Overview
Aave v4 on Ethereum has grown rapidly since launch, with borrowing now concentrated in WETH, USDG, USDC, USDT, and frxUSD. This analysis evaluates these markets under the V4 Umbrella framework, considering loan size, collateral and borrower risk, supplier concentration, market durability, and reserve economics.
We recommend establishing general purpose Umbrella markets for Core WETH, Core USDC, and Core USDT. These markets combine meaningful loan books with strong collateral and relatively conservative borrower profiles, while providing sufficient supplier depth to support independent underwriting. The remaining markets do not currently present a sufficiently strong use case for general purpose coverage, either because credit risk is too limited to justify the incremental protection, supplier bases are too concentrated to support independent underwriting, or market activity remains heavily incentive dependent. As these markets establish themselves and develop broader, more diversified LP bases, their suitability for Umbrella coverage can be reassessed.
The proposed parameters are forward looking, incorporating expected loan growth over the next six to eight weeks. Target liquidity and deficit offsets are sized against projected exposure and reserve economics, while emissions are determined by the opportunity cost of independent underwriting.
Framework for Umbrella Coverage on V4
The V4 coverage framework retains the v3 assessment of loan size, collateral quality, borrower equity, liquidation capacity, deficit offsets, and underwriter opportunity cost. The V4 configuration adds two considerations that are particularly relevant to Umbrella: the mapping between the Spoke originating the risk and the Hub asset bearing the resulting deficit, and whether that risk can be transferred to an independent underwriter base.
The assessment therefore considers two questions.
- How much risk requires protection? The active loan book provides the primary measure of exposure, but coverage needs must be assessed alongside collateral quality and composition, borrower equity, liquidation capacity, and the protections already available through Deficit Offsets. These factors determine the potential loss that Umbrella would ultimately be required to absorb.
- Can Umbrella transfer that risk efficiently? An Umbrella market requires an independent supplier base willing to underwrite the covered risk. Supplier composition therefore matters alongside the underlying credit profile.
Deficit Offsets form the first loss layer before Umbrella coverage. Their sizing should therefore be considered alongside the risk transferred to underwriters and the revenue the reserve generates. This links the DAO’s first-loss contribution to market economics while keeping the overall protection structure proportional to the covered risk.
Underwriter opportunity cost determines the emissions required to attract that independent capital. Supply APY plus emission APY must meet or exceed comparable alternative yield plus a risk premium for slashing risk and lockup. Emissions should therefore reflect both the return available elsewhere and the risk underwriters accept by providing coverage.
Every debt position originates inside exactly one Spoke and is secured only by that Spoke’s collateral. However, Spokes can access liquidity from Hubs other than the Hub that holds their collateral through draw-only credit lines. The resulting debt is still a liability of the borrowing Spoke, but the deficit risk ultimately sits with suppliers of the Hub asset that was drawn. General purpose coverage at the (Hub, asset) level must therefore cover all borrowing from that reserve, including credit line draws by Spokes native to other Hubs, while assessing the distinct collateral and risk profile of each originating Spoke.
Per Spoke attribution also permits narrower, issuer-funded coverage, where an asset issuer or strategy operator can underwrite the risk associated with its own Spoke. This analysis focuses on the general purpose of Umbrella markets, where an independent supplier base funds coverage and covers deficits attributed to Spokes borrowing the covered Hub asset.
Because Aave v4 markets are still developing, supplier composition should not be treated as static. Early markets may be seeded by issuers, partners, or other strategic liquidity providers before attracting a broader LP base. As markets mature and supplier bases diversify, reassess the suitability of Umbrella coverage.
Deficit Handling on v4
On v4, when a liquidation leaves an account with all collateral seized and debt remaining, the Spoke calls reportDeficit on the relevant Hub in the same transaction. Any permissionless liquidator executing liquidationCall can therefore trigger deficit recognition without requiring a keeper, administrator, or governance action. The report covers each remaining debt reserve, with each deficit reported to the Hub from which the reserve was drawn, and clears the user’s position.
