NAFLD is a clinically progressive disease with steatosis, inflammation, endothelial dysfunction and fibrosis being the stages where clinical intervention becomes necessary. Lack of early biomarkers and absence of a FDA approved drug obstructs efforts for effective treatment. NAFLD progression is strongly linked to a balance between liver injury, tissue regeneration and the functioning of endogenous defense mechanisms. The failure of the defense pathways to resist the tissue damage arising from redox stress, one of the “multiple hits” in disease progression, give rise to heightened inflammation and occasional fibrosis. We introduce an endogenous defense mechanism in the liver that is mediated by TRPV4, a transient receptor potential calcium-permeable ion channel that responds to the cytotoxic liver environment and negatively regulates CYP2E1, a cytochrome p450 enzyme. Using Trpv4-/- mice and cultured primary cells, we show that TRPV4 is activated both by damage associated molecular pattern HMGB1 and collagen in diseased Kupffer cells that in turn activate the endothelial NOS (NOS3) to release nitric oxide (NO). The diffusible NO acts in a paracrine fashion in neighboring hepatocytes to deactivate the redox toxicity induced by CYP2E1. We also find that CYP2E1-mediated TRPV4 repression in late stages causes an unrestricted progression of disease. Thus, TRPV4 functions as a sensor of cell stress in the diseased fatty liver and constitutes an endogenous defense molecule, a novel concept with potential for therapeutic approaches against NAFLD, perhaps also against hepatic drug toxicity in general.