A power struggle is unfolding within a decentralized finance giant, and behind the controversy of losing tens of millions in annual revenue lies the governance dilemma faced by the DeFi world at large.

Aave Labs recently migrated its front-end interface's default exchange integration from ParaSwap to CoW Swap. This seemingly ordinary product update sparked strong protests from the Aave DAO. Anonymous DAO member EzR3aal revealed on the governance forum that the fees generated after this change no longer flow into the Aave DAO treasury but instead go to a private address controlled by Aave Labs.

According to estimates, approximately $200,000 in fees are transferred weekly, which means the DAO could potentially lose at least $10 million in revenue annually. This finding quickly ignited intense debate within the Aave community and exposed the long-standing governance challenges of decentralized protocols.

01 The power struggle between the protocol layer and the product layer

The Aave ecosystem consists of two core parts: Aave DAO represents the protocol layer, while Aave Labs represents the product layer. Aave DAO is a decentralized governance organization composed of AAVE token holders, controlling the smart contracts and treasury of the protocol.

Aave Labs is the development team responsible for building, updating, and maintaining the protocol, managing front-end, branding, product marketing, and partnerships. Ideally, both parties work together to promote the development of the Aave ecosystem.

However, the CoW Swap integration incident broke this balance. Aave Labs clearly delineated the boundaries between “protocol” and “product” in its forum response: “The front-end interface is operated by Aave Labs, completely independent of the management of the protocol and DAO.”

Marc Zeller, founder of ACI (the service provider for Aave DAO), pointed out that this is an issue of fiduciary duty. He questioned, “Did Aave Labs unilaterally cut off the DAO's source of income and transfer it to a private company?”

02 The historical contradictions of profit distribution

This dispute is not the first disagreement between Aave DAO and Aave Labs. In March of this year, the Horizon plan proposed by Aave Labs sparked strong opposition from the community.

According to the original proposal, the profit distribution ratio for Horizon would decrease from 50% in the first year to only 10% in the fourth year and beyond. What further displeased the community was that the plan also included the possibility of issuing new tokens, of which only 15% would be allocated to Aave DAO.

At that time, community member gregrwalsh criticized: “I don't understand why Aave tokens should be diluted. If a new token is needed, it should maintain a 1:1 relationship with Aave tokens.” Faced with strong opposition, Aave founder Stani Kulechov ultimately promised to respect DAO consensus and no longer insisted on the issuance of a new token.

However, the actual performance of Horizon after going live has not been ideal. According to data cited by Marc Zeller, Horizon generated only about $100,000 in total revenue, while Aave DAO invested $500,000 in incentive funds, resulting in a net asset value of approximately negative $400,000.

03 The dispute over brand value and contributions

Aave Labs claims that its control over the front end is reasonable, emphasizing that running the front end requires funding, security, and support. Aave founder Stani stated: “At that time, Aave Labs decided to donate to Aave DAO under those circumstances (the funds could have been returned to users).”

However, DAO supporters believe that the value of the Aave brand is co-created by the DAO. EzR3aL pointed out: “The feasibility of charging this fee is because the Aave brand is well-known and accepted in the ecosystem. This is the brand that Aave DAO has paid a price for.”

This brand value is reflected in multiple aspects: the DAO cautiously manages risks, token holders bear the risks of the protocol, the DAO pays fees to service providers, and the reputation of the protocol has survived multiple crises without collapsing.

Aave Labs emphasizes its historical contributions. Stani mentioned: “If it weren't for Emilio convincing me to adopt the design direction of the Aave protocol during 2018-2019, when we were still working on ETHLend, the Aave protocol might not exist at all.”

04 The practical challenges of governance dilemmas

This debate reveals the general governance dilemma of DeFi projects. In theory, the DAO can replace the development team through voting rights. However, the reality is much more complex. Even for projects with a certain market share, when internal problems arise in the team, changing the team may lead to the loss of market competitiveness.

As a decentralized organization, the DAO has voting rights but finds it difficult to operate efficiently. A proposal may go through multiple formulations, modifications, and negotiations from the start, and the success of the project requires a professional team and continuity.

In contrast, Aave Labs, as a centralized entity, can more effectively 'control' the development of the protocol (which requires collaboration with the DAO). This structural asymmetry makes it difficult to clearly define the distribution of power and interests.

Similar contradictions have not appeared for the first time in the DeFi field. There were similar issues regarding front-end fees between Uniswap Labs and the foundation. Ultimately, Uniswap chose to readjust equity and the rights of token holders, completely canceling front-end fees.

05 Transparency and the possibility of future reconciliation

In response to the controversy, community members have made constructive suggestions: in the future, Labs should announce in advance that its product revenue will flow to Labs rather than DAO, or clearly define the revenue sharing ratio between the two.

Aave Labs also acknowledges deficiencies in communication. The lack of prior communication has exacerbated misunderstandings and opposition between both parties.

With the launch of the Aave V4 version, this issue will become more urgent. The new version is explicitly designed to shift complexity from the user side to the abstraction layer, which means more routing, automation, and products positioned between the user and the core protocol. More abstraction means more control over user experience, which is the key point of value creation and extraction.

Summary

The DAO can vote to decide to change the development team, but the reality is much more complex. Even if projects like Sushi can change teams through the DAO, the result of such splits is often not ideal. Aave founder Stani eventually compromised in the previous Horizon controversy, stating, “Aave DAO is a real DAO, and any preliminary discussions and consensus reached must be respected.”

In the future, the Aave community may push for a clearer revenue-sharing agreement. This not only concerns the development of Aave itself but will also set an important precedent for the entire DeFi industry, demonstrating how equity and tokens can coexist.