Decentralized financial lending platform Aave announces V4 protocol upgrade plan

Of all the proposed upgrades, one that stands out is GHO, an algorithmic stablecoin focused on growth protocols.

Decentralized finance (DeFi) lending protocol Aave Labs recently unveiled its development blueprint for the next five years. According to the plan proposed by the company, they intend to upgrade the protocol to the new generation V4 version, and they hope to get feedback from the community on this proposal. At the same time, Aave also emphasized that the V4 upgrade is only part of its broader plan for the Aave 2030 grant proposal.

Aave V4: Proposal

The Aave Labs team announced that their proposal aims to overhaul the protocol, involving “significant upgrades and expansions” to the Aave network. The updates will include the introduction of a cross-chain liquidity layer, the deployment of non-Ethereum Virtual Machine (EVM) Layer 1 technologies, and the reveal of a “brand new visual identity.”

The team also specifically mentioned that the upgrade of Aave V4 will adopt a new architecture that is completely different from the previous three versions. In order to more smoothly integrate features including its native stablecoin GHO, segregated pools, and RWA (tokens backed by real assets) modules, the upgrade will also introduce a "unified liquidity layer."

Another part of the proposal mentions an automatic interest rate feature that could adjust based on market conditions. In line with this, Aave said it is actively working with Chainlink to “define a clear set of data sources.” The team then also recommends a liquidity premium that takes into account the borrower’s collateral composition and adjusts their borrowing costs accordingly.

Expectations for GHO

Of all the upgrades suggested by the proposal, the notable ones focus on developing the protocol’s algorithmic stablecoin GHO. Since its launch in July 2023, the GHO stablecoin has found itself at a disadvantage in competition with stablecoins such as Tether (Tether) and USD Coin (USDC). At least that's reflected in GHO's relatively low market capitalization of just $49 million. This shows that GHO still has a lot of room for improvement in terms of market share and awareness.

To this end, in order to enhance GHO's competitiveness and market position, a series of innovative ideas have been put forward in the Aave V4 upgrade proposal, mainly focusing on improving the clearing engine. Specifically, the proposal proposes the concept of implementing variable liquidation bonuses, which could incentivize users to participate more actively in the platform’s lending and liquidation processes. In addition, the concept of "soft" liquidation has also been raised, which may refer to a softer approach to debt recovery aimed at reducing the impact on borrowers during severe market fluctuations.

In addition to improvements to the clearing mechanism, the proposal also hints at the introduction of new interest-earning options, which may attract more users to hold and use GHO, thereby promoting its circulation and usage. The purpose of these measures is to increase GHO’s appeal, encourage greater adoption, and expand its market share by offering more attractive financial products and services.

In addition, this important upgrade proposal also includes a quick redemption mechanism for the decoupling of the GHO stablecoin. Although this proposal is still preliminary, feedback collection is expected to end in the second quarter of 2024. Once feedback collection is complete, an on-chain vote will be held to determine the final fate of the proposal. If all goes well, the team plans to officially release the complete Aave V4 version in mid-2025.

The proposal of this fast redemption mechanism shows Aave Labs' forward-looking thinking about the market risks that GHO stablecoins may face, and the importance they attach to the security of user assets when designing protocol upgrades. Through on-chain voting, members of the Aave community will have the opportunity to directly participate in the governance of the protocol, which is also a core principle of decentralized finance. The launch of Aave V4 will be an important milestone in the development of the protocol, heralding a more efficient, safer, and more user-friendly DeFi lending experience.

Aave continues to hold its position as the third largest decentralized finance (DeFi) protocol with approximately $10 billion in total value locked (TVL), according to DefiLlama. This data shows the Aave protocol’s prominent position and broad user base in the DeFi field.

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