Aave Proposal Seeks Separate Innovation Market Alongside Core Lending Pool

Why the split is being proposed

The author frames the change as a response to the risk profile of newer collateral types. According to the proposal, innovative assets have brought limited yield benefits to the protocol while exposing the main pool to severe tail risks, pointing to the rsETH and tBTC incidents as examples.

The proposal argues that even audited assets can carry risks outside the lending protocol itself, including dependencies tied to underlying protocols, cross-chain bridges and redemption mechanisms. In that view, controls planned for V4, such as Spoke limits and emergency halts, may reduce direct losses on the books but would not fully address the possibility of depositor panic or bank-run dynamics if confidence breaks down.

How Core and Innovation would operate

Under the plan, AAVE Core would remain the unified liquidity pool for assets the proposal describes as fully validated and high quality. That list would include ETH, BTC, mainstream stablecoins and any other assets that complete a graduation process and satisfy strict admission standards.

AAVE Innovation would run separately on modified V3 infrastructure, described in the proposal as an isolated lending venue comparable to Morpho in structure. Its liquidity would be fully independent from Core, and it would host collateral categories the proposal considers unproven, including liquid-staking derivatives, cross-chain wrapped assets and emerging real-world assets.

Assets listed in Innovation would go through a reference testing period of 12 to 24 months. The proposed review would cover live liquidations, oracle stress, liquidity during extreme market conditions, security of underlying dependencies and bad-debt handling. Assets that pass would still enter Core only with small initial limits, and the DAO’s risk governance would keep full discretion over whether any promotion takes place at all.

Competition, fees and market positioning

The proposal presents the new market as part of Aave’s response to competitive pressure from Morpho and Phoenix, which it says are expanding through niche lending and support for innovative collateral. Morpho is described as Aave’s strongest rival in DeFi lending because its permissionless curator model has attracted curators, issuers and advanced users.

At the same time, the proposal argues that competitors lack what Aave can offer through a two-stage model: isolated incubation for riskier assets followed by possible access to a deep and trusted core liquidity hub. That incubation-to-promotion pipeline is presented as Aave’s strategic advantage rather than something rivals can easily reproduce.

The proposed fee model for Innovation would be low and transparent. Projects could choose not to participate, but the proposal says they would then lose eligibility for eventual access to AAVE Core liquidity unless they complete the Innovation process and follow risk requirements. It also calls for a multidimensional risk-rating system instead of ranking markets only by APY, with the stated goal of making risks clearer to users.

How the proposal fits with V4

The proposal does not reject Aave V4. Instead, it says V4’s Hub-Spoke design should be reserved for capital-efficient operations around mature assets in Core, while Innovation remains on V3 in order to preserve strict separation of funds and losses.

The expected outcome, according to the proposal, is threefold: shield Core depositors from spillover linked to rsETH- or tBTC-style shocks, create a new source of DAO revenue, and strengthen Aave’s position by turning Innovation into a proving ground whose successful assets can later graduate into Core. The next confirmed step is governance consideration of whether Aave should formally adopt that two-market structure as V4 development continues.