From Scattered Markets to One Smart Pool with Custom Mini-Markets
From Scattered Markets to One Smart Pool with Custom Mini-Markets
A beginner-friendly guide to what Aave v4 actually changes, and why it matters.
If you're new to DeFi, all the talk about _markets_, _liquidity_, _hubs_, and _spokes_ can feel like another language.
This post is here to unpack Aave v4 **slowly and simply**, using examples and analogies, so that even if you're not deep into crypto lending, you can walk away with a solid understanding.
1. First: What is Aave, really?
At its core, **Aave is a crypto lending protocol**.
- You can **deposit** assets like ETH, USDC, or wBTC and earn interest.
- Others can **borrow** those assets by putting up collateral.
Think of it like a **decentralized crypto bank**:
- It's **run by smart contracts**, not a company.
- Anyone can participate, as a depositor or borrower, without asking for permission.
2. What Is a "Market"?
Let's clear up one of the first confusing words in Aave: **"market."**
> In Aave, a market is a group of assets that live in the same lending pool, with shared rules and risk settings.
For example, in Aave v3:
- **Ethereum v3 Market** – the main pool on Ethereum (ETH, USDC, WBTC…)
- **Ethereum LST Market** – a separate pool just for liquid staking tokens (stETH, rETH…)
- **Polygon v3 Market** – another pool on a different chain (Polygon)
Each market contains **many assets**, like ETH, USDC, and others.
Analogy: A market is like a bank branch
- The **market** = a **branch**
- The **assets** = the **currencies** supported by that branch
Aave v3 has many "branches," and each has its own money inside.
3. Why This Structure Causes Problems: Fragmented Liquidity
In Aave v3, every market has its **own separate liquidity**. That means:
- If you want a new type of market (say, for risky new tokens), you create a **whole new market**.
- That market starts with **zero liquidity**.
- You then need to **convince people to deposit** into that market.
- Until there's enough liquidity, it's not useful, borrowing rates are high, yields are low.
This is called **liquidity fragmentation**:
> Money is split across many isolated pools instead of being shared in one big place.
**The result:**
- Capital is used less efficiently.
- New markets are slow and hard to bootstrap.
- Borrowers and depositors may get worse rates because liquidity is spread thin.
4. Aave v4 Changes the Architecture: Hubs and Spokes
Aave v4 solves this by rethinking the system.
Instead of many isolated markets with their own liquidity, it introduces:
- **One central Hub per chain**
- **Spokes:** modular mini-markets that plug into the Hub
The Hub = One Big Liquidity Pool
The **Hub** is like:
> One big central bank vault per blockchain where all the liquidity lives.
So instead of five separate pools on Ethereum, you now have **one shared liquidity source**.
- All deposits go into the **Hub**
- The Hub is the **source of liquidity** for everything else
Spokes = Custom Mini-Markets That Plug Into the Hub
A **Spoke** is:
> A modular mini-market that connects to the Hub, borrows from its liquidity, but has its own risk and rules.
Each Spoke can have:
- Custom **risk settings**
- Specific **asset types**
- Its own **strategies**
But unlike v3 markets, **Spokes don't start from zero**. They immediately tap into the Hub's liquidity.
**Examples:**
- **E-Mode Spoke** – for highly correlated assets like ETH and stETH
- **Isolation Spoke** – for newer or riskier tokens, with stricter limits
- **RWA Spoke** – for real-world assets like tokenized bonds or T-bills
- **Vault Spoke** – for advanced collateral types or yield strategies
> A Spoke is your own custom market design — without needing to bootstrap your own pool.
5. Why Spokes Are Safer: Risk Is Isolated
Here's the clever part.
Even though Spokes share liquidity from the Hub, **the risk is isolated within each Spoke**.
That means:
- If one Spoke has a problem (e.g. bad token, oracle failure),
- The issue is **contained** within that Spoke's parameters,
- And doesn't affect other parts of the system.
You get:
- Shared liquidity
- Isolated risk
That's a big step forward from v3, where risk either had to be pooled (which is dangerous), or liquidity had to be split (which is inefficient).
6. What Changes for Normal Users?
If you're a beginner just depositing or borrowing, you don't need to know the whole Hub/Spoke system, but it does affect your experience.
Better Rates
Because liquidity is unified in the Hub, there's:
- More capital available
- More efficient lending and borrowing
That leads to:
- Higher yields for depositors
- Lower borrowing costs due to deeper liquidity
Safer Markets
- Risky assets can be placed in **isolation Spokes**
- Real-world assets (RWAs) can live in **specialized Spokes**
- If something fails, **only that Spoke is affected**
So the system can innovate **without putting your funds at risk**.
Faster Innovation
- Developers can launch new markets (Spokes) quickly
- No need to launch whole new pools from scratch
- All new markets can tap into existing liquidity
That means you'll see **more features, more asset types, and faster upgrades** over time.
7. What Changes for Developers?
If you build in DeFi, this is where Aave v4 gets exciting.
In v3, to do something custom, you had to:
- Launch a whole new market
- Convince people to deposit into it
- Wait until there was enough liquidity to be usable
In v4, you can:
Build a Spoke
Design a Spoke with:
- Custom **risk parameters** (e.g. LTVs, caps, liquidations)
- Custom **assets** (RWAs, long-tail tokens, derivatives)
- Custom **strategies** (plug into other protocols or vaults)
Plug into the Hub
Once the Spoke connects:
> It instantly gets access to Aave's existing liquidity.
No need to bootstrap from scratch.
Focus on Innovation
With the liquidity problem solved, you can focus on:
- Safer risk frameworks
- New use cases (RWAs, structured products)
- Rapid experimentation
The Hub-and-Spoke model makes it easier to build **without breaking the system**.
8. Recap: Aave v4 in One Paragraph
- In Aave v3, liquidity was **fragmented** across many isolated markets.
- Aave v4 introduces a **shared Hub** per chain, where all liquidity lives.
- Developers can build **modular Spokes** that plug into this Hub and apply their own rules.
- Users benefit from **better rates**, **safer markets**, and **faster innovation**.
- Builders get plug-and-play access to deep liquidity, with less friction.
Or, in one sentence:
> Aave v4 turns DeFi lending into one big liquidity hub with plug-in mini-markets that can innovate quickly, while keeping risk contained.
Thanks for reading!
If this helped you understand Aave v4 a little better, feel free to share it or leave a comment. DeFi doesn't have to be confusing, and sometimes all it takes is the right mental model.