alice on Arbitrum.
3. Multiple bridging transactions are batched, and the 10 ETH, which are the underlying assets, are moved to Arbitrum.
4. Once the funds are available on Arbitrum, the whitelisted bridging contract on Arbitrum supplies the 10 ETH to the Aave pool, supporting the previously minted 10 aETH.
In the above example, Aave can move Alice’s 10 aETH from Ethereum to Arbitrum. However, in the real world, this functionality can handle various scenarios, such as general asset cross-chain transfers or allowing Alice to directly withdraw 10 ETH on the Arbitrum network.
The Portal feature allows users who seek higher interest rates across different blockchains to execute cross-chain operations more conveniently. For example, if there is a period when the pool on Optimism is relatively small but offers a higher deposit rate compared to the pool on Ethereum, users can simply use the Portal to migrate their deposits from Ethereum to Optimism and enjoy higher rates.
However, even though the Portal can turn Aave V3 into a DeFi protocol that ignores the liquidity gap between chains, its operation relies on certain trust assumptions. In simple terms, users need to submit bridging transactions to whitelisted bridging protocols (such as Connext) rather than the core Aave V3 protocol. It is important to reiterate that end-users currently cannot use the Portal solely through the Aave core protocol.
This brings us to the concept of the Unified Liquidity Layer, which is the most significant architectural change from Aave V3 to V4. The Unified Liquidity Layer, as shown in the diagram, will adopt a modular design to manage “supply/borrow limits,” “interest rates,” “assets,” and “incentives” in a unified manner, allowing modules to extract liquidity from it.
By integrating liquidity management, the Unified Liquidity Layer will enable Aave to utilize all available assets more efficiently. This means that liquidity can be dynamically allocated to where it is needed most, thereby improving overall capital efficiency.
Furthermore, the modular design means that Aave will be able to add new modules or features (such as isolated pools, RWA modules, or CDPs) or introduce new modules or retire old ones without migrating liquidity, all while maintaining the normal operation of the entire system.
In Aave V3, the Portal allows assets to move between different networks covered by the Aave protocol, activating cross-chain liquidity. The Unified Liquidity Layer extends this functionality by creating a more flexible and abstract infrastructure, which can also support a wider range of liquidity supply and demand.
Under the framework of the Unified Liquidity Layer, Aave will use Chainlink’s Cross-Chain Interoperability Protocol (CCIP) to build the Cross-Chain Liquidity Layer (CCLL), allowing borrowers to instantly access all liquidity across all networks supported by Aave. This improvement is expected to develop the Portal into a full-fledged cross-chain liquidity protocol, and I am excited to see how Aave V4 will utilize this new infrastructure to find new potential revenue sources.
In addition to the Unified Liquidity Layer, Aave is expected to introduce dynamic interest rate mechanisms, liquidity premium mechanisms, smart accounts, dynamic risk parameter configurations, non-EVM ecosystem expansion, and more improvements in the V4 upgrade. Aave will use stablecoin GHO and the Aave lending protocol itself as the core hub to build the Aave Network.
As a leading DeFi protocol, Aave has held approximately 50% of the DeFi lending market share over the past three years. If fork projects are included, about 75% of the value in the DeFi lending market is locked in projects that use Aave’s codebase versions.
Aave has high expectations for the V4 version, stating in related proposals that “these improvements are intended to significantly drive further adoption of the Aave ecosystem and help DeFi expand further, serving potentially billions of new users.”
Tags: Aave, DeFi, LEND, LINK, Ethereum, protocol, liquidity, cross-chain
Source: https://www.odaily.news/post/5195566
