Aave V4 dominance and the GHO liquidity shift

Aave’s revenue and V4 expansion

Aave’s deployment of V4 and the GHO module changes the scale of on-chain credit. The protocol recently hit $2 billion in revenue, following a period where a single day of liquidations on v3 generated $1.25 million in fees. Aave v3 liquidated $234 million in total assets during the August volatility, including $137 million in WETH, $62 million in wstETH, and $21 million in WBTC. One single wallet, 0x645…c4bfa, lost $73 million during these liquidations, which accounted for 31% of all collateral liquidated on v3. Stani Kulechov aims to scale Aave into a global credit layer that targets the $12.6 trillion US repo market and the $4.6 trillion securities-lending market. This expansion includes the Horizon market, which already holds $550 million in net deposits for tokenized assets like US Treasuries. Aave DAO also moved to direct 100% of revenue from Aave Labs products to its treasury, which includes the Aave App and Aave Horizon. Aave v3 currently produces over $100 million annually, and the protocol recently secured $21 billion in value across 14 active markets. The Aave Treasury also received $6 million in revenue overnight from decentralized liquidations to keep markets safe. However, the GHO borrowing rate on Ethereum Core increased to 4.5% on October 5 after the USDC GHO Stability Module faced depletion.

Compound struggles against higher leverage

Compound faces a significant disadvantage because its DAO maintains much lower collateral factors than Aave. These factors act as a governor on the speed of lending, and Aave’s higher limits allow for 10 to 14 loops compared to Compound’s 5 to 8 loops. I see this as a fundamental struggle for liquidity, and you already know that liquidity is the lifeblood of any lending pool. Aave holds $685 million in ezETH, while Compound holds only $80 million. The higher collateral factor on Aave attracts more deposits, while Compound’s lower factor of 88 makes it the more conservative choice for users who want to avoid the high speed and danger of heavy leverage.

In ezETH markets, Aave holds 8.5x more TVL than Compound. Compound’s liquidation factor is 95, which is higher than Aave’s 91, meaning Compound incentivizes its liquidators with a larger premium on rekt positions. Compound V3 allows users to provide different assets as collateral to borrow a market asset, which increases borrowing and allows for higher collateral ratios. Despite these improvements, Compound remains limited by its supply-side liquidity. To win, Compound must use incentive campaigns to attract looping TVL via products like Contango or Vaultcraft. Trying to compete where power is not matched is expensive, and Compound must compensate for a lack of matched power with incentives. Compound can only succeed if Aave users become over-leveraged and suffer mass liquidations.

Morpho and the regulatory grey area

Morpho provides a permissionless alternative where third-party curators manage vaults on top of the protocol’s infrastructure. Users select which vaults to join. These curators exercise discretion over asset allocation and pooling. This model shifts risk management away from the core protocol, unlike Aave which handles risk management internally through permissioned service providers. This distinction creates a legal grey area because regulators often view asset allocation and pooling as professional management services. Aave’s design is more centralized to start with. It manages risk internally to avoid the legal complexities of third-party curation. Some Morpho vaults use guardian setups or veto rights with timelocks to increase decentralization, but the core design remains exposed to legal token classification and professionality thresholds. Regulatory triggers are tied to met revenue thresholds or the presence of security tokens in a vault. The discretion in asset allocation and pooling mimics TradFi portfolio management, so users pay for these services. Will Morpho’s curators face the same legal liabilities as traditional asset managers when they manage user funds?