The evolution of Aave and the shift in stablecoin dominance

I recommend Aave for anyone seeking reliable liquidity. Stani Kulechov launched ETHLend in 2017 before the protocol transitioned to a liquidity pool model in January 2020. This pivot drove the network toward its current status as a massive onchain lending hub. Aave recorded €40.3 billion in net deposits in 2025. The current Aave v4 introduces a modular liquidity layer that supports diverse earning strategies. Users deposit assets into smart contracts to earn interest while borrowers provide overcollateralized assets. This growth follows a $25 billion TVL peak. Aave allows borrowers to select between fixed and variable interest rates. The protocol also supports flash loans, which require repayment within a single transaction. AAVE token holders vote on protocol changes and stake tokens within the Safety Module to provide a backstop for shortfall events. This deflationary token burns whenever the protocol gathers fees. In 2020, the protocol executed a token swap that changed 1.3 billion AAVE tokens into 16 million tokens at a 1:100 ratio. Aave is the most used protocol for stablecoin lending and borrowing across DeFi. Bloomberg reported in February 2025 that Aave is the largest decentralized finance lending platform by deposits. Borrowers also use Ethena assets like USDe or sUSDe for looping. The protocol also allows users to borrow against various collateral types, ranging from conservative stablecoins to higher-yield arrangements.

The stablecoin market looks different in 2026. Sky, formerly MakerDAO, released USDS in August 2024 to upgrade from the legacy DAI token. While DAI still anchors billions in liquidity, USDS now holds a larger market share. As of October 6, 2026, USDS maintains a $7.0 billion circulating supply, whereas DAI holds approximately $4.8 billion. The SkyMoneyConverter contract allows a 1:1 exchange between these two tokens without fees. Sky holds a collateral mix that includes 40 percent real world assets, 35 percent USDC, and the remainder in ETH or other crypto assets. The Sky rebrand replaced MKR with the SKY governance token at a 1:24,000 conversion rate. Users access the Sky Savings Rate through sUSDS, while DAI users maintain access to the DAI Savings Rate. DAI remains the dominant stablecoin on L2s including Polygon, Arbitrum, Optimism, and Gnosis Chain. DAI holders use various bridges to access liquidity across these networks.

You already know that liquidity depth determines protocol success.

Aave manages risk through active governance to avoid the issues seen with other protocols. When MakerDAO expanded its DAI credit line from zero to 600 million DAI within a single month, the Aave Risk Framework Committee proposed adjusting DAI loan-to-value ratios to 0% to prevent depegging risks. This move sought to prevent the kind of stablecoin depegging that hit Angle’s AgEUR protocol. While Compound v2 suffered liquidation cascades, Aave maintains stability through its Safety Module and decentralized governance. Aave also receives 238,339 DAI as part of the SparkLend revenue share. To increase security, the SparkLend proxy spell on Ethereum includes an upgrade to disable the flashloan-into-borrow feature. The protocol also proposed removing sDAI incentives from the Merit program to mitigate expansion risks. For example, the governance proposal distributes 214.55 MKR to eight Aligned Delegates and 175.14 MKR to nine AVC members for Q1 2024. SparkLend also onboards sxDAI on the Gnosis Chain with a 70% Max LTV and 75% liquidation threshold. SparkLend also facilitates the onboarding of EURe and USDC on Gnosis with supply caps of 5,000,000 and 10,000,000 respectively. These specific limits help maintain market stability during the expansion phase. Does the continued expansion of Sky’s USDS eventually force a total migration from DAI?