The Hub records the resulting shortfall on two ledgers. The per asset ledger, asset.deficitRay, measures the deficit attributable to that Hub asset and therefore the loss borne by its suppliers. The per Spoke ledger, spoke.deficitRay, identifies the Spoke that originated the deficit. Both are publicly readable through getAssetDeficitRay and getSpokeDeficitRay. This separation lets you assess each deficit from both the affected Hub asset’s perspective and the Spoke that generated it.
Deficit elimination is a separate operation. eliminateDeficit(assetId, amount, spoke) clears a specific Spoke’s deficit, and the caller must be a registered and active Spoke for that Hub asset with sufficient supplied shares. Elimination burns the caller’s own supplied Hub shares rather than transferring tokens into the Hub. Umbrella capital therefore remains productive supply in the Hub, earning supply yield, until it is used to eliminate a deficit.
These mechanics have two implications for Umbrella design.
- Coverage and Deficit Offsets are defined per (Hub, asset), meaning capital committed to one Hub asset cannot clear a deficit in another.
- Per Spoke attribution allows coverage to be scoped to a specific Spoke, providing the basis for issuer funded Umbrella markets.
State of Aave v4
Aave V4 replaces V3’s monolithic pool design with a modular architecture built from two components: Hubs, which hold liquidity, and Spokes, which create debt. A Spoke’s debt can only be secured by collateral held within that same Spoke, making the Spoke the unit of debt origination and deficit attribution in V4. However, the resulting deficit is recorded against the Hub asset from which the debt was drawn, making the Hub asset the relevant unit for assessing supplier exposure and general purpose Umbrella coverage.
On Ethereum, the DAO currently operates four Hubs serving twelve borrowing Spokes. Several Spokes draw the same asset from more than one Hub. The Bluechip Spoke, for example, borrows USDC from both Core and Prime. Each Hub asset therefore carries the deficit risk associated with every Spoke drawing that asset from that Hub.
Aave V4 on Ethereum has compounded steadily since its April 2026 launch. Deposits stand at ~$596M and active loans at ~$226M, with the loan book doubling roughly every six weeks, a pace sustained for five months. v4 now represents ~2.1% of combined v3 + v4 borrows on Ethereum.
Borrowing is concentrated in five assets: WETH ($79.3M), USDG ($79.2M), USDC ($26M), USDT ($21M), and frxUSD ($20M), with everything else below $1M combined.
Liquidity sourcing differs from debt origination. Of the $177M drawn from Core, roughly $36.3M is originated in Spokes whose collateral sits in other Hubs: Bluechip Spoke, Global Dollar Spokes, and Ethena Spokes. These Spokes reach Core through draw only credit lines. Core suppliers bear the deficit risk associated with the full $177M of Core borrowing, regardless of where the underlying collateral is held.
Protection sizing must account for the incentive campaigns that shape supply and borrowing. Supply side campaigns incentivize deposits of USDG and frxUSD, inflating supply. They also help explain the concentrated supplier bases examined in the next section. USDC and WETH are subject to the opposite type of incentive program, with rewards directed toward borrowing. A portion of the USDC and WETH loan books may therefore represent incentive sensitive demand that could unwind when the campaigns end. Umbrella parameters set against incentive boosted books should anticipate the risk of contraction when campaigns end.
Risk Profile of v4 Reserves
Each V4 Reserve’s risk profile depends on its loan book, collateral quality, borrower equity, borrower concentration, and available independent underwriting capacity. The following sections assess these factors for WETH, USDC, USDT, USDG, and frxUSD.
WETH
Core WETH has 31,677 ETH (~$79.3M) in outstanding debt. WETH is borrowable only from the Core Hub, so the entire WETH loan book and any deficit it produces sit with Core suppliers. Growth has been steady since launch, and at the current pace the loan book is expected to double in six weeks.
