[Xangle Original]
By Crypto_Gang
Translated by LC

Summary

• Aave V3 update in early 2022 will include Portal that would enable the flow of liquidity between multi-chain markets across different networks
• While Aave V2 upgrade focused on improving user experience, Aave V3 upgrade aims to become a multi-chain protocol
• It is anticipated that the V3 Portal update with extended networks will allow Aave to become a mega decentralized bank with a target market size of almost $140B

Aave is a decentralized lending protocol launched in Jan 2020 and has become one of the leading DeFi projects built atop the Ethereum network. After coming out on top amongst the top 10 lending protocols based on TVL in Aug 2021, Aave is still holding the no. 1 position as of writing. Lending protocols sort of function as a bank in that they let users lend or borrow cryptocurrency, although supported features may differ in detail depending on the lending protocols.

Voting to deploy Aave V3 went live on Snapshot in Nov 2021 and passed in governance vote, so Aave V3 will be released upon completion of development. Aave V3 introduces several new updates to improve user experience while maintaining key features of the previous versions such as aTokens, stable interest rate, and credit delegation. Perhaps the most significant update is a feature called “Portal.” Let’s take a look at how Aave has evolved throughout each version upgrade and the background and purpose of Portal. 

Aave V1 → V2: Improving the User Experience

Aave V2 was released at a time when the DeFi market was still at an infant stage except for Ethereum, of which share in the entire DeFi market was about 97% at the time. In this context, there was no reason for the Aave V2 upgrade to extend the protocol to multi-chain.

Instead, Aave V2 focused on improving the lives of the users via collateral swapping, which allows users freely trade assets that were being used as collateral, and gas optimizations by implementing EIP-2612. Aave V2 also introduced debt tokenization and variable debt borrowing to provide more options and flexibility for users.

In the first half of 2021, DeFi services on other mainnets started to expand rapidly as the demand for other mainnets has increased due to Ethereum’s inability to produce effective scaling solutions fast. As a result, Ethereum began to lose its dominance in DeFi market which dropped to below 90% in Feb 2021, then maintained a share of 60 to 65% range until it further dropped to 58% as of writing (Jan 2022).

Aave has also been quick to respond to these changes in market conditions. In Apr 2021, Aave launched on a Layer 2 network Polygon and secured Polygon’s liquidity. Then in Aug 2021, Aave founder Stani Kulechov revealed at the Smart Contract Summit that the protocol was considering launching on Avalanche in Oct 2021, showing various strategic moves to also secure liquidity of other Layer 1 mainnets.  

Despite constant efforts to secure more liquidity, Aave’s multi-chain is still not perfect; Although Aave was successfully launched on Polygon and Avalanche, users must first withdraw their deposits and collateral to bridge their assets using Avalanche Bridge and Polygon Migration Bridge.

V2 → V3: Aave to Become Multi-Chain Lending Protocol

The V3 Portal update will improve user experience as it allows the flow of liquidity between Aave V3 markets across different networks. Portal allows governance-approved bridges to burn aTokens on the source network while instantly minting them on the destination network. The underlying assets can then be supplied to Aave on the destination network in a deferred manner, passing it to the pool after moving through a bridge. This can help bridge the already released markets (Ethereum, Polygon, and Avalanche) with novel solutions to facilitate a seamless cross-chain that would create a single Aave market, or in other words, a multi-chain bank.

Once Aave rolls out V3 with the Portal update to connect the networks, users will be able to freely move their funds (collateral and deposit) between the different channels that Aave supports. Therefore, Portal takes a form of a bridge between these users who will no longer need to manage different lending protocols by chains.

Active Governance Voting for Deployment on other Networks

Aave governance is also keeping in line with the consistent growth of the protocol to become multi-chain through the V3 update. Votings are now live with proposals to connect with various networks even though Aave V3 has not been released yet. Aave governance already passed V3 deployments to Optimism and Arbitrum as Layer 2 networks. Aave also unveiled a governance proposal that could see Fantom blockchain integrate into its ecosystem following a successful community vote. It remains to be seen how Aave V3 can be deployed in a non-EVM chain like Solana, but it seems to be actively moving toward EVM-compatible mainnets and Layer 2 networks.

If voters say yes to the deployment of Aave V3 on Fantom, Aave’s target market size will be $140B with an additional $14B. And as the votes on the proposal to deploy Aave V3 to other networks passes, the target market size will grow further.

Aave competes with other lending protocols, but none supports features like Portal, and there is a limited number of protocols that embrace multi-chain. Although Aave is currently the largest DeFi project by TVL with a sizable lead compared to its rivals, it decided to take on a new challenge, Portal. Let’s see how the project’s latest venture will play out with the Aave V3 upgrade.