# Aave V4 Overview

Aave V4 uses a _Hub & Spoke model_ for liquidity management: the Liquidity Hub consolidates protocol-wide liquidity and accounting, while Spokes implement modular borrowing with isolated risk.

> [!NOTE]
> This evolves Aave V3’s market-per-pool design, so governance can add features
> or markets without migrating liquidity.

## Liquidity Hubs

The Liquidity Hub (Hub) is the central liquidity source in Aave V4. It maintains oversight of Spokes, granting each a _credit line for borrowing_ and a _debit line for supplying_. The Hub enforces system-wide accounting and caps how much liquidity Spokes can draw or add.

- Centralizes liquidity and accounting
- Issues per-Spoke credit/debit limits
- Enforces system-wide constraints
- Provides emergency stop controls

## Hub Assets

Hub Assets are the ERC-20 tokens registered in the Liquidity Hub. They form the shared liquidity that Spokes borrow from and supply to, enabling efficient reuse across Spokes.

## Spokes

Spokes are modules that manage specific supply and borrowing use cases, asset types, or risk profiles. Users interact directly with Spokes, which route liquidity to and from the Hub.

- Local controls (e.g., risk parameters, oracle interactions, emergency stops)
- Independent accounting per Spoke
- Modular: add or remove Spokes without affecting others

## Reserves

Reserves define how a Hub Asset is supplied and borrowed within a specific Spoke. Each reserve has its own risk settings, while the Hub controls how much liquidity can flow to and from the reserve through credit and debit lines.

## Interest Rates

Borrow and supply rates are determined by a utilization curve. _Utilization_ measures how much of an asset’s liquidity is currently borrowed, expressed as `borrowed / total liquidity`.

Below an optimal usage ratio, the borrow rate increases gradually; above it, the rate increases more sharply. The supply rate is derived from borrower interest after protocol fees and reflects supply and demand for that asset.

The curve is defined by a base rate, slopes below and above the optimal usage ratio, and the optimal usage ratio itself, configured per Hub Asset.

_User Risk Premium_ represents an additional interest charge applied to a user’s borrowing cost based on the quality of their collateral. It is a percentage surcharge on top of the shared borrow rate for that asset, weighted by the collateral needed to cover the debt, and recalculated as the position changes.

## User Positions

A user position is the combined view of what a user has supplied and borrowed within a Spoke. Positions are tracked per reserve internally, and surface as an aggregate view of a user’s activity on that Spoke.

- **User Supplies**: the assets a user deposits into a Hub through the Spoke. They accrue interest over time and expand the Hub’s available liquidity.
- **User Borrows**: the assets a user draws from a Hub through the Spoke. They create a debt balance that accrues interest until it is repaid.

_Health factor_ reflects position solvency and indicates how close a position is to liquidation. It is calculated as eligible collateral value divided by debt value and **must stay above 1** to avoid liquidation. It increases when debt is repaid or collateral value rises, and decreases as interest accrues, collateral value falls, or new debt is taken.

## Liquidations

Positions become eligible for liquidation when their health factor drops below 1.0. Aave V4 introduces a redesigned liquidation engine that improves capital efficiency and fairness compared to Aave V3.

**Target Health Factor**: Instead of a fixed close factor, liquidators repay only enough debt to restore the position to a Target Health Factor set at the Spoke level. This prevents over-liquidation.

**Variable Liquidation Bonus**: The bonus paid to liquidators scales with the position’s health factor. Lower health factors offer higher bonuses, creating a Dutch-auction style incentive that prioritizes the riskiest positions.

**Dust Prevention**: If the remaining debt or collateral after liquidation would fall below $1,000, the liquidator must liquidate that debt or collateral in full, preventing small leftover balances from accumulating.

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## Next Steps

  <IconCard
    href="/aave-v4/liquidity"
    icon="MarketsIcon"
    title="Liquidity"
    description="How liquidity is organized"
  />
  <IconCard
    href="/aave-v4/positions"
    icon="UserIcon"
    title="User Positions"
    description="Manage supply and borrow positions"
  />
  <IconCard
    href="/aave-v4/getting-started/react"
    icon="ReactIcon"
    title="React Quickstart"
    description="Build with AaveKit React"
  />