Collateral composition
WETH is borrowable against weETH in the Etherfi Spoke and wstETH in the Lido Spoke, while the rsETH route in the Kelp Spoke is frozen and limited to existing positions. The Etherfi exposure accounts for about 96% of total WETH debt and is driven primarily by its leveraged weETH strategy. This concentration is reinforced by the current borrowing incentive, which makes ETH borrowing cheaper when weETH is supplied as collateral, supporting demand for leveraged weETH positions. WETH borrowing is also enabled in the Main Spoke, where it is used primarily for shorting, but this represents less than 1% of total WETH borrowing activity. As a result, a single leveraged strategy largely drives the current WETH debt profile, with borrowing incentives partly supporting its scale.
Supplier concentration
Core WETH has a sufficiently broad supplier base to support an Umbrella market, with approximately $86.9M of supply distributed across 826 suppliers with balances of at least $10. Because most Umbrella underwriters come from the supplier base of the relevant (Hub, asset) market, both the size and distribution of WETH suppliers are key determinants of available underwriting capacity. The current breadth of the supplier base provides a meaningful pool from which to attract independent underwriters.
The chart shows the transition from a seeded base towards a more diversified market. Concentration has declined every month since, and the supplier count has grown roughly linearly since launch. This trajectory supports the framework: early supplier bases are seeded, then diversify as markets mature.
Revenue
Core WETH earns annualized borrow interest revenue of 88.4 ETH (~$221k), measured over the trailing 30 days.
At the current growth trajectory, annualized revenue is expected to increase to approximately 222 ETH over the next six to eight weeks. This reflects the expected growth in the loan book over the period, together with the current borrowing rate structure.
Reserve revenue is one of the inputs used to determine the appropriate level of DAO funded first loss deficit coverage.
USDC
USDC is listed on all four hubs, with $26.3M borrowed. Core is the largest market at $13.6M, followed by Prime at $7.1M, Global Dollar at $3.1M and Plus at $2.6M.
Of Core’s borrowed USDC, $4.0M (30%) is drawn through credit lines by Spokes native to other hubs. The Bluechip Spoke accounts for $3.66M of these draws, with collateral held in Prime, while the Ethena Ecosystem Spoke draws $0.37M, with collateral held in Plus. Although Core suppliers bear the deficit risk for these positions, the majority of the credit line exposure is extended to the Bluechip Spoke, which has a comparatively lower risk profile. This concentration toward a lower risk Spoke further reduces the overall credit risk of the Core USDC market.
Collateral composition
The Core USDC market combines substantial collateral coverage with a relatively diversified borrower profile across the v4 books. Approximately $39.5M of collateral supports $13.6M of debt, resulting in roughly 2.9x collateralization, while pristine collateral accounts for 87.1% of the pool. Only 4.3% of outstanding debt is associated with positions below a 1.1 health factor, indicating limited near term liquidation exposure. Borrowing is also relatively dispersed, with the five largest borrowers accounting for just 34.3% of total debt. Taken together, the strong collateral coverage, high share of pristine collateral, and diversified borrower base indicate a comparatively low credit risk profile for Core USDC.
The Prime USDC market has $18.9M of exclusively pristine collateral backing $7.1M of debt through Bluechip, providing approximately 2.7x collateralization. The collateral consists of WBTC (65%), wstETH (21%), cbBTC (7%), and WETH (7%), with none of the collateral being rehypothecated. Given the quality and composition of the collateral, the absence of rehypothecation, and the strong collateral buffer, Prime USDC presents limited credit risk. It therefore does not require Umbrella coverage under the framework.
The Global Dollar USDC and Plus USDC markets have more limited collateral distributions and substantially smaller equity buffers. Global Dollar has $3.5M of collateral backing $3.1M of debt, equivalent to approximately 1.14x collateralization, with syrupUSDG accounting for 79% and PT USDG for 21% of collateral. 86% of the debt is associated with positions below a 1.1 health factor.
