Author: Chloe, ChainCatcher
Recently, a dispute has surfaced between Aave DAO and Aave Labs. The former is responsible for the governance protocol, while the latter is the developer of Aave products.
The crux of the controversy lies in the fees incurred from the recently announced deep integration with CoW Swap. An Aave DAO member, using the pseudonym EzR3aL, pointed out that Aave Labs' integration of the CoW Swap service, intended to optimize user transaction paths, has resulted in on-chain data showing that the fees generated by this integration no longer flow into the DAO but directly into Labs' private address. At the current rate, this amounts to approximately $10 million flowing out of the DAO treasury annually.
EzR3aL raised concerns with the community: why wasn't the DAO consulted beforehand regarding the fees? He argued that these fees should belong to the DAO. Labs' position was that these were revenues from the front-end and product layers, therefore belonging to Labs and unrelated to the protocol side.
On the surface, this conflict is about the ownership of $10 million in profits, but at a deeper level, it serves as a wake-up call for DeFi governance structures.
Funds that should have gone into the DAO treasury were redirected to a private address controlled by Aave Labs.
On December 4th, Aave Labs announced a deepened partnership with CoW Swap, utilizing a bulk auction execution system to handle asset swaps, collateral swaps, debt swaps, and collateral repayments. This allows users to manage all aspects of on-chain lending on a single platform. In addition to reducing gas fees, the system also protects users from front-running through MEV-resistant execution methods.
According to DefiIgnas, under the previous setup, excess fees such as referral fees (commissions received from partner platforms) and positive slippage (excess assets generated during the exchange process) were transferred to the Aave DAO treasury as revenue.
However, the integration of CoW Swap altered the flow of revenue. Following an investigation by EzR3aL , it was discovered that funds that should have gone into the DAO's treasury were being redirected to a private address controlled by Aave Labs. The community questioned why the DAO was not consulted before deciding on the destination of CoW Swap-related revenue and argued that these proceeds should belong to the DAO.
EzR3aL posted that currently, another entity, not Aave DAO, is receiving at least $200,000 worth of Ether per week from this integration, estimating that this could represent approximately $10 million in potential annual revenue that has not flowed into the DAO treasury.
Aave Labs insists that its previous surplus revenue was donated voluntarily to the DAO, not under duress.
In response to this incident, DAO members believe it amounts to a “hidden privatization” of community assets. They point out that Aave Labs received funding from the DAO to develop these features and therefore has a “fiduciary responsibility,” emphasizing the need to return the profits to the funders.
On the other hand, Aave Labs insists that Aave is a "front-end product" independently developed and maintained by them, rather than a protocol contract directly governed by the DAO. Labs founder Stani Kulechov emphasized in his response that any surplus revenue from ParaSwap in the past was voluntarily donated to the DAO, not obligated. This switch to CoW Swap is a self-funded upgrade by Labs and does not affect the protocol's openness.
Marc Zeller, founder of the Aave-Chan Initiative, a delegated platform involved in Aave governance, described the decision to allocate CoW Swap fees specifically to Aave Labs as unacceptable.
This is not the first time that a DAO and Labs have clashed over their interests, highlighting the challenges of on-chain governance.
This isn't the first time Aave has experienced friction between its DAO and Labs. In recent years, several deployment plans proposed by Aave Labs, after being approved by the DAO, have ultimately resulted in the DAO's expenses exceeding its revenue. For example, the Horizon product sparked significant controversy. This RWA lending market, proposed by Aave Labs, received approval from the DAO, which pledged $500,000 in incentive funds to attract users. However, Horizon has only generated approximately $100,000 in revenue to date, resulting in a direct loss of $400,000 for the DAO.
Worse still, tens of millions of GHO stablecoins were supplied to the Horizon market, but the yield these GHO stablecoins earned was lower than the cost required to maintain the GHO peg. This means that in addition to the direct loss of $400,000, the DAO is also suffering from interest rate differential losses, with the actual total loss far exceeding the book figures.
