Aave Merit Program 2025 Update and Performance Analysis

Makoto Takahiro

Makoto Takahiro

— 13 min read
This article is for informational purposes only and does not constitute investment advice. Always do your own research (DYOR) before making any financial decisions.
Aave Merit Program 2025 Update and Performance Analysis

Overview

Aave launched Merit in March 2024 as a strategic response to intense competition from protocols like Morpho and Compound. The program distributes wETH and GHO tokens through merkle-tree-based airdrops every two weeks. According to data from The Block, Aave reached $47 billion in TVL by October 2025, up from $8 billion at the start of 2024.

Merit uses a booster-based reward system that encourages specific behaviors. Users earn points for actions that benefit the protocol: borrowing wETH or GHO, depositing liquid staking tokens, and participating in governance. The program penalizes activities deemed harmful, such as using Morpho optimizers, with up to 100% reward dilution.

The initial 90-day program allocated $2.1 million in wETH and $2.9 million in GHO. First distribution in March 2024 sent 280 wETH to borrowers. The program runs continuously through 2025, with extensions approved by Aave DAO.

Bottom line: Merit has proven effective at defending Aave's market position, attracting approximately 200,000 ETH from competing protocols according to DAOTimes. The program addresses the competitive DeFi landscape where lending protocols fight for market share through strategic incentives.

2025 Performance and Market Position

Aave TVL Growth Trajectory 2023-2025

Aave's TVL surged from $8B to $47B during 2024-2025, representing 487% growth

Data: DefiLlama, The Block (November 2025)

Aave commands 60-62% of the DeFi lending market share in 2025, according to Coinlaw statistics. The protocol processes over $40 billion in active loans across 14 blockchains. Monthly active users reached 99,200 as of August 2025.

In Q2 2025, Aave's TVL grew 52%, doubling the broader DeFi sector's 26% growth rate. The protocol generated $122.13 million in fees during Q2, with net revenue of $17.16 million after incentives. Founder Stani Kulechov projects reaching $100 billion in net deposits by year-end.

Aave accounts for approximately 23% of all DeFi TVL, making it the largest protocol by this metric. The protocol reached $3 trillion in cumulative deposits on August 15, 2025, while surpassing $29 billion in active loans on August 13.

Merit Program Mechanics and Distribution

Merit operates through a sophisticated points system that remains partially confidential to prevent gaming. Users accumulate points based on protocol-aligned activities over time. The Aave Chan Initiative manages the program, with distributions occurring every two weeks.

Merit Boosters and Diluters

Action Type Specific Activity Impact Rationale
Booster Borrowing wETH Positive multiplier Direct protocol engagement
Booster Borrowing/holding GHO Positive multiplier Supports native stablecoin
Booster Depositing minority LSTs Enhanced rewards Diversifies collateral base
Booster AAVE token staking Enhanced rewards Long-term alignment
Booster Migration from competitors Bonus points Market share capture
Diluter Using Morpho Optimizers Up to -100% Revenue extraction
Neutral Standard deposits Base rate Basic participation

Data: Aave Governance Forum, BeInCrypto (2024-2025)

The program intentionally discourages use of Morpho's optimizer products, which Aave delegate Marc Zeller described as "revenue-draining" in governance discussions. Morpho CEO Paul Frambot contested this characterization, arguing that Morpho contributes liquidity and efficiency to the Aave ecosystem.

Merit Round 6, implemented in July 2024, updated parameters to reflect evolving market conditions and maintain program effectiveness. The Aave DAO continuously refines reward mechanisms based on community feedback and protocol performance data.

Competition in DeFi Lending

DeFi Lending Protocols Market Share 2025

Aave maintains dominant position with 62% of DeFi lending TVL

Data: DefiLlama, CoinGecko (August 2025)

Morpho emerged as Aave's primary competitor in 2024-2025, crossing $10 billion in deposits by August 2025. The protocol uses peer-to-peer matching on top of existing pools from Aave and Compound, offering better rates for both lenders and borrowers. Morpho operates across Ethereum, Arbitrum, Polygon, Unichain, Katana, and Base.

Compound holds approximately $3 billion in TVL as of 2025, representing roughly 12% of the lending market. Despite being one of DeFi's oldest protocols, Compound has seen slower growth compared to newer architectures like Morpho's P2P model.

MakerDAO's SparkLend and other protocols account for the remaining market share. SparkLend integrates with Sky Protocol's Direct Deposit Dai Module to provide competitive rates, particularly for stablecoin lending.