The Plus USDC market has $2.9M of collateral backing $2.6M of debt, also approximately 1.14x collateralized, with sUSDe accounting for roughly 99% of collateral and effectively the entire debt book below a 1.1 health factor. Both markets therefore have limited collateral diversification and relatively small equity buffers.
Supplier concentration
The Core USDC market has the most diversified supplier base in v4. The largest LP holds 6.7% and the top five hold 24.2%.
For the framework, that breadth supports a more meaningful distinction between parties supplying liquidity and parties potentially absorbing deficits.
The other USDC hubs have narrower supplier bases. Prime has 67 suppliers, with the five largest accounting for 79.7% of its $7.75M supply. Global Dollar has only two suppliers, collectively providing the full $5.1M, while a single supplier accounts for the entire $3.0M supplied to Plus. These supplier bases are currently too narrow to establish a sufficiently independent pool of underwriters. Allowing these markets to grow and diversify their supplier bases before introducing Umbrella coverage would provide a broader pool from which to attract independent underwriters.
Revenue
The Core USDC market generated approximately 49,000 USDC in annualized borrow interest based on the trailing 30 days.
At unchanged rates, annualized revenue is expected to increase to approximately 100,000 USDC as the loan book grows over the next 6 to 8 weeks.
USDT
USDT is listed on Core, Prime, Plus and Global Dollar, with ~$20.6M borrowed. Core is the largest market at $15.6M, followed by Prime and Plus at $2.5M each, while Global Dollar carries a negligible $0.04M book. Of Core’s $15.6M, ~$11.0M is borrowed through Core native Spokes. A further $4.6M (30%) is borrowed through credit lines by Bluechip at $4.24M, and Ethena Ecosystem at $0.38M. Although Core suppliers bear the deficit risk, most credit line exposure goes to the comparatively lower risk Bluechip Spoke.
Collateral composition
The Core USDT market has $15.6M of outstanding debt backed by approximately $42.1M of collateral, providing roughly 2.7x collateralization. Pristine assets account for 86.5% of the collateral pool. WETH represents 37% of collateral, followed by WBTC at 27%.
Only 2.5% of outstanding debt is associated with positions below a 1.1 health factor, indicating limited near term liquidation exposure. The five largest borrowers account for 30.1% of total debt, reflecting a relatively diversified borrower base. Alongside Core USDC, Core USDT therefore has one of the more conservative borrower profiles across v4. Combined with its strong collateral coverage and high share of pristine assets, the relatively low health factor exposure and borrower concentration point to a comparatively low credit risk profile.
The Prime USDT market has $2.5M of debt backed by $5.3M of exclusively pristine non rehypothecated collateral through the Bluechip Spoke, providing approximately 2.1x collateralization. Overall, the strong collateral buffer, high collateral quality, and conservative borrower profile point to comparatively low credit risk.
The Plus USDT market has $2.9M of collateral backing $2.5M of debt, providing approximately 1.18x collateralization. The collateral is overwhelmingly concentrated in sUSDe, which accounts for approximately 96% of the collateral, while 92.5% of outstanding debt is associated with positions below a 1.1 health factor. This indicates a comparatively thin collateral buffer.
Supplier concentration
The Core USDT market has 170 suppliers providing $16.9M in liquidity. The largest supplier accounts for 34.4% of supply, while the top five and top twenty account for 73.5% and 93.4%, respectively. This is materially more concentrated than Core USDC and provides a weaker basis for attracting independent underwriters, despite the market’s conservative borrower profile.
The Prime USDT market has 18 suppliers, with the top five accounting for 97.7% of its $2.8M in supply, while a single supplier provides the entire $3.0M supplier base for Plus. These supplier bases are currently too narrow to establish a sufficiently independent pool of underwriters. Allowing both markets to grow and diversify their supplier bases before introducing Umbrella coverage would provide a broader pool from which to attract independent underwriters.
Revenue
The Core USDT market generated approximately 54,000 USDT in annualized borrow interest revenue over the trailing 30 days.
