Author: Chen Mo cmDeFi
The recent heated debate between Aave DAO and Aave Labs, a controversy over governance power at the protocol and product layers, reflects the governance dilemma facing the entire industry. I organized this issue. Who exactly is the master of Aave?
1/6 · Cause of the matter
Aave Labs replaced the front-end integration of ParaSwap with CoW Swap, and the fees generated thereafter flowed to Labs' private address. An anonymous DAO member, EzR3aL, exposed this issue in the governance forum, accusing Labs of 'privatizing' the value of the protocol. Labs' stance is that this belongs to the income from the front-end and product layer, owned by Labs, and is unrelated to the core of the protocol.
2/6 · First, let's break down who Aave DAO and Aave Labs are.
DAO represents Protocol (protocol layer)
Labs represents Project (product layer)
The core controversy is whether Aave is a Protocol (managed by the DAO) or a Project (built by Labs), and how this affects revenue rights.
Aave DAO is easy to understand; it is a governance organization unique to the crypto world, composed of holders of $AAVE tokens who vote to exercise power within the DAO organization. Almost over 90% of crypto projects are structured this way, and the definition of "governance token" also comes from this. Its greatest power is to vote on project proposals, deciding whether to proceed with specific updates and developments, as well as future directions.
Aave Labs is a development team responsible for building, updating, and maintaining the protocol (such as front-end interfaces and mobile apps). They typically also maintain the Aave brand and IP, so on social media and in the market, Aave Labs is usually assumed to be Aave. Its founders also have considerable influence on social media.
Generally speaking, Aave Labs and Aave DAO need to collaborate. For example, Labs will set many development plans, optimize certain features, and even upgrade versions V3 V4. These plans are led by Aave Labs but ultimately decided by DAO voting. Usually, when both parties' interests are aligned, they support each other, together forming Aave.
3/6 · What core resources do they control respectively?
Once conflicts of interest arise, if these two roles are strictly separated, they can be dismantled because they are inherently two independent entities. Let's examine the core resources and powers each side holds:
Aave DAO controls the underlying core, such as smart contracts and treasury management, which is in the hands of the DAO. Although Labs can propose development plans, they need to be voted on by the DAO to be implemented. Thus, it is a Protocol, and any product can operate on top of it; theoretically, multiple front-end products can be built on one Protocol, such as Aave? Bave? Cave are all possible.
Aave Labs controls the front end, brand, product marketing, and partnerships. Thus, it communicates directly with users and represents a very good product.
Therefore, Labs supporters generally believe that the integration of CoW Swap is entirely a front-end action unrelated to Aave's underlying architecture, and Labs could even unilaterally decide not to integrate it, so any revenue generated would naturally belong to Labs. Correspondingly, DAO supporters argue that this is a form of plunder because with the existence of AAVE governance tokens, all benefits should prioritize AAVE holders or remain in the treasury to be decided by DAO voting. Additionally, previously, ParaSwap's revenue would continuously flow into the DAO, and the new CoW Swap integration has changed this status, further leading the DAO to perceive this as a form of plunder.
Both sides hold their own views.
4/6 · Governance Dilemma
This reflects a somewhat awkward governance and power dilemma. From the perspective of $AAVE holders, they usually stand on the side of the DAO since the income entering the treasury benefits token holders. Although Labs has corresponding expenses each year, they can reimburse through the DAO. If they could independently create a profitable avenue, it seems that community power is being gradually consumed.
From Aave Labs' perspective, although the theoretical core control lies with the DAO and the proposal must be voted on to be implemented, from the first version of Aave to now, Labs has played a role in unifying the overall strategy, making significant contributions to the growth of the project. As Stani said, "If it weren't for Emilio persuading me to adopt the design direction of the Aave protocol in 2018-2019, when we were still working on ETHLend, I don't think the Aave protocol would even exist."
Who is the true owner of Aave?
5/6 · Power Struggle
This governance dilemma exists in most projects. Governance tokens are bought with real money, and ideally, these holders collectively decide the future of the project. When the team no longer holds voting rights, they could even be forced to replace Labs.
However, the gap between reality and ideal states is significant. Even for projects with a certain market share, when internal problems and disputes arise, the aftermath is often a loss of market presence. Sushi is a good example. The DAO can exercise power, and the project can change personnel. Although due to the design of smart contracts, even with a significant overhaul, the product's functionality can still perfectly retain its original stability. However, from past cases, the results of splits usually lead to unfavorable outcomes.
The core issue here is that, currently, the DAO is characterized as a decentralized organization. Although it has voting power, it struggles to operate efficiently. There may be independent developers, VCs, and large holders within the community, and once each role begins to fully exercise its power, a proposal may undergo multiple revisions, modifications, and negotiations right from the start. A project's success requires a professional team and continuity. The DAO can hire a new team, but it may be challenging to quickly connect and iterate, easily losing market position. Thus, Labs' existence, on the surface, appears to be able to "control" the protocol entity (which needs to collaborate with the DAO).
Personally, I prefer a scenario where both sides reach an agreement to balance the distribution of interests. However, everything is still under discussion, and there has been no governance vote yet. The potential hidden danger behind this is that even if a resolution is ultimately reached, this incident has exposed the divergence of expectations between the founding team and token holders.
In the long run, I still have confidence in Aave's development because it is one of the few DeFi projects that have been market-validated and possess a strong moat. The contradiction in governance power is an issue the entire industry needs to confront. How Aave handles this incident may become a model case for the future.
6/6 · Voices and Discussions
During the argument, Emilio believes someone is maliciously belittling Aave Labs' contributions and value. ACI team members pointed out that Aave Labs has attempted to leverage the DAO multiple times and has been exposed.
Suggestions from community members for Labs:
In the future, Labs should announce in advance that the revenue from the products they build will flow to Labs, rather than to the DAO.
Or clearly define the revenue-sharing ratio between the DAO and Labs.
Establish a transparent page on the Aave main website or Labs website, providing clear information to help investors interested in the $AAVE token (especially institutions or funds) make a judgment.
Although the DAO model is controversial, Aave DAO's token holders are the most active and vocal group, which demonstrates the vibrancy of its community. The front end, website, and applications are the focal points of controversy, where "each side holds its own opinion," lacking clear definitions.
Zeller's allegations regarding the value of the extraction protocol at Labs:
The listed projects (Portals, Credit Delegation Vault, Lens, etc.) indeed indicate that many exploratory initiatives by Aave Labs have not directly translated into protocol revenue or significant adoption rates.
It also mentions version V4, the DAO has so far spent $15 million, and compared to the liquidity moat of V3, the value proposition is unclear. There are concerns about whether this is a new trap for revenue extraction.
In the process of innovation, failure is inevitable. Not every feature or product can succeed. The DAO is, to some extent, investing in the R&D capabilities of Aave Labs. My understanding is that Zeller is not denying contributions but is calling for a higher standard of accountability, transparency, and value alignment.
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