Competitive Advantages by Protocol

Protocol TVL (2025) Key Innovation Strengths Weaknesses
Aave $47B Flash loans, Merit rewards Multi-chain, established brand, GHO stablecoin Legacy architecture, complex governance
Morpho $10B P2P matching layer Better rates, capital efficiency Newer platform, smaller ecosystem
Compound $3B Autonomous protocol Time-tested, simple model Limited features, slower innovation
SparkLend $2B+ D3M integration Sky Protocol liquidity Limited to USDS ecosystem
Kamino (Solana) Largest on Solana Automated vaults High LTV ratios, low fees Solana-specific

Data: DefiLlama, DefiRate, CoinGecko (2025)

GHO Stablecoin Journey to Peg

GHO Price Stability Progress 2023-2025

GHO achieved $1 peg after six months of optimization and community efforts

Data: CoinGecko, DL News (July 2023 - March 2024)

GHO launched in July 2023 but struggled to maintain its $1 peg, trading as low as $0.94 in August 2023. The stablecoin lacked a traditional redemption mechanism, which prevented arbitrage opportunities that typically support peg stability.

Aave DAO implemented several measures to restore the peg. The community increased GHO borrow rates from 1.5% to 2.5% in September 2023. A liquidity committee received funding to deploy GHO across Balancer, Maverick, and Uniswap pools.

The breakthrough came with safety module integration in January 2024, allowing users to stake GHO and earn approximately 10% yield. The GHO Stability Module (GSM) launched shortly after, enabling one-to-one swaps between GHO and other stablecoins like USDT or USDC.

By February 2024, GHO finally reached its $1 peg after six months of persistent efforts. As of 2025, GHO circulates with over 35 million tokens in supply. The stablecoin has become core to Aave's revenue strategy, with interest payments flowing directly to the DAO treasury.

Merit program distributions include GHO rewards for borrowers and stakers, creating additional demand. The stablecoin maintains better stability in 2025 compared to its initial performance, though it requires active management through the liquidity committee and GSM.

Security Record and Incidents

Aave maintained a relatively strong security record through 2024-2025, with no major breaches affecting core protocol funds. The platform's careful approach to upgrades and extensive auditing processes prevented several potential vulnerabilities.

Security Timeline

Date Event Impact Response
Nov 2023 Critical bug reported via bounty V2/V3 vulnerability Guardian paused affected pools, applied fixes
Nov 2023 Harmony Bridge aftermath $1.2M stuck on Harmony Reserves frozen, ongoing recovery efforts
Aug 2024 ParaSwap adapter exploit $56K stolen from periphery No user funds affected, contract deprecated
Dec 2024 Aave V1 flash loan attack $10M+ (deprecated version) V1 already frozen, no V2/V3 impact
Jun 2025 Proxy deposit vulnerability 48.9 AAVE tokens Patch deployed, rewards mechanism updated

Data: Vibranium Audits, SolidityScan, Aave Governance Forum (2023-2025)

The August 2024 ParaSwapRepayAdapter hack exploited an arbitrary call error in a periphery contract not part of core Aave. The attacker stole $56,000 across Ethereum, Arbitrum, Polygon, Optimism, and Avalanche. Marc Zeller characterized the loss as equivalent to raiding a "tip jar" since no user deposits were at risk.

The incident sparked tension between Aave founder Stani Kulechov and Euler Finance founder Michael Bentley, who had criticized Aave's security practices days before. Kulechov dismissed the concerns, though the exploit revealed gaps in audit coverage for peripheral contracts.

Aave proactively coordinated with forks during the November 2023 vulnerability disclosure. BGD Labs reached out to over three dozen Aave forks, including major deployments like Spark and Radiant, to ensure they applied necessary security patches.

Most incidents affected deprecated versions (V1) or peripheral contracts rather than the core lending pools. Aave's Guardian system enables rapid response to threats, with the ability to pause markets and freeze assets when necessary.

Aave V4 Upgrade Coming Q4 2025

Aave plans to launch V4 in the fourth quarter of 2025, representing the protocol's most ambitious upgrade. The redesign introduces modular "hub and spoke" architecture, replacing V3's monolithic structure. Each hub serves as a central liquidity pool, while spokes represent specialized markets with custom risk parameters.

The unified liquidity layer prevents fragmentation that occurred in V3 deployments across different chains. Liquidity can flow between markets without requiring user migration. This design should reduce gas fees by 30-50% compared to V3, according to Aave Labs estimates.

