Aave, V4, and the Flywheel Behind DeFi’s Lending Blue Chip

--- Aave’s revenue dominance, first-mover innovation, and upcoming V4 upgrade position it to expand beyond DeFi into institutional RWAs while reinforcing its moat. The number is 12.8 million. That’s the total revenue that Aave did in November 2025. That’s also 3× more revenue than the rest of its competitors combined. ---

“Aave’s revenue surge this year cements it as DeFi’s lending blue chip.” ---

Key Takeaways

Aave generated \$12.8M in revenue in November 2025, outperforming all competitors combined
Flash loans remain a core innovation, even as execution becomes more competitive
The V4 upgrade focuses on efficiency, modularity, and new customizable markets
Institutional RWAs via Horizon represent Aave’s next major growth vector
Revenue buybacks and tokenomics strengthen Aave’s long-term moat ---

The Origin of Aave

In 2016, Stani Kulechov from Finland was studying law when he first became interested in Ethereum. His idea was: what if you could remove the middleman, like banks, and provide more value to the user? One ICO and prototype later, Aave was released on Ethereum mainnet in January 2020. Aave positions itself as a scalable “open-source, non-custodial liquidity market” with variable rates. Simply put, you have control over your own funds, and you deposit and borrow assets with Aave in exchange for interest. ---

Flash Loans and First-Mover Advantage

But the reason they’re so popular is because Aave V1 created the first flash loan for arbitrage. These are uncollateralized loans that are issued and repaid within 12 seconds. Why 12 seconds? That’s the amount of time for Ethereum to complete one transaction block before the next block is mined. In 2020, the strategy worked like this: Borrow millions from Aave, buy tokens lower on Uniswap, sell the same tokens higher on Sushiswap LP, and watch money make money in 12 seconds. The strategy still exists today, but it’s a lot harder to execute given the maturity of the space and price-oracle constraints. Leaning into their first-mover advantage, Aave continues to lead innovation. Introducing different product upgrades such as their debt delegation via aTokens in V2 and their GHO stablecoin in V3. Apart from innovation, Aave has had an impressive track record of having no major security exploits, protecting its users’ funds. This places them as a vanguard for capital safety and earning user trust. ---

The V4 Upgrade and Liquidity Architecture

The upcoming V4 upgrade is highly anticipated, as it promises even cheaper borrowing rates and more efficient liquidity for the protocol. But more importantly, it introduces new markets that arbitrageurs can participate in. The V4 upgrade also aligns with Ethereum’s Fusaka upgrade, using a Hub-and-Spoke model for liquidity management. Which, honestly, is a convoluted way to say better load balancing for supply and demand. ---

Tokenomics and the AAVE Flywheel

So let’s look at the AAVE token, the glue that holds the ecosystem together. There is a total/circulating supply of 16 million AAVE, with 95% of that in circulation. The other 5% has been burned. The AAVE token has been fully unlocked since 2021 and introduced staking to create token incentives. Staking AAVE enables:

Fee discounts (up to 20% on borrowing)
Earnings from liquidation penalties (5–10% of collateral)
And most importantly, voting on proposals to guide the protocol’s direction Post-April 2025, the protocol allocated \$50 million of its treasury revenue to annually buy back AAVE for burning or distribution via governance votes. ---

Revenue Breakdown

Protocol revenue has already hit \$86M+ YTD, funding ongoing buybacks despite market dips. Aave’s revenue comes from three main sources:

Borrowing – 60%
Flash loans – 25%
Liquidation penalties – 10% Minor sources like stablecoin peg mechanisms (for example, GHO minting fees) or cross-chain portal fees in V3/V4 make up the remaining 5%. 5% may not look like much now, but I’ll get into this in a bit, and why I think this will increase when V4 arrives. ---

Core Technology Stack

Aave’s core technology is its pool-based AMM for lending. Suppliers feed shared liquidity pools, and borrowers draw instantly at utilization-based rates. The busier the market, the higher borrow rates become. A key feature is its flash loans, which charge between 5–9 basis points to fuel arbitrage opportunities. Also included is a risk engine called Efficiency Mode, which dynamically adjusts liquidation levels based on the borrowed asset. For example, USD-pegged stablecoins, which are considered lower risk, benefit from higher loan-to-value ratios. Lastly are its product versions, which represent a direction toward improving capital efficiency across fragmented blockchains.

V1 introduced flash loans
V2 added aTokens to delegate or tokenize debt on one blockchain
V3 added portals and vault features, allowing aTokens to move across blockchains via canonical bridges and boosting flash-loan activity The upcoming V4 upgrade changes the model a bit and is a bold move. On the efficiency side, V4 reduces flash-loan fees, benefiting users at the cost of reduced protocol revenue. V4 also introduces automated risk silos, aiming to reduce bad debt and preserve the treasury. On the revenue side, which I think is the key here, V4 adds customizable new markets, which remain intentionally vague in the documentation. ---

Future Roadmap and RWAs

Let’s look at why this matters. For Aave to grow further, they need to increase utilization and expand the markets they serve. They’re doing this by targeting the institutional RWA market. To better service these markets, V4 will be used to discover scalable parameters and definitions for customizable markets. Aave launched Horizon in August 2025 to capitalize on the growing RWA segment, which has surpassed \$500 million in total market size. The core function of Horizon is to allow users to supply permissioned, tokenized RWAs as collateral while borrowing Aave’s native stablecoin, GHO. Earlier in November, the VanEck Treasury Fund announced it was placing \$93 million worth of RWAs onto Horizon to collateralize GHO. Now, 100% of the minting fees go back into the AAVE token treasury. This positions Aave as a kind of central bank and treasury reserve model—but far more productive due to flash loans. Now let’s return to on-chain RWAs. Can these be traded on the secondary market? The answer is no. To remain compliant, RWAs on Horizon are for collateral use only and cannot be traded. ---

Risks

The risks Aave faces fall into two categories: utilization risk and security risk. Low borrow utilization means less revenue for the protocol, while high utilization makes borrowing too expensive for arbitrageurs to use flash loans. To offset this, Aave needs to service new on-chain markets. New serviceable markets allow users to discover new arbitrage strategies, which in turn generate more revenue. The second risk is technical. Smart-contract risks have been rare post-V3, and most exploits have occurred on the periphery rather than within Aave itself. However, cross-chain bridges have a long history of hacks and price-manipulation attacks, so we can’t completely rule this out yet. ---

Competitors

Aave leads with 60–62% lending market share, holding \$30 billion in TVL. In comparison, MakerDAO, Morpho, and Compound hold a cumulative \$15.8 billion. Aave also maintains a defensible moat through revenue buybacks and V4 modularity, allowing it to outpace forks. ---

Final Thoughts

After eight years as a dominant player, Aave is one of the rare protocols that has truly stood the test of time. They’ve continuously improved their product offerings while maintaining strong security. Its revenue surge this year cements Aave as DeFi’s lending blue chip. They’re far ahead of the competition in market share, and constant product updates make it difficult to find a credible alternative. With the upcoming V4 integration for capital efficiency and the growing RWA market, I’d take a bet on Aave as a growth asset. That’s all for this episode of Whitepaper by AthenaX. Once again, this is purely educational and not financial advice. See you in the next one.