Aave Founder Stani Kulechov: V4 Shared Liquidity is Superior to Fully Isolated Markets
Aave founder Stani Kulechov published a post addressing six criticisms of Aave V4, with the core argument being that V4's "hub-and-spoke" architecture isolates markets by risk attributes but allows for liquidity sharing within limits through a central pool, which is more capital efficient than fully isolated models like Morpho's curated vaults.
Kulechov stated that complete liquidity isolation often backfires: it fragments capital, reduces fund utilization, and increases user costs, especially after incentives for cold starts are exhausted. In V4, spokes represent specific lending markets, while the hub is responsible for sharing liquidity across multiple markets. Curated vaults typically start with zero liquidity and require capital or incentives for cold starts; however, new spokes in V4 can leverage the entire hub's balance sheet from day one. He emphasized the difference between "isolated markets" and "risk allocation with shared liquidity."
In response to criticisms that "V4 is too complex" and "too new to deploy," Kulechov claimed that the V4 architecture is simpler and sufficiently flexible, with the overall codebase significantly smaller than Aave V3. It has already hosted $1.2 billion in deposits and is deployed across multiple networks, including Ethereum, Avalanche, and Circle's stablecoin chain Arc. V4 is set to launch on the Ethereum mainnet on March 30, 2026, establishing three centers with different risk levels: Prime (low risk), Core (risk-adjusted), and Plus (risk-return). Each spoke receives a limited credit line from the hub, with initial partners including Lido, EtherFi, Kelp, Ethena, and Lombard. The project has been in development for over two years, with over a year spent on security testing and an audit budget of approximately $1.5 million.
Deposit growth for V4 accelerated significantly in September. Deposits were less than $340 million at the beginning of August, around $577 million at the beginning of September, and surpassed $1 billion around September 16-17, doubling in about a month. Active borrowing remained between $300 million and $310 million, with a utilization rate of about 26%. The largest increase came from EtherFi Cash's spoke market on Optimism, with deposits exceeding $300 million. In contrast, Aave V3 still manages about $31 billion, with V4 accounting for less than 4% of Aave's total deposits.
In the curator ecosystem, Kulechov stated that V4 supports third-party curators like EtherFi, with plans to add more in the future. The key difference from the vault model is that curators can build and manage the entire market structure, rather than just managing deposits within a vault, allowing them to participate in a broader lending market revenue share, not limited to management fees based on deposit size. The Arc deployment comes with commercial terms: a governance proposal submitted by Aave Labs on May 29 indicates that the Arc ecosystem will guarantee Aave DAO at least $2 million in revenue annually for five years, totaling $10 million, with initial support for USDC, EURC, and cirBTC assets.
In terms of market mechanisms, this is a product narrative battle triggered by V4 deposits surpassing $1 billion. Buyers include liquidity re-staking token (LRT) issuers like EtherFi, Lido, and Kelp, as well as public chain entities like Circle: they need ready lending depth to provide collateral for their assets and are willing to exchange revenue shares or guaranteed income for access to Aave hub liquidity. Funds are migrating from V3's single large pool to V4's layered centers, while moving from independent vaults that require cold starts to spoke markets with shared liquidity. Beneficiaries include asset issuers and curators who can directly borrow against the hub's balance sheet, as well as Aave DAO, which collects protocol revenue; under pressure are lending protocols like Morpho and Euler that center around curated vaults, as well as vault curators that rely on management fees and charge based on deposit size.
Source: Public Information
ABAB AI Insight
Aave originated from ETHLend, founded by Kulechov in 2017, which raised about $16.2 million through an ICO that year and issued the LEND token. However, the P2P matching model lacked liquidity, leading to a transition to a liquidity pool model and rebranding to Aave in 2018. Subsequently, V1 (January 2020), V2 (December 2020), and V3 (March 2022) were launched, with the native stablecoin GHO introduced in July 2023 and an institutional RWA lending platform Horizon set to launch in August 2025. In December 2025, Aave Labs faced a conflict with the community over retaining front-end trading routing revenue instead of passing it to Aave DAO, and a governance vote on brand asset ownership failed. In 2026, the core development team BGD Labs and governance service provider Aave Chan Initiative (ACI) exited; in April, Chaos Labs, which had managed Aave's risks since 2022, also announced its departure, with CEO Omer Goldberg stating that V4 expanded the risk scope without matching resources and consensus, "this collaboration no longer reflects how we believe risk should be managed." Under Chaos Labs, Aave's TVL grew from about $5 billion to over $26 billion without significant bad debts.
In terms of capital pathways, V4 essentially transforms Aave from a "single lending pool" into a "liquidity wholesaler." During the V3 era, adding a new high-risk asset threatened the entire pool's safety, forcing Aave to use isolation models and E-Mode patches to limit risk, making it difficult to list long-tail assets. V4 centralizes the balance sheet at the hub and wholesales limited credit lines to spokes: LRT issuers gain lending depth, Aave receives deposits and interest spreads, and public chains like Arc directly purchase "liquidity access rights." The guaranteed income of at least $2 million annually from Arc indicates that Aave is beginning to sell "listing rights" to public chains and asset parties, similar to how exchanges operate.
A direct comparison can be made with Morpho. Morpho Blue is set to launch in January 2024, adopting a minimalist isolated market and curated vault model, with institutions like Gauntlet and Steakhouse serving as curators, and providing crypto collateral loans based on Coinbase on the Base chain, differentiating itself from Aave. However, the curated model faced stress testing in November 2025 when the xUSD collapse by Stream Finance caused approximately $93 million in losses, impacting multiple curated vaults accepting it as collateral, exposing that "risk isolation does not equal risk control." Another reference is Euler, which was hacked for about $197 million in March 2023 and later restarted with a modular vault architecture from V2. Currently, DeFi lending is transitioning from "large pool monopolies" to "modular credit distribution," with Aave V3 still holding a dominant share, but marginal growth is shifting towards customizable market structures.
Structural judgment: This represents a restructuring of the industry chain, as DeFi lending splits from "protocol as market" into "liquidity layer + risk layer + distribution layer." The underlying mechanism is that the core cost of DeFi lending is liquidity cold start. Each new market in independent vaults requires raising deposits and paying incentives anew; once incentives stop, funds flow away. In contrast, a shared hub spreads cold start costs across the entire balance sheet, making the marginal cost of new markets approach zero. The trade-off is risk transmission: while spokes are isolated by limits, they share the same hub, and if a collateral asset in one spoke crashes, the bad debts are ultimately borne by the hub's depositors. The current utilization rate of about 26% in V4 indicates that shared liquidity does not automatically lead to high efficiency; the key lies in whether the hub can balance "expanding credit limits" and "controlling contagion risk." At this critical juncture, Aave has lost its most experienced external risk management party, which is the greatest uncertainty before V4 scales up.
ABAB News · Cognitive Laws
- The most expensive moment for liquidity is the day it starts from zero.
- Isolation reduces contagion but also lowers efficiency; sharing increases efficiency but amplifies contagion.
- Charging management fees for vaults versus charging tolls for balance sheets.
Some parts of the AI interpretation are based on background knowledge and were not verified point by point this time; readers interested in a deep read are advised to verify before reading: Morpho's section (launching in January 2024, curator list, collaboration with Coinbase), Stream Finance's approximately $93 million loss, Euler's approximately $197 million hack, ETHLend's $16.2 million ICO and version timeline, and the December 2025 income dispute between Aave Labs and DAO.