Digg was more or less dead before the v4 launch. They were already losing a flood of users to reddit and other social media networks (facebook and twitter were going though the roof). They had massive issues with voting rings manipulating their algorithm and selling access to their front page. And when new front page spots weren't bought, they were almost always just posts that had reached the front page of reddit several hours earlier.

This post also mentions an update to google search which hit them hard, and a bunch of internal issues, senior staff leaving. They had a limited runway and the company was going to run out of money unless they did something.

The something they decided to do was "launch digg v4". It wasn't ready from a technical perspective. Worse, it really looks like they skipped the market research step used their once chance to throw a bunch of ideas at the wall to see what worked.