The Leader in Decentralization Lending: The Evolution of Aave from V1 to V4

The DeFi market showed significant growth in the first quarter of 2024, with both fees and revenues hitting annual highs. As an important player in the DeFi lending market, Aave stood out particularly. In the first quarter of 2024, Aave's total borrowing reached $6.1 billion, a quarter-on-quarter increase of 79%, and lending revenue grew by 40% to $34.9 million, continuing to maintain its industry-leading position.

Aave was founded by Stani Kulechov in 2017, originally named ETHLend. At the end of 2018, the project transformed into a liquidity pool model and was renamed Aave. Aave officially launched in 2020 and was renamed Avara in November 2023. Currently, Aave has expanded to 12 different blockchains and plans to launch a V4 version upgrade.

Aave's core business is to achieve peer-to-peer contract lending of crypto assets through a dynamic interest rate model and liquidity pools. Its total locked value ( TVL ) ranks third among DeFi projects and is at the top in the lending category. Avara is gradually expanding its business into new fields such as cross-chain lending, stablecoins, and social protocols.

The total supply of AAVE tokens is 16 million, of which 13 million are allocated to token holders and 3 million are injected into the ecosystem reserve. The current market circulation is approximately 14.8 million. With business expansion and market recovery, Aave's TVL and price have both increased.

The Aave V3 version has basically replaced V2, far surpassing other lending protocols in terms of TVL, trading volume, and the number of supported chains. However, Avara also faces challenges in expanding new business, with its main income still relying on traditional lending. The stablecoin GHO has recently regained its peg, and the TVL of the institutional lending platform Aave Arc remains low.

In the future, Aave could consider further optimizing cross-chain lending solutions, strengthening the integration of stablecoin services with the platform, integrating DeFi capabilities into emerging businesses, and consolidating various business sectors into a complete ecosystem.

The Development History of Aave

In May 2017, Stani Kulechov founded the ETHLend project. Initially faced with severe liquidity challenges, it transformed into a peer-to-peer contract model by the end of 2018, introducing a liquidity funding pool, and officially renamed itself Aave.

In November 2023, Aave Companies rebranded to Avara, launching the GHO stablecoin, the Lens social protocol, the Aave Arc institutional lending platform, and other new businesses, while expanding into areas such as wallets and gaming.

Currently, Aave V3 is steadily running on 12 blockchains. In May 2024, Aave Labs announced the upgrade proposal for version V4. As of mid-May 2024, Aave ranks third in the DeFi space in terms of TVL, reaching $10.694 billion.

Avara is headquartered in London, with 96 employees currently. The main management team includes:

• CEO Stani Kulechov: Master's degree in Law from the University of Helsinki, serial entrepreneur
• COO Jordan Lazaro Gustave: Master's in Risk Management from Paris X Nanterre University
• CFO Peter Kerr: Formerly worked at HSBC, Deutsche Bank, etc.
• Head of Institutional Business Ajit Tripathi: Formerly worked at Binance, ConsenSys, etc.

Aave's Financing Journey

• 2017: ETHLend raised $16.2 million through ICO
• July 2020: Received $3 million Series A funding led by Three Arrows Capital
• October 2020: Raised $25 million in Series B funding, launched governance token AAVE
• May 2021: Deployed to Polygon, received $200 million Matic lending mining rewards

Evolution of Aave's Core Features

The main functional evolution of Aave from V1 to V3:

V1(2020-01-01 ):

• Lending Pool
• aToken Model
• Innovative Interest Rate Mechanism
• Flash Loan

December V2(2020 ):

• Simplified and optimized architecture
• Debt Tokenization
• Flash Loan V2
• Expected to reduce Gas fees by 15%-20%

V3(2023-01-):

• Efficient mode ( E-mode )
• 隔离模式(Isolation Mode)
• 门户(Portal)

V4(Proposal 2024 May: )

• Brand new architecture design
• Unified Liquidity Layer
• Fuzzy control interest rate
• GHO Native Integration
• Aave Network

Core Mechanism of Aave

Borrowing Rate

Aave designs specific interest rate strategy contracts for each reserve asset, which include the following parameters:

• Optimal Loan Utilization Rate
• Optimal Stable Loan Utilization Rate
• Overutilization Rate
• Benchmark interest rate
• Variable Interest Rate Slope 1
• Variable Rate Slope 2
• Stable interest rate slope 1
• Stable interest rate slope 2

Variable interest rate calculation formula:

R = R0 + Ru * U (R: Loan Interest Rate, R0: Benchmark Interest Rate, Ru: Interest Rate Slope, U: Utilization Rate)

Interest Rate Model Characteristics:

• When the utilization rate is below the optimal utilization rate, the borrowing interest rate gradually rises.
• When the utilization rate exceeds the optimal utilization rate, the borrowing interest rate rises sharply.

Aave V3 categorizes interest rate strategies into three types based on asset risks:

1. Low-Risk Asset Strategy
2. Medium Risk Asset Strategy
3. High-Risk Asset Strategy

Lending Process

1. The deposit party deposits tokens to obtain aToken
2. The borrower borrows assets through over-collateralization or flash loans.
3. The borrower redeems the collateral assets after repaying the principal and interest.

Clearing Mechanism

Initiate when the value of the collateral assets falls and causes the borrower to reach the liquidation threshold:

• Different assets have different loan-to-value ratios ( LTV ) and liquidation thresholds.
• The borrower must pay the liquidation penalty.
• The health factor reflects the safety level of borrowing. If it is below 1, liquidation may occur.

