Aave V4's unified liquidity layer: evolved from the 'Portal” function of Aave V3

Compiled by: Felix, PANews

In May 2024, Aave proposed a V4 version proposal. In the design of the new version, it plans to adopt a new architecture, introduce a unified liquidity layer, fuzzy control of interest rates, and GHO native Integration, Aave Network and other designs. This article mainly outlines the new functions of Aave V4’s Unified Liquidity Layer (ULL), covering the functions of Portal (cross-chain asset flow). Portal is one of the functions of Aave V3, but few people know and use it. Let’s explore how Portal develops into a unified liquidity layer.

Portal

Portal is designed to provide a bridge for supplying assets on the Aave Marketplace on different networks. It allows whitelisted bridges to destroy aToken on the source network while immediately minting aToken on the target network.

Suppose Alice has 10 aETH on Ethereum and wants to transfer 10 aETH to the Arbitrum network. Once Alice submits a transaction to the whitelisted bridge protocol, the bridge protocol performs the following steps:

1. Place unsecured 10 aETH minted to the intermediate contract.
2. The intermediate contract then transfers 10 aETH to Alice on Arbitrum.
3. Batch multiple bridge transactions and actually move 10 ETH to Arbitrum.
4. Once funds are available on Arbitrum, the whitelisted bridge contract on Arbitrum provides 10 ETH to the Aave pool to back up the 10 aETH that were previously minted unsecured.

In the above example, Portal can transfer Alice's 10 aETH from Ethereum to Arbitrum, but in practice, various situations can be handled. For example, Alice could receive 10 ETH on the Arbitrum network instead of 10 aETH, or could simply be used for the general purpose of transferring funds.

The Portal feature provides convenience for users looking for higher interest rates on different networks. For example, Optimism’s pool size is relatively small, so even with smaller borrowing volumes, Optimism’s interest on deposits is higher than that of Ethereum.

Users can enjoy higher deposit interest rates by simply using the Portal to transfer their deposit positions from Ethereum to Optimism with one click.

Although Portal enables Aave V3 to be a chain-agnostic, unbounded liquidity protocol, it initially requires important trust assumptions to operate effectively.

Users should submit bridge transactions to whitelisted bridging protocols (such as Connext) rather than the Aave V3 core protocol. Likewise, end users are not using Portal's core protocol methods.

ULL

The most important architectural change from Aave V3 to V4 is the unified liquidity layer. This layer manages supply/borrowing caps, interest rates, assets, and incentives, allowing modules to draw liquidity from them.

By integrating liquidity management, ULL can utilize existing assets more efficiently. Liquidity can be dynamically allocated where it is needed most, improving overall efficiency.

ULL’s modular design means that new lending modules or features (such as segregated pools, RWA modules, and CDP) can be added without disrupting the entire system.

For example, when the borrowed module is updated, the clearing module remains unchanged. Additionally, it enables Aave DAO to easily onboard new modules or exit old ones without the need to migrate liquidity.

In Aave V3, Portal allows assets to be moved between different instances of the protocol, promoting cross-chain liquidity. ULL achieves this functionality by creating a more flexible and abstract infrastructure that can support various liquidity supply needs.

Cross-Chain Liquidity Layer (CCLL): By adopting Chainlink’s CCIP and V4’s unified liquidity layer capabilities, CCLL will allow borrowers to access instant liquidity on all supported networks.

#These improvements have the potential to develop Portal into a full cross-chain liquidity protocol. Look forward to seeing how Aave V4 will leverage this new infrastructure as a potential revenue stream for the protocol.

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