Aave: v3 to v4 Architecture

01 · Concept — what problem does it solve?

Aave is the largest DeFi lending protocol — roughly $14B TVL and ~60% of the lending market in 2026. Its history is the industry's history in miniature: a monolithic shared pool (v3) hardened with risk controls after early bad-debt scares, now extending into a modular hub-and-spoke design (v4, live since March 2026). Studying Aave is studying how DeFi credit grew up.

02 · Mechanics — v3 (monolithic, the workhorse)

• One pool, aTokens: suppliers receive interest-bearing aTokens that appreciate automatically; all assets share the pool.
• Isolation Mode: a risky new asset can be listed as isolated collateral — capped debt ceiling, borrowable only against approved stablecoins, not combinable with other collateral. Contains long-tail risk.
• eMode (efficiency mode): for correlated assets (stETH/ETH, USDC/USDT) LTV rises toward ~93–97%, enabling capital-efficient leverage loops where collateral and debt move together.
• Supply & borrow caps: per-asset ceilings added precisely to prevent the v2 CRV-style incidents.
• GHO & Umbrella: Aave's overcollateralized stablecoin (GHO, ~$580M) and the Umbrella safety system — ERC-4626 vaults that auto-slash to cover bad debt without a governance vote.

03 · Mechanics — v4 (modular, hub-and-spoke)

            ┌─────────────────────┐
   Spokes → │   LIQUIDITY HUB     │ ← unified capital + accounting
 (markets)  │  credit/debit lines │
            └─────────────────────┘
   Lido · EtherFi · Ethena · RWA · stables — each a configurable Spoke

• Hub: the central capital pool. Spokes: individual markets that draw liquidity from the Hub via a granted credit line and supply via a debit line.
• Decoupled governance: the Hub sets baselines; Spokes self-configure risk within those limits — faster iteration, partitioned blast radius.
• Users interact with Spokes, never the Hub directly. (Live on mainnet since March 2026, but still nascent — v3 holds ~96% of TVL.)

04 · Edge cases & risks

• KelpDAO contagion (Apr 2026): a $293M exploit at an adjacent protocol triggered a multi-billion-dollar Aave TVL flight in two days — in a monolithic pool, perceived systemic risk drives withdrawals even without direct loss.
• eMode correlation risk: ~97% LTV is safe only while the pair stays correlated; an LST depeg erases the thin margin fast.
• GHO peg history: GHO traded below $1 for long stretches after launch until rate policy and the stability module corrected it — collateral-backed stables aren't automatically pegged.
• v4 partitions risk, doesn't delete it: a Spoke with a large credit line that gets exploited exposes the Hub up to that line. Modularity caps the blast radius; it doesn't remove it.