Aave: A Deep Dive into DeFi's Lending Infrastructure Leader

Aave Overview

Aave is a foundational money market in the DeFi space, renowned for its robust liquidity and high trustworthiness. The Aave protocol commands over half of the Total Value Locked (TVL) in the lending market, making it a preferred platform for institutions and retail users alike. Through cross-chain expansion and conservative risk management strategies, Aave has built a formidable business moat and continues to innovate to enhance its advantages. From the dual-market structure of V3 to the upcoming Liquidity Hub and Spokes in V4, Aave is not only solidifying its market position but also gradually evolving into the infrastructure layer for on-chain capital markets.

Market Positioning

As the largest lending protocol by TVL, Aave enjoys a significant lead over its competitors. As of this writing, Aave's TVL stands at approximately $5.4 billion, more than five times that of the second-largest lending protocol, Morpho (around $1.08 billion). This scale advantage creates a strong competitive moat, allowing it to attract institutional capital while providing highly convenient participation channels for retail investors seeking passive income. Aave's growth momentum remains steady, with its TVL recently reaching an all-time high. This growth is attributed to its first-mover advantage, iterative product updates, and expansive multi-chain strategy.

Cross-Chain Expansion

The Aave protocol is currently deployed on 19 chains, but the vast majority of its liquidity (over 80%) remains concentrated on Ethereum, followed by Plasma. In Layer 2 networks, Arbitrum holds the most, followed by Linea and Base. This deployment reflects Aave's strategic choices: prioritizing Ethereum's liquidity depth and security, then cautiously expanding into Layer 2 networks with sustained user activity growth.

Core Functionalities and Architecture

At its core, Aave operates on a liquidity pool model, meaning users deposit assets into a shared liquidity pool. Depositors receive aTokens representing their positions, which accrue interest over time and can be used as collateral to borrow assets.

Aave V3

The Aave V3 platform introduces two distinct lending markets, each serving unique functions. The Aave Prime market is optimized for capital efficiency, supporting only blue-chip assets. Its signature feature, "High Efficiency Mode," allows for a loan-to-value ratio of up to 95% for highly correlated assets (such as wstETH and WETH), with a liquidation threshold of 96.5%. The market size is currently around $1.17 billion.

Aave Core

The Aave Core market covers a broader range, exceeding $4.2 billion in size, and supports a diverse range of assets. Aave Core prioritizes risk control by limiting exposure to high-risk assets via "Isolated Mode" and enforcing stricter loan-to-value limits, typically below 85%. This dual-market structure embodies Aave's balancing act between capital efficiency and system safety. However, this structure also leads to fund fragmentation, as liquidity cannot flow freely between Prime and Core markets. The upcoming V4 release is focused on addressing this issue.

Aave V4 and Aave App

Aave V4, recently launched on the testnet, aims to solve the liquidity fragmentation problem and drive its evolution into a modular lending infrastructure. At the heart of V4 is the Liquidity Hub, which aggregates liquidity from both Prime and Core markets. Funds will dynamically flow to where they are needed, rather than being locked in silos, improving efficiency and reducing idle deposits. Another complementary innovation is Spokes, a specialized market instance connected to the Liquidity Hub. Each Spokes can independently set parameters, such as supporting long-tail assets, setting supply and borrow caps, while the Liquidity Hub ensures that all parameters operate within system rules. The Spokes design enables marginal innovation while safeguarding core system security.

Taken together, these upgrades mark Aave's transformation from a single lending protocol to a foundational layer for on-chain capital markets. Through liquidity integration and modular design, Aave V4 is paving the way for it to remain a cornerstone of DeFi lending for years to come. Another major update for Aave this week is the launch of the Aave App, which helps retail investors earn up to 6.5% APY and provides balance protection up to $1 million. This is a significant leap forward as it will help many retail investors access the DeFi space that was previously difficult to access. The Aave App also provides on-chain and off-chain services, further optimizing the user experience. Its APY is highly competitive, surpassing traditional investment channels such as bonds and bank deposits, providing a high-quality alternative for ordinary users.

Conclusion

Aave is solidifying its position as a leading on-chain bank, and the recent major developments announced are closely aligned with its development roadmap. The latest version, Aave V4 (currently in the testnet stage), indicates that it is transforming into a more flexible and modular direction, and the Aave App will attract a "completely new user base" to the DeFi ecosystem. In addition, its RWA market, Horizon, enables users to easily borrow funds using their tokenized assets as collateral by improving the utilization of tokenized assets. As a leader in on-chain lending, Aave has captured a dominant market share, making it one of the preferred platforms for institutions, whales, and ordinary DeFi users to deposit stablecoins on-chain. With its scale advantage and robust risk control mechanisms, this leading position will continue in the foreseeable future. Ultimately, multiple protocols will emerge in the lending field, and some protocols have already opened up niche markets and continue to deepen them, while Aave, as a benchmark in this vertical, always relies on its liquidity and scale advantage to build moats and continue to promote industry innovation.