Will Aave Win? Behind the Major Shifts at DeFi’s Largest Protocol

A new chapter: Over the last few weeks, DeFi's leading lending protocol Aave has undergone its most significant technical and organizational overhaul in recent years.

• Two weeks ago at EthCC in Cannes, the platform activated its long-awaited V4 upgrade, marking a major step toward a more modular protocol architecture.
• Last week, the Aave DAO approved a major economic restructuring, consolidating all value accrual from Aave-branded products under the AAVE token.

Why it matters: With $26 billion in user deposits, Aave remains the largest protocol in DeFi. With a market share of over 50% it‘s the dominant lending protocol in the industry.

Under competitive pressure: In recent months, however, that lead has come under pressure. Modular lending protocols like Morpho are increasingly establishing themselves as the default infrastructure for onchain asset management solutions, used by players such as Coinbase, Bitwise, and Société Générale. In the last 12 months, Morpho’s market share across major networks has risen from roughly 10% to 16%, while Aave's has stagnated at around 58%.

Change in market share in DeFi lending since April ‘25. Includes Ethereum, Base, Arbitrum, and Solana. Source: DefiLlama

The V3 trade-off: Much of Aave's dominance is built on V3, its protocol version that has been running since 2022. Put simply, V3 operates a single large lending pool per chain, meaning all collateral assets share the same underlying liquidity. This model proved highly resilient, withstanding multiple market turbulences without accumulating significant bad debt and becoming one of the most trusted protocols in DeFi. However, it also constrained expansion: newer or riskier assets could not be listed alongside blue-chip collateral like BTC or ETH without exposing the entire pool to additional risk.

The V4 fix: V4 preserves shared liquidity while adding a layer of flexibility on top. The new architecture introduces "hubs" that aggregate all user deposits on a given chain, alongside "spokes," which are specialized markets that draw liquidity from this shared pool. Each spoke sets its own rules for which collateral it accepts and at what terms, while tapping into the hub's existing deposits rather than needing to attract its own.

• "One can think of the relationship between hubs and spokes as similar to that of central and commercial banks. The hubs act as central banks, holding the liquidity, while the spokes function as commercial banks that access this liquidity via credit lines, enabling different risk parameters and strategies without fragmenting capital," explained Stani Kulechov, founder of Aave Labs.

Illustrative example of Aave V4’s architecture on Ethereum Mainnet

What this unlocks: For institutional participants, this opens new possibilities. Custom spokes can connect directly to qualified custodians, allowing institutions to borrow against assets without moving them onchain. The architecture also expands Aave’s collateral universe, from real-world assets to positions like Uniswap LP tokens, while enabling new lending primitives such as fixed-rate borrowing.

A pivotal moment: The V4 launch coincides with the most significant organizational shake-up in Aave's history. In recent months, disputes over revenue distribution and governance authority have led to the departure of three of the protocol’s most established contributors.

A new deal: The Aave DAO's response came on Sunday with the passage of what is called the "Aave Will Win" proposal, a framework that fundamentally restructures how the protocol is developed and funded. Under the new model, Aave Labs de facto becomes the protocol's primary contributor, absorbing much of the responsibilities of the departing teams. The DAO funds its work. In return, 100% of revenue from all Aave-branded products flows directly to the DAO treasury.

Aave’s current business and product lines, generating over $140 million in annual revenue

Scaling distribution: Much of that product revenue will come from Aave's expanding distribution channels. A consumer-facing Aave App targets non-crypto users with a simplified savings experience, while Aave Kit lets fintechs and institutions embed Aave directly into their own platforms.

• "Recent examples include Whop, which allows its 21 million users to earn passive yield on their balances with zero crypto friction, and Fireblocks, which has integrated Aave into its native yield offering for institutional clients," Kulechov told Blockstories.

Building the institutional venue: Alongside distribution, Aave Labs intends to invest heavily in Horizon, its dedicated market for real-world assets and institutional lending.

• "We are continuing to allocate significant resources to Aave Horizon. This includes expanding the asset base and simplifying how regulated markets connect to onchain liquidity," Kulechov noted.

All eyes on V4: Beyond these efforts, scaling Aave V4 remains a central priority. The ongoing rollout follows a security-first approach, with deposit caps being gradually increased over time. In the first two weeks since go-live, the new version has already attracted roughly $30 million in deposits and $10 million in loans.

Alexandre Elkrief is Co-Founder and Co-CEO of Upshift, a DeFi protocol that provides generalized vault infrastructure for institutional-grade onchain asset management. Upshift currently manages $400 million in assets under management.

How does V4 position Aave competitively against modular lending platforms like Morpho?

V4 addresses a clear limitation. In V3, Aave could only list blue-chip collateral in a single shared pool, which meant lenders consistently earned lower yields than on Morpho, where curators can build vaults with riskier collateral and pass higher returns to depositors. The spoke architecture changes that: long-tail assets can now be listed in isolated spokes with low caps, giving lenders access to higher-yielding opportunities without cross-contaminating the core pool.

But the gains come with trade-offs. More spokes mean more parameters, more risk decisions, and a larger attack surface, all managed centrally through Aave governance. This is also what distinguishes Aave from truly modular lending protocols: users subscribe to the Aave brand and its governance-managed risk framework. But on platforms like Morpho, users choose a curator and thus bear the risk of that curator’s decisions, not Morpho’s.

This reinforces the ongoing bifurcation in onchain lending: Aave continues to operate as an integrated onchain bank, while platforms like Morpho function as marketplaces for asset managers. V4 makes Aave more flexible, but it does not change which side of that divide it sits on.