The Governance Struggle Behind The Power Play Of Aave DAO And Aave Labs

This article is reposted from Chaincatcher.

Recently, the Aave DAO vs Aave Labs controversy has been quite heated, focusing on the governance power dispute between the protocol layer and the product layer, which reflects the governance dilemma across the entire industry. I have organized some thoughts on this issue. Who is the true owner of Aave?

1/6 · The Origin of the Issue

Aave Labs replaced the front-end integration of ParaSwap with CoW Swap, and the resulting fees flowed to Labs’ private address. An anonymous DAO member, EzR3aL, exposed this matter on the governance forum, accusing Labs of “privatizing” the protocol’s value. Labs’ stance is that this belongs to front-end and product layer revenue, owned by Labs and unrelated to the core of the protocol.

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

DAO represents the Protocol (protocol layer)
Labs represents the Project (product layer)

The core controversy is whether Aave is a Protocol (managed by DAO) or a Project (built by Labs)? And how this affects the rights to revenue.

Aave DAO is easy to understand; it is a governance organization unique to the crypto world, composed of holders of the $AAVE token, who vote to exercise power within the DAO. Almost 90% of crypto projects have this structure, and the definition of “governance token” comes from this. Its greatest power is to vote on project proposals, deciding whether to implement certain updates and developments, as well as the future direction.

Aave Labs, on the other hand, 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 often assumed to be Aave. Its founders are also quite influential on social media.

Generally speaking, Aave Labs and Aave DAO need to collaborate. For example, Labs will propose many development plans, optimize certain features, and even upgrade versions V3 and V4. These plans are led by Aave Labs but ultimately decided by DAO votes. Usually, when both parties have aligned interests, they support each other, forming Aave together.

3/6 · What Core Resources Do They Control?

Once interests conflict, it is possible to separate these two roles, as they are independent entities. Let’s look at the core resources and powers each possesses:

Aave DAO controls the underlying core, such as smart contracts and treasury control, which are in the hands of the DAO. Although Labs can propose development plans, they need to be approved by DAO votes 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 a Protocol, such as Aave? Bave? Cave?

Aave Labs controls the front-end, brand, product marketing, and partnerships. Therefore, it directly communicates with users and represents a well-functioning product.

Supporters of Labs generally believe that the integration of CoW Swap is purely a front-end action and unrelated to Aave’s underlying architecture. They argue that Labs can unilaterally decide not to integrate it, and thus any generated revenue naturally belongs to Labs. Conversely, DAO supporters argue that this is a form of plunder, as the existence of the AAVE governance token means that all benefits should first flow to AAVE holders or remain in the treasury to be decided by DAO votes. Additionally, previously, ParaSwap’s revenue would continuously flow into the DAO, and the new CoW Swap integration changed this status, further leading the DAO to perceive this as a plunder.

Both sides hold their ground.

4/6 · Governance Dilemma

This reflects a rather awkward governance and power dilemma. From the perspective of $AAVE holders, they typically stand with the DAO, as revenue entering the treasury benefits token holders. Although Labs has corresponding expenses each year, they can report these through the DAO. If they can profit independently, it seems that community power is gradually being consumed.

However, from Aave Labs’ perspective, although the theoretical core control lies with the DAO, plans must be voted on before implementation. Since the first version of Aave, Labs has played a unifying role, making significant contributions to the project’s growth. 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 working on ETHLend, I think the Aave protocol might not exist at all.”

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 project’s future. When the team no longer holds voting rights, they could even be forcibly replaced.

However, the gap between reality and the ideal state is significant. Even for projects with a certain market share, when internal issues or disputes arise, they can easily lose market presence after the drama, as seen with Sushi. The DAO can exercise power, and the project can change personnel. Thanks to the design of smart contracts, even if a project undergoes a major overhaul, it can still maintain the original stability at the functional level. However, past cases show that the results of splits usually lead to unfavorable outcomes.

The core issue here is that, currently, the DAO is a decentralized organization. Although it has voting rights, it struggles to operate efficiently. The community may have independent developers, VCs, and large holders. Once each role begins to fully exercise its power, a proposal may undergo multiple rounds of drafting, modification, and negotiation from the start. The success of a project requires a professional team and continuity. The DAO can hire a new team, but it may struggle to quickly connect and iterate, easily losing market position. Thus, Labs’ existence appears to be an entity that can “control” the protocol (which needs to collaborate with the DAO).

Personally, I tend to favor a solution that balances the distribution of interests between the two. However, everything is still under discussion, and no governance vote has occurred. The potential hidden danger behind this is that even if a resolution is ultimately reached, this incident has already exposed the divergence in expectations between the founding team and token holders.

In the long run, I remain optimistic about Aave’s development, as it is one of the few DeFi projects that has been validated by the market and possesses a strong moat. The contradiction of governance power is an issue that the entire industry needs to face. How Aave handles this incident may become a case study for the future.

6/6 · Voices and Discussions

Arguments have arisen, with Emilio believing that some are maliciously devaluing Aave Labs’ contributions and value. ACI team members pointed out that Aave Labs has attempted to exploit the DAO multiple times and has been exposed.

Community members’ suggestions for Labs:

In the future, Labs should announce in advance that the revenue from the products they build will flow to Labs, not the DAO.
Alternatively, clearly define the revenue-sharing ratio between the DAO and Labs.
Establish a transparent page on the Aave main website or Labs website to provide clear information, helping investors interested in the $AAVE token (especially institutions or funds) make judgments.

Although the DAO model is controversial, the token holders of Aave DAO are the most active and vocal group, demonstrating the community’s vitality. The front-end, website, and applications are the focal points of the dispute, where “each side holds its ground,” lacking clear definitions.

Zeller’s accusations against Labs for extracting protocol value:

The projects he listed (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.

He also mentioned the V4 version, noting that the DAO has spent $15 million so far, and compared to the liquidity moat of V3, the value proposition is unclear. He expressed concerns about whether this is a new trap for extracting revenue.

In the process of innovation, failure is inevitable. Not every feature or product can succeed. The DAO is, to some extent, investing in Aave Labs’ R&D capabilities. My understanding is that Zeller is not denying contributions but is calling for higher standards of accountability, transparency, and value alignment.