At unchanged rates, annualized revenue is expected to reach approximately 100,000 USDT as the loan book expands over the next 6 to 8 weeks.
USDG
The Core USDG market has $49.3M borrowed against $64.0M supplied, at 77% utilization. Global Dollar has $29.9M borrowed against $33.4M supplied, at 90% utilization. Combined borrowing is approximately $79.2M, making USDG one of the largest borrowed assets in v4. Prime and Plus do not list it.
Core native Spokes account for $33.9M of borrowing. Another approximately $15.4M, or 31%, is drawn through credit lines by Global Dollar native strategy Spokes. This differs from the USDC and USDT markets, where Core credit lines are primarily used by the lower risk Bluechip Spoke. Core USDG’s credit lines instead extend to strategy Spokes backed by yield bearing and maturity dated assets.
The book’s scale has developed alongside continuous supply incentives. While the timing does not establish that all borrowing depends on rewards, the current market structure provides limited evidence that the present scale can be sustained without incentives. As incentives are depleted, there is therefore a meaningful risk of contraction in both supply and borrowing, which should be considered when assessing the durability of the current book size.
Collateral composition
The Core USDG market has approximately $72.9M of collateral backing $49.3M of debt, providing approximately 1.5x collateralization. Pristine collateral represents approximately 57% of the pool. The collateral supporting the credit lines therefore sits alongside a substantial pristine component, rather than extending Core into a uniformly lower risk pool.
The five largest borrowers account for 49% of total debt, indicating a relatively concentrated borrower base, while 32% of outstanding debt is associated with positions below a 1.1 health factor. This combination points to meaningful borrower concentration and near term liquidation exposure for the Core USDG market.
The Global Dollar USDG market has approximately $34.9M of collateral backing $29.9M of debt, providing approximately 1.17x collateralization. SyrupUSDG accounts for effectively the entire collateral pool, while approximately 95% of outstanding debt is associated with positions below a 1.1 health factor. The limited collateral diversification and thin collateral buffer indicate a comparatively higher credit risk profile.
Supplier concentration
The Core USDG market has 384 suppliers holding $64M in liquidity. Before campaigns, essentially a single wallet held ~100% of supply, nearly the entire supplier count arrived during the campaign era.
A large LP associated with the program operator accounts for 34.5% of Core supply, while the five largest suppliers collectively account for 43.3%.
The Global Dollar USDG market remains more concentrated: among 73 suppliers holding $33.0M, the same wallet accounts for 84.9% of supply, while the top five account for 91.6%.
frxUSD
The Core frxUSD market has $19.8M borrowed against $29.1M supplied, representing 68% utilization. Unlike the other stablecoin markets, most of its debt originates through credit lines. Spokes native to other hubs account for approximately $12.3M, or 62% of total borrowing. The Ethena Ecosystem Spoke is the largest contributor at $8.0M, backed by sUSDe, while the Bluechip Spoke contributes another $4.28M against collateral held in Prime. Core native Spokes account for approximately $7.5M.
The borrowed book increased from $2.7M when the supply side incentive campaign began to $19.8M, with its expansion closely associated with the incentive period. Growth has nevertheless plateaued since mid July. Rewards remain the larger component of supplier returns, while debt growth has slowed despite continued incentives, suggesting that the current book may have limited organic growth momentum.
Collateral composition
$37.8M of collateral backs $19.8M of debt, providing approximately 1.9x collateralization, with pristine collateral representing approximately 66% of the pool.
In addition, 45% of debt is associated with positions below a 1.1 health factor, while the five largest borrowers account for 53% of total debt.
Supplier concentration
Among wallets meeting the $10 minimum balance, 47 suppliers provide $29.1M in liquidity. The largest supplier accounts for 47.2% of supply, while the top five account for 90.5%, making frxUSD the most concentrated supplier base among the Core stablecoin markets.
