The governance struggle behind the Aave DAO and Aave Labs' power game

Author: Chen Mo cmDeFi

Behind the recent dispute over governance power between Aave DAO and Aave Labs, the protocol layer and the product layer is the governance dilemma of the entire industry. I sorted out this question. Who is the owner of Aave?

1/6 · Cause

Aave Labs replaced the front-end integration of ParaSwap with CoW Swap, and the fees incurred then went to the Labs private address. Anonymous DAO member EzR3aL exposed the matter in the governance forum, accusing Labs of “privatizing” protocol value, Labs’ position is that this belongs to front-end and product layer revenue, is owned by Labs, and has nothing to do with the core of the protocol.

2/6 · First, let’s break down who Aave DAO and Aave Labs are

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

The core controversy is whether Aave is a protocol (managed by a DAO) or a project (built by Labs)? and the impact on the right to income.

Aave DAO is well understood, it is a governance organization unique to the Crypto world, composed of holders of $AAVE tokens who vote and exercise power in the DAO organization. Almost more than 90% of crypto projects are based on this structure, and the definition of “governance token” comes from this. Its greatest power is to vote on project proposals, decide whether the project will be updated and developed, and the future direction of the project.

Aave Labs is a development team responsible for the construction, update, and maintenance of the protocol. (such as front-end interfaces, mobile apps), usually they also maintain the Aave brand and IP, so on social media and in the market, Aave Labs is usually Aave by default. Its founders are also quite influential on social media.

Generally speaking, Aave Labs and Aave DAO need to work together, for example, Labs will formulate many development plans, optimization of certain functions, and even version upgrades to V3 V4, which are led by Aave Labs but ultimately decided by DAO voting. Usually, when the two have the same interests, they are mutually supportive and together form Aave.

3/6 · Which core resources do they control, respectively

Once there is a conflict of interest, if the two characters are separated, they can also be dismantled, because they are two independent individuals, take a look at the core resources and powers they have:

Aave DAO controls the underlying core, such as smart contracts and treasury, in the hands of the DAO. So it’s a protocol, the upper layer can be any product can work, theoretically you can build multiple front-end products on one protocol, Aave? Bave？ Cave is also available.

Aave Labs masters front-end, branding, product marketing, and partnerships. So it communicates directly with the user, who represents a good product.

Therefore, Labs supporters generally believe that the integration of CoW Swap is completely a front-end behavior and has nothing to do with Aave’s underlying architecture. Corresponding DAO supporters believe that this is a predation because of the existence of AAVE governance tokens, all benefits should go to AAVE holders first, or remain in the treasury and be voted on by the DAO. In addition, Previously, ParaSwap’s revenue would continue to flow into the DAO, and the new CoW Swap integration changed this state, making the DAO think it was a predation.

Both have their own opinions.

4/6 · Governance dilemma

From the perspective of $AAVE holders, they are usually on the side of the DAO, because the income entering the treasury is beneficial to token holders, while Labs can reimburse accounts through the DAO, and if they can open a separate opening to make profits, it seems that the power of the community is gradually being swallowed up.

However, from the perspective of Aave Labs, although the theoretical core control lies with the DAO, and the plan can only be implemented after it is finally voted on, from the first version of Aave to the present, Labs is a united front overall role position, which has made great contributions to the growth of the project. As Stani said, “If it weren’t for Emilio convincing me to adopt the design direction of the Aave protocol in 2018-2019, when we were still doing ETHLend, I think the Aave protocol probably wouldn’t exist at all.” ”

Who is the real owner of Aave.

5/6 · Power struggles

This governance dilemma exists in most projects, where governance tokens are bought with real money, and ideally these holders jointly decide the future of the project, and when the team no longer holds voting rights, Labs can even be forced.

For example, Sushi is a good example, DAO can exercise power, and projects can also be replaced, although thanks to the design of smart contracts, even if a project changes blood, it can perfectly retain the original stability at the product function level. But judging from past cases, the result of division is usually a bad ending.

The core problem here is that at present, the characteristics of DAO are a decentralized organization, although it has voting rights, it is difficult to operate efficiently, there may be independent developers, VCs, and large investors in the community, once each role begins to fully exercise its power, then a proposal may go through multiple iterations of formulation, modification, and game from the beginning. The success of a project requires a professional team and continuity, and DAOs can hire new teams, but it may be difficult to quickly connect and iterate, and it is easy to lose market position. Therefore, the existence of Labs is ostensibly more like an entity that can “control” the protocol (which requires collaboration with the DAO).

Personally, I prefer to finally reach a solution between the two to weigh the distribution of benefits. But at the moment everything is being discussed, and there is no governance vote. The potential hidden danger behind this is that even if a settlement is reached, this incident has exposed the divergence of expectations between the founding team and token holders.

In the long run, I am still optimistic about the development of Aave, because it is currently one of the few DeFi projects that has been verified by the market to have a strong moat, and the contradiction of governance power is a problem that the entire industry needs to face.

6/6 · Voices and discussions

Quarrel, Emilio believes that someone is maliciously belittling the contribution and value of Aave Labs. ACI team members pointed out that Aave Labs had repeatedly tried to exploit DAOs and was debunked.

Community members’ suggestions for Labs:

• In the future, Labs should announce in advance that the revenue from the products they build will go to Labs, not the DAO.
• Or clearly define the revenue share between DAOs and Labs.
• Set up a transparent page on the Aave main website or Labs website to provide clear information and help investors (especially institutions or funds) interested in $AAVE tokens make judgments.

Despite the controversial DAO model, Aave DAO’s token holders are the most active and vocal group, showing the vitality of its community. The front-end, website and application are the focus of controversy, and it is easy to have a situation of “each has its own word” and lacks clear definition.

Some of Zeller’s allegations against Labs for extracting value from the protocol:

The projects it cites (Portals, Credit Delegation Vault, Lens, etc.) do indicate that many of Aave Labs’ exploratory initiatives have not directly translated into revenue or significant adoption rates for the protocol.

It also mentions the V4 version, which the DAO has spent $15 million so far, with an unclear value proposition compared to V3’s liquidity moat, raising concerns about whether this is a new revenue-squeezing trap.

In the process of innovation, failure is inevitable. Not every feature or product is successful. The DAO is investing in Aave Labs’ R&D capabilities in a way, and I understand that Zeller is not denying contributions, but is calling for higher standards of accountability, transparency, and value alignment.

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