Aave V4 Key Features and Improvements

Feature Function Benefit
Hub-and-Spoke Architecture Modular lending markets with centralized liquidity Eliminates liquidity silos, enables custom parameters
Unified Liquidity Layer Cross-market liquidity sharing Better capital efficiency, no migration needed
Health-Targeted Liquidations Partial position liquidation Minimizes borrower losses, maintains positions
Dynamic Risk Configuration Per-position parameter adjustments Prevents unexpected liquidations from global changes
Position Manager Automated execution of strategies Simplified UX, automated risk management
Multi-Call Batching Bundle multiple actions in one transaction Lower gas costs, faster execution
Reinvestment Module Deploy idle liquidity to yield strategies Additional LP returns, better capital efficiency
ERC-4626 Tokenization Standard vault token format Tax efficiency, broader composability

Data: Aave Governance, Cointelegraph, Unchained (September 2025)

The Reinvestment Module emerged as a late addition to V4 design. This feature allows Aave to deploy unused capital from lending pools into low-risk yield strategies, similar to Ethena's rebalancing mechanism. The module should increase returns for liquidity providers while maintaining security.

V4 deprecates several V3 features: credit delegation, stable rate borrowing, and loan-to-value configurations. The team determined these features added complexity without sufficient usage to justify their maintenance burden.

Development roadmap includes whitepaper release, public codebase publication, and testnet launch before mainnet deployment. Aave will undergo multiple security audits given the architectural changes. The upgrade requires careful coordination since over $40 billion in assets depend on the protocol's security.

Horizon and Institutional Adoption

Aave launched Horizon in March 2025 as a permissioned lending platform targeting institutional users. The project connects DeFi with traditional finance by allowing institutions to pledge tokenized securities as collateral for stablecoin loans.

Horizon runs on Aave V3 initially, with plans to migrate to V4 after that version's release. The platform supports real-world assets (RWAs) like tokenized Treasury bills, money market funds, and corporate bonds. Circle provides compliance oversight for the platform.

The Aave DAO voted against creating a separate token for Horizon, keeping focus on the main AAVE token. This decision ensures that institutional activity benefits existing token holders rather than diluting value across multiple assets.

Horizon represents Aave's push into institutional DeFi, a sector expected to drive the next phase of protocol growth. The platform provides familiar borrowing structures for traditional finance participants while maintaining decentralized settlement and transparency.

Revenue Model and DAO Economics

Aave generates revenue through borrowing interest, with 10-20% of interest payments flowing to the DAO treasury. In Q2 2025, the protocol collected $122.13 million in total fees. After deducting incentive distributions, net revenue reached $17.16 million.

GHO borrowing has become a major revenue source, accounting for roughly 5% of protocol income despite having only 35 million tokens in circulation. All GHO interest goes directly to the Aave DAO rather than to individual lenders, creating a sustainable funding mechanism.

The protocol approved a $50 million annual buyback program in April 2025, using treasury funds to purchase AAVE tokens from the market. The first $4 million buyback in April drove a 13% price increase. However, this strategy requires maintaining strong protocol revenues to remain sustainable.

AAVE token holders can stake in the Safety Module to earn approximately 5-7% APY plus additional rewards. Stakers provide insurance for the protocol, with their tokens subject to slashing if shortfalls occur. The safety module held over $400 million in staked assets as of mid-2025.

Flash loan fees represent another revenue stream, though smaller than borrowing interest. These instant, uncollateralized loans charge a 0.09% fee and are popular for arbitrage and liquidation strategies. Flash loans processed billions in volume during 2025.

FAQ

1. How does the Merit program reward distribution work?
Merit distributes wETH and GHO tokens every two weeks through merkle-tree-based airdrops. Users accumulate points based on protocol-aligned activities, with the exact calculation kept partially confidential. The Aave Chan Initiative manages distributions via a SAFE multisig wallet funded by the DAO.
2. Can I claim past Merit rewards if I missed a distribution?
Merit rewards remain claimable after distribution dates. Visit apps.aavechan.com/merit to check eligibility and claim tokens. Unclaimed rewards do not expire, though users should claim regularly to track their participation.
3. Why does using Morpho reduce my Merit rewards?
Aave views Morpho optimizers as extracting revenue without contributing value. The Merit program applies up to 100% dilution for users who route liquidity through Morpho. This policy remains controversial, with Morpho arguing it provides efficiency benefits to the Aave ecosystem.
4. How does Aave compare to Morpho for rates?
Morpho often provides better rates through peer-to-peer matching, improving on Aave's pool-based rates by 0.5-2% in many markets. However, Aave offers more features, established security, and broader asset support. The Merit program can offset rate differences for Aave-aligned users.
5. Is GHO safe to use as a stablecoin?
GHO maintains its peg through the GSM and safety module mechanisms as of 2025. The stablecoin is overcollateralized, with each token backed by assets deposited in Aave. Risk exists from smart contract vulnerabilities and liquidation scenarios, but GHO has operated stably since achieving peg in February 2024.
6. When will Aave V4 launch?
Aave targets Q4 2025 for V4 mainnet launch. The team will release a whitepaper, publish the codebase, and conduct testnet trials before deployment. Exact timing depends on audit completion and community governance approval. Users should monitor governance forums for updates.
7. What happened with the $56K hack in August 2024?
An attacker exploited the ParaSwapRepayAdapter periphery contract, stealing $56,000 across multiple chains. No user funds were at risk since the contract only held leftover tokens from swap slippage. The incident affected a peripheral adapter not part of core Aave, and the contract was deprecated after discovery.
8. How does Aave maintain security with such large TVL?
Aave employs multiple security layers: extensive audits by firms like Trail of Bits and OpenZeppelin, bug bounty programs, the Guardian system for emergency pauses, and gradual rollouts of new features. The protocol maintains separate versions (V2, V3) to isolate risks. V4 will undergo months of testing before mainnet deployment.
9. Can I participate in Merit if I'm not on Ethereum mainnet?
Merit currently operates only on Aave V3 Ethereum mainnet. The program may expand to other chains if community governance approves. Users on Polygon, Arbitrum, or other networks should monitor governance proposals for potential multi-chain Merit expansion.
10. What's the future outlook for Aave in 2025-2026?
Aave aims for $100 billion in deposits by end of 2025 according to founder forecasts. V4 launch should improve capital efficiency and attract institutional users through Horizon. Regulatory clarity, particularly for stablecoins like GHO, could accelerate growth. Competition from Morpho and new protocols remains a challenge requiring ongoing innovation.

