Among all the proposed upgrades, one notable one is the algorithmic stablecoin GHO, which is focused on growing the protocol.

Aave Labs, a decentralized finance (DeFi) lending protocol, recently announced its development roadmap for the next five years. According to the company's plan, they intend to upgrade the protocol to the new generation V4 version, and they hope to get community feedback on this proposal. At the same time, Aave also emphasized that the V4 upgrade is only part of its broader plan for the Aave 2030 grant proposal.

Aave V4: Proposal

The Aave Labs team announced that their proposal aims to overhaul the protocol, involving "significant upgrades and expansions" to the Aave network. These updates will include the introduction of a cross-chain liquidity layer, the deployment of non-Ethereum Virtual Machine (EVM) layer 1 technology, and a "brand new visual identity."

The team also specifically mentioned that the Aave V4 upgrade will adopt a completely different new architecture from the previous three versions. In order to more smoothly integrate features including its native stablecoin GHO, isolated pools, and RWA (real asset-backed tokens) modules, this upgrade will also introduce a “unified liquidity layer.”

Another part of the proposal mentions an automatic interest rate feature that can be adjusted based on market conditions. In line with this, Aave said it is actively working with Chainlink to “define a clear set of data sources.” The team then also proposed a liquidity premium that takes into account the collateral composition of borrowers and adjusts their borrowing costs accordingly.

Expectations for GHO

Of all the upgrades suggested in the proposal, a notable section focuses on developing the protocol’s algorithmic stablecoin, GHO. Since its launch in July 2023, the GHO stablecoin has found itself at a disadvantage in competition with stablecoins such as Tether and USD Coin (USDC). At least this is reflected in GHO’s relatively low market capitalization of only $49 million. This shows that GHO still has a lot of room for improvement in terms of market share and awareness.

To this end, in order to enhance GHO's competitiveness and market position, the Aave V4 upgrade proposal proposes a series of innovative ideas, mainly focusing on improving the liquidation engine. Specifically, the proposal proposes the concept of implementing a variable liquidation bonus, which may encourage users to participate more actively in the platform's lending and liquidation process. In addition, the concept of "soft" liquidation has also been proposed, which may refer to a more gentle way of debt recovery aimed at reducing the impact on borrowers when the market fluctuates violently.

In addition to improvements to the liquidation mechanism, the proposal also hints at the introduction of new options for earning interest, which could attract more users to hold and use GHO, thereby promoting its circulation and use. These measures are intended to increase the attractiveness of GHO, encourage greater adoption, and expand its market share by providing more attractive financial products and services.

In addition, this important upgrade proposal also includes a quick redemption mechanism for the decoupling of the GHO stablecoin. Although this proposal is still preliminary, it is expected to collect feedback by the end of the second quarter of 2024. After the feedback is collected, an on-chain vote will be conducted to determine the final fate of the proposal. If all goes well, the team plans to officially release the complete Aave V4 version in mid-2025.

The introduction of this fast redemption mechanism shows Aave Labs' forward-looking thinking on the market risks that GHO stablecoins may face, and their emphasis on the security of user assets when designing protocol upgrades. Through on-chain voting, members of the Aave community will have the opportunity to directly participate in the governance of the protocol, which is also a core principle of decentralized finance. The launch of Aave V4 will be an important milestone in the development of the protocol, heralding a more efficient, safer, and more user-friendly DeFi lending experience.

Aave continues to hold its position as the third-largest decentralized finance (DeFi) protocol with approximately $10 billion in total value locked (TVL), according to DefiLlama. This data shows the Aave protocol’s prominent position and broad user base in the DeFi field. #Aave #借贷协议