Flash Loan

• No need to collateralize to borrow large amounts of assets
• Complete borrowing and repayment within a block
• The transaction fee is 0.05%, lower than Uniswap V2's 0.3%.

Credit Delegation

• Deposit users can delegate unused credit limits to other users.
• Borrowers gain additional borrowing capacity
• Opium launches credit default swap ( CDS ) product suite

The Main Upgrades of Aave V4

Liquidity Layer

1. Unified Liquidity Layer

• Concept design of Portal based on V3
• Unified management of supply and borrowing limits, interest rates, assets, and incentives
• Facilitates the addition or removal of functional modules in the future.

2. Liquidity Premium

• Adjust loan interest rates based on collateral risk
• Low-risk assets ( such as ETH ) enjoy lower lending rates.
• High-risk assets ( such as altcoins have relatively high borrowing costs.

) Fuzzy Control Interest Rate

• Fully Automated Interest Rate Mechanism
• Dynamically adjust the slope and inflection points of the interest rate curve
• Flexibly adjust the base interest rate according to real-time market demand

Lending Module Optimization

• Smart Account: Single wallet managing multiple positions
• Smart Account Vault: Borrowing without the need to provide collateral directly.
• Dynamic Risk Allocation: Adjust risk parameters based on market changes
• Automatic delisting mechanism: Simplified asset delisting process

Excess Debt Protection Mechanism

• Track undercollateralized positions
• Automatically handle accumulated excessive debt
• Set a debt threshold; if exceeded, borrowing ability is automatically lost.

GHO native integration

• Efficiently minting GHO in the liquidity layer
• GHO "soft" liquidation: referencing the crvUSD liquidation model
• Stablecoin interest is paid in GHO
• Emergency Redemption Mechanism: Addressing Extreme Decoupling Situations

Aave Network

• As the main hub for Aave and GHO
• Use GHO for payment
• Managed by Aave Governance V3
• Inherit network security from Ethereum

![From ETHLend to Aave V4, the evolution of decentralized lending complete body]###https://img-cdn.gateio.im/webp-social/moments-f52b9af4e4e69bcc0faeedccf2bd3866.webp(

Aave's Ecosystem Expansion

) GHO stablecoin

Features:

• The borrowing interest rate is determined by AaveDAO and adjusted dynamically.
• Facilitator: Controls the minting and burning mechanism
• Asset Bucket: The community votes to determine the holding limit.
• Discount model: Adjust borrowing and lending rates based on stkAAVE holdings.

Integration with Aave V3:

• Isolation Mode: Multi-Asset Collateral to Generate GHO
• Efficient Mode: Borrow more GHO with non-volatile assets
• Cross-Chain Gateway: Facilitates GHO's multi-chain expansion

Lens Protocol

Features:

• Open social protocol based on Polygon
• Transform social behavior into NFTs
• Including personal profile NFTs, collectible NFTs, and follow NFTs

Main Functions:

• Publication: posts, comments, and retweets
• Comment: Comment on Publication
• Mirror: A feature similar to the retweet function of traditional social media.

Ecological Applications:

• Lenster.xyz: Decentralization Twitter alternative
• Lenstube.xyz: Video Content Platform
• Orb.ac: Decentralization Resume Platform

Aave Arc

• Private liquidity pool for institutional investors
• Supports USDC, BTC, ETH, and AAVE four assets
• Implement strict KYC procedures and whitelist mechanisms

![From ETHLend to Aave V4, Decentralization Lending Complete Evolution Path]###https://img-cdn.gateio.im/webp-social/moments-66dcee965f7118f88f925613c94b472f.webp(

Financial Analysis of Aave

The total revenue for the 2023-2024 fiscal year is $20,264.6, a slight decrease of 3.2% compared to the previous year. Since December 2022, the revenue has covered the token incentive expenses, resulting in a surplus.

Main source of income:

1. Loan Income ) Agreement Income (
2. Flash Loan Fee ) 0.05% (
3. Other function fees ) settlement, portal bridge, Aave Arc, etc. (
4. GHO Minting Fees

![From ETHLend to Aave V4, the evolution of Decentralization lending complete])https://img-cdn.gateio.im/webp-social/moments-eacc11f1c7caeaa229b6dc8bf33229eb.webp(

Aave's Market Performance

) Lending Market

• Ranked first in TVL, reaching $1.025 billion
• Has logged into 12 blockchains, leading other lending protocols
• The largest lending protocol on Ethereum, Arbitrum, Avalanche, Polygon, and Optimism.

Flash Loan Market

• Market share of about 40%, second only to Balancer
• The market share on the Polygon network is significantly leading.

Cross-chain Lending Market

• Huge potential but product stability needs to be strengthened.
• Launched slower compared to early protocols like Radiant

Stablecoin market

• GHO accounts for approximately 0.504% of the market share in the fiat-collateralized stablecoin sector.
• Relatively small market cap, mainly used for staking profits on the Aave platform or exchanging with other stablecoins.

![From ETHLend to Aave V4, Decentralization lending complete evolution path]###https://img-cdn.gateio.im/webp-social/moments-7c3e885d312cb15b19a186898822ed25.webp(

AAVE Token Analysis

• Total supply: 16 million pieces
• Circulation: Approximately 14.7 million coins
• Allocation: 13 million tokens to be distributed to token holders, 3 million tokens injected into the ecosystem reserve.

Usage:

1. Participate in Aave protocol governance
2. Earn protocol profit dividends through staking in the security module.

Governance mechanism:

• A DAO composed of AAVE, stkAAVE, and aAAVE holders
• Voting weight is based on token balance