Related Resources

Explore more about DAOs and decentralized finance tools:

Dashboard of DAO tools - comprehensive database of platforms and services for DAO operations

List of DAOs - explore active decentralized autonomous organizations across ecosystems

Sources

Protocol Data and Metrics:

DefiLlama - Aave Protocol Metrics and TVL Data

The Block - "Aave's parabolic rise near $50 billion TVL signals institutional embrace of DeFi lending" (October 2025)

Coinlaw - "Aave Statistics 2025: TVL, Users & Market Trends Revealed" (September 2025)

Messari - AAVE V3 Fundamentals & Overview

Merit Program:

The Defiant - "Aave Moves To Launch $5M Quarterly Incentives Program" (February 2024)

Blockworks - "Aave tries a new round of airdrops targeting competitors" (March 2024)

BeInCrypto - "How Aave Plans to Reward Loyalty and Outpace Rivals Through Merit Airdrop" (March 2024)

Aave Governance Forum - ARFC Merit Updates and Discussion Threads

DAOTimes - "Aave DAO Launches Merit Airdrop, Distributing 280 WETH to Borrowers" (March 2024)

Competition Analysis:

Medium/The Capital - "How Morpho is Becoming the Next Big DeFi Lending Protocol" (March 2025)

DefiRate - "Morpho Review: DeFi Crypto Lending & Borrowing Protocol" (June 2025)

CoinGecko - "Top 10 Crypto Lending Protocols for 2025" (June 2025)

The Crypto Times - "Morpho Crosses $10B in Deposits, Hits Major DeFi Lending Milestone" (August 2025)

DL News - "Morpho unseats Compound to become second-biggest DeFi lender" (February 2024)

GHO Stablecoin:

DL News - "Aave's GHO stablecoin finally reaches $1 peg" (February 2024)

Blockworks - "GHO cannot maintain its peg without changes" (September 2023)

CoinDesk - "Aave's GHO Stablecoin Nears Elusive Dollar Peg" (November 2023)

Yahoo Finance - "Aave stablecoin GHO struggles to hold dollar peg" (August 2023)

Security Incidents:

Vibranium Audits - "Aave Hacked: $56K Stolen from Periphery Contract" (August 2024)

SolidityScan - "AAVE Repay Adapter Hack Analysis" (November 2024)

Aave Governance Forum - "Aave v2/v3 security incident 04/11/2023"

CoinsBench - "AAVE Exploit: So Easy That it's Hard Not To Hack" (June 2025)

Blockworks - "Aave cooperates with forks following vulnerability" (November 2023)

Aave V4 and Future Development:

Cointelegraph - "Aave V4 Slated for Q4 2025 — Here's What Users Should Know" (September 2025)

MEXC News - "Aave V4 Launches Q4 2025: Essential Updates Every User Must Know"

Cryptonews Australia - "Aave Gears Up for V4 Launch With Modular Lending Markets" (September 2025)

Unchained - "Aave Labs Unveils V4 Upgrade Proposal" (May 2024)

Crypto Central - "Aave CEO Reveals Protocol Upgrades for Q4 2025 Launch" (September 2025)

Market Analysis:

99Bitcoins - "Aave Price Prediction 2025-2030" (August 2025)

AmbCrypto - "Aave Price Prediction: 2025, 2030, 2040" (August 2025)

CoinMarketCap - "Latest Aave News - Future Outlook, Trends & Market Insights"

Bitget - "What Is Morpho (MORPHO)? DeFi Lending Explained" (October 2025)