Recently, the controversy between Aave DAO and Aave Labs has come to light.
Author: Chloe
Source: ChainCatcher
Recently, the controversy between Aave DAO and Aave Labs has come to light. The former is responsible for governing the protocol, while the latter is the developer of Aave products.
The focus of this controversy is the issue of fees generated by the recent announcement of deep integration with CoW Swap. A member of Aave DAO, known by the pseudonym EzR3aL, pointed out that Aave Labs recently integrated CoW Swap services, originally intended to optimize user trading paths, but on-chain data indicates that the fees generated from this integration no longer flow into the DAO, but instead go directly into Labs' private address. At the current rate, approximately $10 million will flow out of the DAO treasury in a year.
EzR3aL raised concerns to the community: why were the fee matters not consulted with the DAO in advance? And argued that these fees should belong to the DAO. Labs' position is that this is revenue from the front-end and product layers, thus belongs to Labs and is unrelated to the protocol side.
This conflict is superficially about the allocation of $10 million in revenue, but on a deeper level, it serves as a warning for DeFi governance structures.
Fees that should have entered the DAO treasury were directed to a private address controlled by Aave Labs.
On December 4th, Aave Labs announced a deepened collaboration with CoW Swap, using a batch auction execution system to handle asset exchanges, collateral exchanges, debt exchanges, and repayment with collateral functions, allowing users to manage various aspects of on-chain loans on a single platform. In addition to reducing gas fees, it also protects users from the impact of front-running transactions through anti-MEV execution methods.
According to DefiIgnas's explanation, under previous settings, referral income (referral fees earned from partner platforms) and positive slippage (excess assets generated during exchanges) were all transferred to Aave DAO treasury as income.
But the integration of CoW Swap changed the flow of income. After EzR3aL investigated the destination, it was found that the fees that should have entered the DAO treasury were being directed to a private address controlled by Aave Labs. The community questioned: why was there no consultation with the DAO before deciding the direction of CoW Swap-related income? And argued that this revenue should belong to the DAO.
EzR3aL posted that currently, another entity rather than Aave DAO is earning at least $200,000 in Ether weekly from this integration, estimating this could represent a potential income of about $10 million annually that has not flowed into the DAO treasury.
Aave Labs insists that the previously excess income was voluntarily donated to the DAO, not an obligation.
Regarding this incident, DAO members believe that it amounts to 'invisible privatization' of community assets. They pointed out that Aave Labs had previously received funding support from the DAO to develop these features, thus they have a 'fiduciary duty' to emphasize returning profits to the funders.
On the other hand, Aave Labs claims that Aave is their independently developed and maintained 'front-end product,' not a protocol contract directly governed by the DAO. Labs founder Stani Kulechov emphasized in his response that the previous excess income from ParaSwap was voluntarily donated to the DAO, not an obligation. This switch to CoW Swap is an upgrade invested by Labs at their own expense, which does not affect the openness of the protocol.
Marc Zeller, founder of the Aave-Chan Initiative, a delegation platform participating in Aave governance, described the decision to specifically allocate CoW Swap fees to Aave Labs as unacceptable.
The conflict of interest between the DAO and Labs is not the first time, highlighting the on-chain governance dilemma.
This is not the first time Aave has experienced friction between the DAO and Labs. Over the past few years, several deployment plans proposed by Aave Labs have been approved by DAO votes, ultimately leading the DAO's expenditures to exceed revenues. For example, the Horizon product has caused significant controversy, and after being approved by DAO votes, the DAO committed to injecting $500,000 in incentive funds to attract users. However, Horizon has only generated about $100,000 in revenue to date, resulting in a direct loss of $400,000 on the DAO's books.
Worse yet, tens of millions of GHO stablecoins were supplied to the Horizon market, but the yields obtained from these GHO are lower than the costs needed to maintain GHO's peg. This means that in addition to a direct loss of $400,000, the DAO continues to bear interest rate loss, resulting in an actual total loss far exceeding the accounting figures.
Aave Labs proposed projects with DAO funding support, but when projects performed poorly, all losses were borne by the DAO and token holders, while Labs could profit from other channels (such as service fees or cooperative revenues related to Horizon). The core question from DAO members is: if the DAO bears the risks and costs, why don't the revenues flow back correspondingly?
