[ARFC] Deploy Aave V4 on Arc

Governance New Market
1

Summary

This ARFC proposes deploying Aave Protocol V4 on Arc Network.

Motivation

Aave Labs proposes deploying Aave V4 on Arc, the institutional-grade public layer-1 blockchain built by Circle, at or near Arc mainnet launch.

The initial deployment would activate with one Liquidity Hub and two Spokes, supporting an initial set of high-quality assets: USDC, EURC, WETH and cirBTC.

Relative to the Temp Check, which proposed an initial scope of USDC, EURC and cirBTC, this ARFC adds WETH as a fourth launch asset in response to demand signals from prospective liquidity providers and to strengthen day-one borrow markets.

Following the Temp Check, this ARFC sets out the proposed initial token listing and parameters.

Deploying on Arc provides several benefits:

  • Positions Aave as a core lending protocol at launch.

  • Increases market access for Circle-issued assets.

  • Expands Aave’s reach into institutional liquidity flows.

  • Generates additional protocol TVL and revenue.

Arc’s infrastructure is designed to concentrate stablecoin and tokenized asset liquidity, making it a logical fit for Aave.

Following the passing of the TEMP CHECK Snapshot, this ARFC sets out the proposed launch topology, asset scope, oracle configuration, incentive structure, and rollout path.

Rollout

The rollout will follow a deliberately conservative, phased path. The deployment would launch at or near Arc mainnet with conservative caps, followed by monitored expansion and cap increases per LlamaRisk recommendations as live conditions support. Additional assets, including further RWA assets, could be onboarded through subsequent governance processes.

Incentive and Revenue Structure

In connection with the deployment, Aave DAO is expected to receive a minimum of $2m per year in protocol revenue from the Aave V4 deployment on Arc, with any shortfalls covered by certain Arc ecosystem participants for the first five years following deployment. This structure provides protection for Aave DAO during the bootstrap phase.

Specification

This section will be updated upon receiving feedback from various stakeholders in the lead-up to the deployment.

Hub and Spoke Configuration

The proposed initial Arc deployment will activate with one Liquidity Hub and two Spokes.

Hub Assets
Arc Core Hub cirBTC, wETH, USDC, EURC
Hub Spoke Collateral Borrowable
Arc Core Hub Main Spoke cirBTC, wETH, USDC USDC, EURC, cirBTC, WETH
Arc Core Hub Forex Spoke USDC, EURC USDC, EURC

Risk Parameters

The initial token listing and parameters will be updated based on the latest risk analyses.

Next Steps

  1. Gather community feedback and risk analysis from LlamaRisk

  2. Escalate the proposal to the ARFC Snapshot stage.

  3. If the ARFC Snapshot outcome is YAE, publish an AIP vote for final confirmation and enforcement of the proposal.

Disclaimer

Aave Labs is not compensated by Arc, nor affiliated with them.

Copyright

Copyright and related rights waived via CC0.

1 Like
2

Can Aave and LlamaRisk share more color on the contemplated risk parameters for the FX Spoke and potential RWA listings, given the guaranteed revenue floor structure…?

3

Summary

LlamaRisk provisionally supports the launch of Aave V4 on Arc and presents the initial market parameters for the deployment. Arc has not yet reached mainnet, and this support is conditional on the outcome of LlamaRisk’s network-level and asset-level risk assessments. The parameters in this document are preliminary and may be revised as those assessments conclude and as the network and its markets become observable on-chain.

This document consolidates the hub-and-spoke architecture configuration, liquidation parameters, collateral factors, interest rate model settings, and Add Cap and Draw Cap recommendations. The deployment is structured around a single Core Hub and two spokes, supported by a supply-only tokenized integration layer. The Core Hub serves as the primary liquidity venue, while each spoke targets a specific use case.

The initial configuration adopts a conservative approach to cumulative Add Caps. Because Arc is a newly launching network where on-chain liquidity is not yet established, the caps are set ahead of liquidity being deployed and may be refined once market conditions become observable on-chain.

The assets expected at launch are USDC, EURC, cirBTC, and wETH. USDC, EURC, and wETH are already listed on existing Aave instances, while cirBTC would be onboarded to an Aave instance for the first time.

Market Design

The recommended launch configuration consists of one hub and two spokes. The Core Hub serves as the sole borrowing environment, structured around two spokes targeting a distinct collateral type, user intent, and risk profile:

image
image2560×1624 248 KB

Source: LlamaRisk

  • Main Spoke: The Main Spoke is the general-purpose lending venue and is expected to host the majority of liquidity within the deployment. It accepts the broadest collateral set and the broadest borrowable set in the deployment, where USDC, cirBTC, and wETH are collateral against which users can borrow USDC, EURC, cirBTC, and wETH. In the future, the Main Spoke can provide credit lines to specialized Hubs, allowing them to access its liquidity while preserving separate risk profiles.
  • Forex Spoke: It supports trading and hedging across fiat-pegged stablecoins, with EURC and USDC as collateral, which can be borrowed against each other. Due to limited secondary market liquidity for EURC, conservative caps have been set.

