Aave v4

To understand the innovations that Aave v4 brings with it, let's first consider the differences between Aave v3 and Aave v4.

The first thing to consider is that Aave v3 operates many separate markets (or "instances") on a single chain. For example on Ethereum, we have:

• Ethereum Prime

• Ethereum Core

• Etheremu EtherFi

Each of these markets have their own liquidity pool and settings. In turn, this means the liquidity stays siloed under each market, which makes it harder to expand and limits capital efficiency.

With Aave v4, this model is updated to Hub & Spoke:

• Hubs represent a unified Liquidity Hub per blockchain. So instead of Ethereum having the three aforementioned markets, with v4, the entire Ethereum blockchain will have a unified Hub. This removes fragmentation and unifies liquidity on the specific chain

• Spokes are modular interfaces with specific rules that connect to the Hub and enable lending and borrowing.

Users do not interact with the Hub directly, but go through Spokes. The Hub maintains accounting via a share-based system, enforces global rules like "borrow ≤ supply," and controls how much liquidity each Spoke can access

This system also ensures more reliable borrow APYs, as markets no longer have siloed liquidity. The impact that comes from withdrawing a large amount of an asset from one Spoke is softened thanks to the Hub's unified liquidity (and thus, less impact on the borrow APY).

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What are Spokes in Aave v4, and why do they matter?

As we mentioned, Spokes are user-facing modules. Each Spoke can:

• Define its own collateral types, LTVs and risk rules

• Handle oracles, liquidations and safety controls to ensure risk is contained within that module.

If we consider Aave v3's multiple Ethereum markets such as Prime, Core, EtherFi - each of these markets has their own set of rules, LTVs and assets.

Spokes can be seen as a paralel and more efficient solution to these fragemented markets.

Common types of Spokes include:

• E-Mode Spokes - For highly correlated assets (e.g., stablecoins, LSTs), offering higher borrowing power while keeping risk isolated

• Isolation Spokes: For new or volatile assets, with strict caps to limit exposure.

• RWA Spokes: Tailored for real-world assets like tokenized treasuries, adding custody and compliance rules.

• Vault Spokes: Let users borrow against assets held outside the protocol (e.g., in a Safe), with all collateral logic handled within the Spoke

If we were to make a pro-Aave v4 argument, it's better because:

• Liquidity is unified but risk is isolated

• Spokes let developers experiment without redeploying large parts of the protocol

• New modules (Spokes) can be added or removed independently

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Risk-aware borrowing with risk premiums

In Aave v3, borrowing rates depended solely on supply and demand for each asset, even if the collateral was risky. That meant safer borrowers indirectly subsidized risk.

Aave v4 introduces Risk Premiums, layered on top of a Hub-level base rate:

• Asset Liquidity Premiums: Set per asset based on risk; stable, liquid assets get lower premiums.

• User Risk Premiums: Weighted average of a user’s collateral mix.

• Spoke Risk Premiums: Based on the overall risk profile of each Spoke’s users.

Borrow rate = base rate + risk premium. The safer your collateral, the closer your rate is to the base. Spokes can also customize premiums. For instance, E-Mode Spokes can reward highly trusted assets like stETH.

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Overall, Aave v4 transforms Aave v3s architecture into a flexible, modular platform. Liquidity is centralized while risk is decentralized, making lending more efficient, safer and more customizable.

Aave v4 is still in development, and information presented in this article is subject to change.