DAO members believe that the value of this brand comes from the DAO's conservative risk governance, the token holders bearing the protocol risks, the DAO paying service provider fees, and the protocol surviving through multiple crises to earn a reputation for security. However, Aave Labs is now leveraging this brand and user trust established with DAO funding to profit independently at the front-end interface and product level, but these profits do not flow back to the DAO?
As EzR3aL said, the value of the Aave brand has been accumulated over many years through the DAO's use of funds, governance, and risk-bearing. 'These fees can only be generated if the Aave brand is widely recognized and accepted by the market, and this brand was established at the cost of Aave DAO.'
Uniswap has also encountered governance issues, ultimately reflected in token prices?
If this pattern continues, AAVE token holders will face a paradox: the usage of Aave products increases, but the token value cannot grow correspondingly, as the value is captured by Labs outside the protocol. This is also why the DAO bears risks and needs to bring controversies to the forefront; they are defending the brand and intellectual property that the DAO has been managing all along, as ultimately, only the token holders will be harmed.
YCC founder Duo Nine stated that Aave Labs redirected income to their own pockets without informing anyone, rather than to AAVE token holders or the DAO treasury, simply arguing that they own the IP and front-end, thus they can handle it as they wish. 'In this case, AAVE's governance is just a smokescreen.'
The Aave incident is repeating the mistakes of Uniswap in 2023.
In October of that year, Uniswap Labs charged a 0.15% fee on front-end transactions of specific tokens (mainstream tokens such as ETH, USDC, WBTC, and stablecoins), which sparked controversy because the Uniswap protocol, Uniswap Labs, and Uniswap Foundation operate independently.
This policy will primarily harm the interests of UNI holders. The Uniswap protocol originally planned to charge transaction fees through a 'fee switch,' with the revenue distributed to UNI token holders, but Labs has already started collecting front-end fees. If the protocol fees are initiated, users will have to bear double charges, making it more difficult to implement the fee switch and depriving UNI holders of the opportunity to receive dividends.
Secondly, in the fiercely competitive DEX market, various platforms are lowering fees to attract users. Uniswap Labs has imposed an additional 0.15% fee, forcing users to switch to free third-party Uniswap front ends or other aggregators, resulting in significant uncertainty for Labs' actual revenues.
Duo Nine commented on the Aave incident, stating that Aave is following in Uniswap's footsteps, which means that the team's profit distribution is opaque. 'If Aave wants to avoid Uniswap's situation, it needs to resolve this issue quickly. Otherwise, if Labs can redirect revenue at will and let AAVE holders bear the losses, then holding AAVE tokens would be meaningless.'
However, a significant turning point occurred in November this year. Uniswap Labs and the Uniswap Foundation jointly proposed the UNIfication governance proposal, finally preparing to launch the fee switch mechanism that the community has long awaited.
The core content of the proposal includes: using protocol fees to burn UNI tokens, directly destroying 100 million UNI tokens from the treasury (symbolizing the revenue that should have been burned if the fee mechanism had been initiated back then) and a key point, Uniswap Labs will stop earning fees from interfaces, wallets, and APIs, directly responding to the aforementioned controversy of the 0.15% front-end charge. In addition, the proposal will integrate governance structures, with the Uniswap Foundation merging into Uniswap Labs, managed by a single team responsible for ecosystem development.
According to the latest news, the proposal has received support of over 63,000,000 UNI tokens in the initial Snapshot vote, with almost no opposition.
Regardless of whether it's Aave or Uniswap, the earlier controversies reflect the practical dilemmas faced by current DeFi governance: when the boundaries of responsibility and authority among the protocol side, product side, and brand side are blurred, conflicts of interest are difficult to avoid. In the early stages of the project, this ambiguity may promote flexible cooperation, but when it comes to actual profit distribution, it can easily lead to disputes.
The core issue of the Aave incident lies in the lack of a clear revenue distribution mechanism and transparent decision-making process between the DAO and Labs. If this issue cannot be resolved properly, it will not only affect the value of AAVE tokens but may also weaken the community's confidence in governance.