In addition to the two spokes above, a tokenized spoke layer will also be created, which is a supply-only integration layer that tokenizes deposits of the Core Hub’s borrowable assets (USDC, EURC, cirBTC, and wETH) into composable positions for external vaults, aggregators, and strategies, without enabling borrowing or introducing additional collateral risk to the Core Hub.

Dynamic Liquidation Bonus Configuration

V4 replaces V3’s static liquidation bonus with a dynamic bonus that scales with the health factor. Each spoke is configured through three parameters: the Target Health Factor (the HF a borrower is restored to after liquidation), the Health Factor For Max Bonus (the HF at which the maximum bonus is reached), and the Liquidation Bonus Factor (which scales the curve so the bonus at an HF of 1.0 matches the corresponding V3 value). The Forex Spoke uses correlated-asset settings, and the Main Spoke applies a wider curve suited to volatile collateral.

Chain Hub Spoke Liquidation Bonus Factor Target Health Factor Health Factor For Max Bonus
Arc Core Hub Main Spoke 90.00% 1.2400 0.90
Arc Core Hub Forex Spoke 100.00% 1.0442 0.99

V4 Spoke Parameters

The liquidation protocol fee is proposed to be set at 10% across all assets, aligning with the configuration used for the majority of assets on Aave V3.

Chain Hub Spoke Reserve Collateral Factor Max Liquidation Bonus Borrowable Collateral Risk Liquidation Fee
Arc Core Hub Main Spoke cirBTC 75.00% 7.22% TRUE 0 10.00%
Arc Core Hub Main Spoke USDC 78.00% 5.55% TRUE 0 10.00%
Arc Core Hub Main Spoke wETH 83.00% 5.55% TRUE 0 10.00%
Arc Core Hub Main Spoke EURC 0.00% - TRUE - -
Arc Core Hub Forex Spoke EURC 90.00% 2.00% TRUE 0 10.00%
Arc Core Hub Forex Spoke USDC 90.00% 2.00% TRUE 0 10.00%

Add and Draw Caps

The Add Cap and Draw Cap values below are preliminary. They are set conservatively ahead of liquidity being deployed on-chain, where secondary-market depth is not yet established, and reflect the hub-and-spoke structure of Aave V4 and the distinct risk profiles of each spoke. These values may be refined once liquidity is deployed and market conditions become observable on-chain. For USDC and EURC, the cumulative Add Cap is distributed across the Main and Forex Spokes. Add Cap and Draw Cap are denominated in token units.

Chain Hub Spoke Reserve Add Cap Draw Cap
Arc Core Hub Main Spoke cirBTC 1,100 220
Arc Core Hub Main Spoke USDC 56,000,000 51,000,000
Arc Core Hub Main Spoke wETH 24,000 4,800
Arc Core Hub Main Spoke EURC 20,000,000 18,000,000
Arc Core Hub Forex Spoke EURC 10,000,000 9,000,000
Arc Core Hub Forex Spoke USDC 13,000,000 11,000,000
Arc Core Hub Core Tokenized USDC Spoke USDC 10,000,000 0
Arc Core Hub Core Tokenized EURC Spoke EURC 9,000,000 0
Arc Core Hub Core Tokenized cirBTC Spoke cirBTC 160 0
Arc Core Hub Core Tokenized wETH Spoke wETH 6,000 0

Tokenized Spokes serve as the standard entry point for integrators, vaults, aggregators, and other strategies routing liquidity into Aave V4 markets. They are supply-only and accept deposits exclusively in each hub’s primary borrowable assets, ensuring a simple, composable tokenized representation.

Interest Rate Curves

The IRM parameters apply to an asset across all spokes within that hub. The parameters follow the same two-slope utilization curve used in V3, defined by a base variable borrow rate, slope below the optimal usage ratio (Slope 1), slope above it (Slope 2), and the optimal usage ratio itself (Uoptimal). The Liquidity Fee is the fraction of borrower interest captured by the protocol treasury, equivalent to the reserve factor in V3. The goal of the initial configuration is to keep the setup as similar as possible to the one currently used in Aave V3.

Chain Hub Reserve Base Slope 1 Slope 2 Uoptimal Liquidity Fee
Arc Core Hub USDC 0.00% 4.00% 10.00% 90.00% 10.00%
Arc Core Hub EURC 0.00% 5.50% 50.00% 90.00% 10.00%
Arc Core Hub cirBTC 0.00% 4.00% 80.00% 80.00% 25.00%
Arc Core Hub wETH 0.00% 2.50% 8.00% 90.00% 15.00%

Disclosure

This review was independently prepared by LlamaRisk, a DeFi risk service provider funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.