Editor’s note: Aave, the veteran DeFi leader, is actively promoting the V4 protocol upgrade. Combined with previously disclosed information, the upgrade content of Aave V4 is to build a “Unified Liquidity Layer” (ULL), thereby aggregating liquidity from multiple networks within a single protocol.

In terms of time planning, The Defiant previously reported that Aave plans to start prototyping the V4 protocol in the fourth quarter and plans to complete the code in the second quarter of 2025. This morning, the latest X speech by Aave founder Stani Kulechov reconfirmed and even shortened this expectation. Stani first revealed that Aave will launch Aave Network after V4, and in response to the community’s question about the time, he said: “I am sure this will happen next year, or even earlier.”

The following content is an overview of the “unified liquidity layer” of the core upgrade content of Aave V4 by Backlash developer Madiha, compiled by Odaily Planet Daily.

The main upgrade content of Aave V4 is the “unified liquidity layer”. In essence, this function is an extension of the Portal concept of Aave V3.

The so-called Portal was originally a function in Aave V3 that was applied to the cross-chain field, but in fact most users did not understand or use this function. Next, let’s gradually analyze how Portal evolved into a “unified liquidity layer”.

Portal was originally designed to achieve cross-chain bridging of supply assets on different blockchains covered by Aave. This function allows the whitelisted bridge protocol to destroy aToken on the source chain and instantly mint aToken on the target chain.

For example, Alice has 10 aETH on Ethereum, and she wants to move these 10 aETH to Arbitrum. Once Alice submits the transaction to the whitelisted bridge protocol, the bridge protocol will start to execute according to the following steps.

· 10 aETH with “no underlying asset support” (actually there is, but it has not been transferred to the target chain yet) are minted through an intermediate contract on the target chain (Arbitrum in this case).

· The intermediate contract then transfers the 10 aETH to Alice on Arbitrum.

· Batch multiple bridge transactions and move the 10 ETH as the underlying asset to Arbitrum.

· Once the funds are available on Arbitrum, the whitelisted bridge contract on Arbitrum will supply 10 ETH to the Aave pool to support the 10 aETH previously minted.

In the above example, Aave can move Alice’s 10 aETH from Ethereum to Arbitrum, but in the real world, this function can actually handle a variety of situations, such as general cross-chain asset transfers, or allowing Alice to withdraw 10 ETH directly on the Arbitrum network.

The Portal function allows users who are looking for higher interest rates between different blockchains to perform cross-chain operations more conveniently. For example, the pool on Optimism is relatively small during a certain period, but the deposit interest rate is higher than the pool on Ethereum. Users can simply operate through Portal to migrate their deposits from Ethereum to Optimism and enjoy higher deposit rates.

However, although Portal can make Aave V3 a DeFi protocol that ignores the liquidity barriers between chains, its operation requires certain trust assumptions. In short, users need to submit bridge transactions to some whitelisted bridge protocols (such as Connext) instead of the Aave V3 core protocol. Once again, end users cannot currently use Portal solely through Aave’s core protocol.

This brings us to the concept of a “unified liquidity layer,” which is the most important architectural change from Aave V3 to V4. As shown in the figure below, the “unified liquidity layer” will adopt a modular design to uniformly manage “supply/borrowing caps,” “interest rates,” “assets,” and “incentives,” and allow each module to extract liquidity from them.

By integrating liquidity management, the “unified liquidity layer” will allow Aave to make more efficient use of all available assets, which means that liquidity can be dynamically allocated to where it is most needed, thereby improving overall capital efficiency.

In addition, the modular design also means that Aave will be able to add new modules or features (such as isolated pools, RWA modules or CDPs) while maintaining the normal operation of the entire system, or easily introduce new modules or retire old modules without migrating liquidity.

In Aave V3, Portal allows assets to move between different networks covered by the Aave protocol, thereby activating the cross-chain function of liquidity. The “Unified Liquidity Layer” covers this function by creating a more flexible and abstract infrastructure that can also be used to support a wider range of liquidity supply needs.

Under the framework of the “Unified Liquidity Layer”, Aave will use Chainlink’s Cross-Chain Interoperability Protocol (CCIP) to build a “Cross-Chain Liquidity Layer” (CCLL), allowing borrowers to instantly access all liquidity across all networks supported by Aave. This improvement is expected to develop Portal into a full-fledged cross-chain liquidity protocol, and I am looking forward to seeing how Aave V4 uses this new infrastructure to find new potential sources of revenue.

The above is Madiha’s full analysis of the “unified liquidity layer”.

It is worth mentioning that in addition to the “unified liquidity layer”, Aave is expected to introduce dynamic interest rate mechanism, liquidity premium mechanism, smart account, dynamic risk parameter configuration, non-EVM ecological expansion and other improvements in the V4 version upgrade, and will build Aave Network with stablecoin GHO and Aave lending protocol itself as the core hub.

As a veteran DeFi leader, Aave has occupied about 50% of the DeFi lending market in 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 the Aave codebase version.

For the V4 version, Aave has placed extremely high expectations in the relevant proposals: “These improvements are designed to significantly promote the further adoption of the Aave ecosystem and help DeFi achieve further expansion, thereby serving 1 billion potential new users.”

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