The majority of suppliers are affiliated with the issuer, placing a substantial share of supply within the Frax ecosystem.
This concentration means that an Umbrella market funded from the current supplier base would largely concentrate underwriting with the party whose asset it protects. Such an arrangement would provide limited risk transfer away from the issuer ecosystem, weakening the case for Umbrella coverage.
Recommendation
We recommend establishing general purpose Umbrella markets for Core WETH, Core USDC, and Core USDT.
These markets combine meaningful loan books with relatively strong collateral and borrower profiles, while their supplier bases provide sufficient depth to attract additional underwriters. They therefore offer the strongest combination of meaningful exposure and viable risk transfer under the v4 framework.
We do not recommend coverage for the remaining markets at this stage. The decision reflects the balance between the amount of risk requiring protection, the incremental value of Umbrella coverage, and the availability of capital to underwrite that risk.
Prime USDC and Prime USDT have relatively low credit risk and strong collateral coverage, limiting the incremental protection that Umbrella would provide relative to its underwriting cost. Global Dollar USDC and Plus USDT/C have more limited and concentrated borrowing, with collateral and borrower profiles that do not currently provide sufficient scale or risk diversification to justify separate coverage. Their supplier bases are also too concentrated to support a sufficiently broad underwriting base.
Core USDG and Core frxUSD have meaningful loan books, but their current structures provide weaker foundations for general purpose coverage. Both remain heavily influenced by incentive-driven supply and borrowing, creating uncertainty around the durability of their current exposure, while Core frxUSD has a highly concentrated supplier base and substantial exposure to the issuer ecosystem. In both cases, the current market structure limits how much Umbrella can meaningfully transfer risk.
These markets should therefore be reassessed as their loan books mature, incentive dependence declines, and supplier bases broaden and diversify.
The proposed parameters are forward looking and account for approximately six to eight weeks of expected growth.
Specification
New Umbrella markets
| Hub | Covered reserve | Covered Spokes | Cooldown | Unstake window |
|---|---|---|---|---|
| Core | WETH | All Spokes borrowing the reserve | 20 days | 2 days |
| Core | USDC | All Spokes borrowing the reserve | 20 days | 2 days |
| Core | USDT | All Spokes borrowing the reserve | 20 days | 2 days |
Target Liquidity & emissions
| Hub | Covered reserve | Target Liquidity | Max Emission / year | Emission APY at target |
|---|---|---|---|---|
| Core | WETH | 800 ETH | 20.8 ETH/yr | 2.6% |
| Core | USDC | 400,000 USDC | 12,800 USDC/yr | 3.2% |
| Core | USDT | 400,000 USDT | 12,800 USDT/yr | 3.2% |
Reward configuration & budget
| Hub | Covered reserve | distributionEnd | Collector allowance |
|---|---|---|---|
| Core | WETH | launch + 12 months | 20.8 ETH |
| Core | USDC | launch + 12 months | 12,800 USDC |
| Core | USDT | launch + 12 months | 12,800 USDT |
Deficit offsets
| Hub / reserve | Deficit offset |
|---|---|
| Core WETH | 33 ETH |
| Core USDC | 15,000 USDC |
| Core USDT | 15,000 USDT |
Next Steps
-
Deploy the approved Umbrella markets for Core WETH, Core USDC, and Core USDT using the parameters specified above.
-
Monitor covered loan books, supplier composition, borrower concentration, reserve revenue, and changes in incentive driven demand following activation
-
****Re-run the framework after three months to assess whether the coverage levels, supplier bases, and market conditions remain appropriate and adjust parameters if necessary.
Disclaimer
TokenLogic is an active service provider to the Aave DAO, the beneficiary of stream 100086 and the KPI as outlined in this publication. The scope of this engagement is available via this forum proposal.
TokenLogic supports and maintains an independent delegate voting platform within the Aave community.
TokenLogic and associated entities have no undisclosed material conflicts of interest at the time of submission.
Copyright
Copyright and related rights waived via CC0.