Aave Labs proposes projects, and the DAO provides funding. However, when a project underperforms, all losses are borne by the DAO and token holders, while Aave Labs may profit from other sources (such as Horizon-related service fees or partnership revenue). The core question raised by DAO members is: if the DAO bears the risks and costs, why aren't the corresponding profits returned to it?
DAO members believe the brand's value stems from its conservative risk governance, token holders' assumption of protocol risk, the DAO's payment of service provider fees, and the protocol's reputation for security gained through its survival through multiple crises. However, Aave Labs is now leveraging the brand and user trust built with DAO funding to independently monetize its front-end interface and product, without these revenues flowing back to the DAO?
As EzR3aL stated, the value of the Aave brand is accumulated by the DAO over many years through funding, governance, and risk-taking. "These costs can only be incurred if the Aave brand becomes widely known and accepted by the market, and this brand is built at a price that Aave DAO has paid."
Uniswap has also experienced governance issues, which were ultimately reflected in the token price.
If this model continues, AAVE token holders will face a paradoxical situation: the usage of Aave products will increase, but the token value will not grow accordingly because the value is captured by Labs outside the protocol. This is why the DAO is taking the risk of bringing the controversy to the forefront; they are defending the brand and intellectual property that the DAO has been building, because ultimately, only token holders will suffer.
YCC founder Duo Nine stated that Aave Labs redirected revenue to its own pockets, rather than to AAVE token holders or the DAO treasury, without informing anyone, claiming only that they owned the IP and frontend and could do whatever they wanted with it. "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 certain tokens (such as ETH, USDC, WBTC, and other mainstream cryptocurrencies and stablecoins). This move sparked controversy because the Uniswap protocol, Uniswap Labs, and Uniswap Foundation operate independently.
This policy will first and foremost harm the interests of UNI holders. The Uniswap protocol originally planned to charge fees for transactions through a "fee switch," with the proceeds distributed to UNI token holders. However, Labs has already started charging front-end fees. If protocol fees are also activated, users will have to bear double charges, which will make it more difficult to implement the protocol fee switch, and UNI holders will lose the opportunity to receive dividends.
Secondly, in the highly competitive DEX market, all platforms are lowering transaction fees to attract users. Uniswap Labs, on the other hand, adds a 0.15% fee, forcing users to turn to free third-party Uniswap front-ends or other aggregators, making Labs' actual revenue highly uncertain.
In commenting on the Aave incident, Duo Nine believes that Aave is following the same path as Uniswap, namely, the lack of transparency in team profit distribution. "If Aave wants to avoid the Uniswap situation, it needs to solve this problem as soon as possible. Otherwise, if Labs can redirect revenue at will and make AAVE holders bear the losses, then there is no point in holding AAVE tokens."
However, the situation took a major turn in November of this year. Uniswap Labs and the Uniswap Foundation jointly proposed the UNIFication governance proposal, finally preparing to launch the long-awaited fee on/off mechanism.
The core of the proposal includes: burning UNI tokens using protocol fees; directly burning 100 million UNI tokens in the vault (symbolizing revenue that would have been burned if the fee mechanism had been implemented); and crucially, Uniswap Labs will cease earning fees from its interface, wallet, and API, directly addressing the aforementioned controversy surrounding the 0.15% front-end fee. Furthermore, the proposal will integrate the governance structure, merging the Uniswap Foundation into Uniswap Labs, with a single team responsible for ecosystem development.
According to the latest news , the proposal has received support from over 63,000,000 UNI tokens in the initial Snapshot vote, with almost no opposition.
The controversies surrounding Aave and Uniswap reflect the current dilemmas facing DeFi governance: when the boundaries of responsibility between protocols, products, and brands are blurred, conflicts of interest become inevitable. In the early stages of a project, this ambiguity might foster flexible collaboration, but it easily leads to disputes when it comes to the actual distribution of profits.
The core issue in the Aave incident lies in the lack of a clear profit-sharing mechanism and transparent decision-making process between the DAO and Labs. If this problem is not properly resolved, it will not only affect the value of the AAVE token but may also undermine the community's confidence in governance.
