Aave Sovereignty Dispute: Agreement to DAO, Products to Labs?

Author: Chen Mo (cmDeFi)

The recent heated debate between Aave DAO and Aave Labs, a dispute over governance power at the protocol and product levels, reflects a broader governance dilemma across the industry. This article analyzes the issue: Who truly owns Aave?

1. Cause of the incident

Aave Labs replaced its frontend-integrated ParaSwap with CoW Swap, and the resulting fees flowed to Labs' private address. Anonymous DAO member EzR3aL exposed this on the governance forum, accusing Labs of "privatizing" the protocol's value. Labs' position is that this revenue belongs to the frontend and product layers and belongs to Labs, and is unrelated to the protocol's core.

2. First, let's break down who Aave DAO and Aave Labs are.

• DAO stands for Protocol (protocol layer)
• Labs stands for Project (product level)

Aave DAO is easy to understand; it's a unique governance organization in the Crypto world, composed of holders of $AAVE tokens who vote and exercise power within the DAO. Almost 90% of crypto projects use this structure, hence the definition of "governance token." Its greatest power is voting on project proposals, deciding whether to implement updates and developments, and determining the project's future direction.

Aave Labs is a development team responsible for building, updating, and maintaining the protocol (such as the front-end interface and mobile app). They also typically maintain the Aave brand and IP, so on social media and in the market, Aave Labs is usually used interchangeably with Aave. Its founders are also quite influential on social media.

Generally, Aave Labs and the Aave DAO need to collaborate. For example, the Labs develops many plans, optimizes certain functions, and even upgrades to versions V3 and V4. These plans are led by Aave Labs, but the final decision is made by the DAO through a vote. Usually, when their interests align, they support each other and together constitute Aave.

3. What core resources do they each control?

If a conflict of interest arises, these two roles can be forcibly separated, because they are two independent entities. Let's examine the core resources and power they each possess:

The Aave DAO controls the underlying core, such as smart contracts and the treasury. While Labs can propose development plans, they need to be voted on by the DAO before implementation. Therefore, it is a protocol, and any product can operate on top of it. Theoretically, multiple front-end products can be built on a single protocol, such as Aave, Bave, or Cave.

Aave Labs handles front-end development, branding, product marketing, and partnerships. Therefore, it communicates directly with users and represents a high-quality product.

Therefore, Labs supporters generally believe that the integration of CoW Swap is entirely a front-end action, unrelated to the underlying architecture of Aave. They even argue that Labs could unilaterally decide not to integrate, and any revenue generated would naturally belong to Labs. Correspondingly, DAO supporters view this as exploitation, arguing that with the existence of the AAVE governance token, all benefits should prioritize flowing to AAVE holders or remaining in the treasury for the DAO to decide through voting. Furthermore, previously, ParaSwap revenue continuously flowed into the DAO; the new CoW Swap integration changes this, further reinforcing the DAO's perception of exploitation.

Both sides have their own version of events.

4. Governance Dilemmas

This reflects a rather awkward governance and power dilemma. From the perspective of $AAVE holders, they usually side with the DAO because it is beneficial for token holders for the revenue to go into the national treasury. Although Labs has corresponding expenses every year, it can be accounted for through the DAO. If a separate channel can be opened to make a profit, it seems that the community's power is being gradually eroded.

From Aave Labs' perspective, although theoretically the core control lies with the DAO and the final plan must be approved by vote before implementation, Labs has played a coordinating role since the first version of Aave, making significant contributions to the project's growth. As Stani said, "If Emilio hadn't convinced me to adopt the design direction of the Aave protocol in 2018-2019, when we were still working on ETHLend, I think the Aave protocol might not even exist."

Who is the true owner of Aave?

5. Power struggles

This governance dilemma exists in most projects. Governance tokens are purchased with real money, and ideally, these holders should jointly decide the future of the project. When the team no longer holds voting rights, they can even force the replacement of Labs.

However, the gap between reality and the ideal is significant. Even projects with a certain market share can easily lose market share when internal team problems and disputes arise, leading to a fiasco. Sushi is a good example; the DAO can exercise power, and project personnel can be replaced. Although thanks to the design of smart contracts, even with a major overhaul, the original stability of the product functionality can be perfectly preserved, past cases show that splits usually result in negative outcomes.

The core issue here is that, currently, DAOs are decentralized organizations. While they possess voting rights, they struggle to operate efficiently. The community may include independent developers, VCs, and large investors. Once each role begins to fully exercise its power, a proposal may undergo multiple rounds of drafting, modification, and negotiation from its inception. A project's success requires a professional team and continuity. While a DAO can hire new teams, it may struggle to quickly integrate and iterate, easily losing its market position. Therefore, Labs, on the surface, resemble entities capable of "controlling" the protocol (requiring collaboration with the DAO).

Personally, I prefer that the two sides eventually reach a solution that balances the distribution of benefits. However, everything is still under discussion, and there has been no governance vote yet. The potential hidden danger is that even if a settlement is eventually reached, this incident has already exposed a divergence in expectations between the founding team and token holders.

In the long run, I remain optimistic about Aave's development because it is one of the few DeFi projects that has been proven by the market to have a strong competitive advantage. The conflict of governance power is a problem that the entire industry needs to face. How Aave handles this incident may become a model case for the industry in the future.

6. Sound and Discussion

The argument escalated, with Emilio believing someone was maliciously downplaying Aave Labs' contributions and value. ACI team members countered that Aave Labs had repeatedly attempted to exploit DAO, only to be exposed.

Community members' suggestions for Labs:

• In the future, Labs should announce in advance that the revenue from the products it builds will go to Labs, not DAO.
• Alternatively, the revenue sharing ratio between the DAO and Labs can be clearly defined.
• Establish a transparency page on the Aave main website or Labs website to provide clear information and help investors (especially institutions or funds) interested in the $AAVE token make informed decisions.

Despite the controversy surrounding the DAO model, Aave DAO's token holders are the most active and vocal group, demonstrating its community vitality. The front-end, website, and application are the focal points of contention, where conflicting interpretations and clear definitions are common.

Zeller's allegations regarding Labs' value extraction protocol:

The projects it cites (Portals, Credit Delegation Vault, Lens, etc.) do indeed demonstrate that many of Aave Labs’ exploratory initiatives have failed to directly translate into revenue or significant adoption of the protocol.

The article also mentions version V4, which DAO has spent $15 million to date. Compared to the liquidity moat of version V3, its value proposition is unclear, raising concerns about whether this is a new revenue-extracting trap.

Failure is inevitable in the innovation process. Not every feature or product will succeed. DAO is, to some extent, an investment in Aave Labs' R&D capabilities. My understanding is that Zeller is not denying contributions, but rather calling for higher standards of accountability, transparency, and value alignment.