Yearly Loss of Ten Million Revenue Triggers Governance Dispute, Aave Labs Accused of "DAO Treachery"
Original Title: Who Owns 'Aave': Aave Labs vs Aave DAO
Original Author: Ignas, Crypto KOL
Original Translation: Felix, PANews
Recently, Aave Labs and Aave DAO engaged in a debate regarding fee distribution related to the CoWSwap integration, which the community also sees as a potential DeFi governance crisis. The author of this article provides an interpretation of this debate from a neutral perspective. The following is a detailed overview.
On December 4th, the lending protocol Aave Labs switched the default exchange integration of its front end interface aave.com from ParaSwap to CoWSwap. While this seemed like a minor product update, it actually exposed a deep-seated internal conflict within Aave.
This conflict is not about CowSwap, fees, or even user experience but about ownership. Specifically, it questions who controls Aave, who decides on the allocation, and who captures the value created around the protocol.
In the old setup, the exchange feature primarily served user retention:
Users could rearrange or exchange assets without leaving the Aave interface. Importantly, all referral fees or positive slippage surplus fees were redistributed as revenue to the Aave DAO treasury.
CowSwap's integration changed this dynamic.
According to Aave documentation, exchanges now incur a fee of around 15 to 25 basis points. Orbit, on behalf of EzR3aL (Note: A senior governance participant of Aave DAO and an independent delegate), investigated the destination of these fees and concluded: these fees no longer go to the DAO treasury but flow to an address controlled by Aave Labs.
“Assuming only 200,000 USD is transferred per week, the DAO loses at least 10 million USD annually.” — EzR3aL
Has Aave Labs unilaterally cut off the DAO's revenue source and transferred it to a private company?
Aave has operated smoothly over the years because even though the division of responsibilities is blurred, the interests of all parties have remained aligned.
· DAO Governance Protocol
· Aave Labs Building Frontend Interface
Funds have mostly flowed in one direction, so nobody cared too much to define the issue.
But now, this tacit coordination seems to have broken down.
As Aave founder and CEO Stani.eth wrote:
· "At that time, Aave Labs decided to donate to the Aave DAO in those cases (funds that could have also been returned to users)"
Aave Labs' response: "The protocol and the product are separate concepts."
In a response from Aave Labs on the forum:
· "The frontend interface is operated by Aave Labs, completely separate from the protocol and DAO governance."
· "The frontend interface is a product, not a protocol component."
From their perspective, this is normal. Running a frontend requires funding, security requires funding, support also requires funding.
The surplus from Paraswap flowing to the DAO is not a permanent rule. There is no precedent to follow.
ACI (Aave DAO Servicing Provider) and its founder Marc Zeller see this as an issue of entrusted responsibility.
"Every servicing provider on the Aave DAO payroll has a mandatory entrusted obligation to the DAO, thereby being accountable to AAVE token holders' best interest." —Marc Zeller in forum comments.
He believes there is a tacit understanding: the DAO lends its brand and intellectual property, and profits from the frontend should also belong to the DAO. "It seems we have taken this for granted all along."
Marc Zeller also claims that the DAO has lost income, and routing decisions could direct volume to competitors, resulting in a potential loss of around 10% of income to the Aave DAO.
Protocol vs. Product
Aave Labs has drawn a clear line between the protocol and the product.
The DAO manages the protocol and its on-chain economy. Aave Labs operates the frontend interface as a separate and independently conceptualized product.
As explained by the Aave founder in this tweet:
· Aave Labs' frontend interface is a product that is fully aligned with our own principles, which we have been developing for over 8 years, similar to other interfaces using the Aave protocol, such as DeFi Saver.
· It is entirely reasonable for Aave Labs to monetize its product, especially since it does not touch the protocol itself, and given the ByBit security incident, this ensures secure access to the protocol.
The Aave DAO does not own intellectual property because the DAO is not a legal entity and cannot hold trademarks or enforce trademark rights in court.
The DAO governs the smart contracts and on-chain parameters of the Aave protocol but does not govern the brand itself.
However, the DAO has been granted a license to use the Aave brand and visual identity for protocol-related purposes. Past governance proposals have explicitly granted the DAO extensive rights to use the visual identity "for the benefit of the Aave protocol, Aave ecosystem, and Aave DAO."
Source: Aave
As EzR3aL puts it:
"The reason why charging this fee is viable is because the Aave brand is well known and accepted in the ecosystem. This is the brand that the Aave DAO has paid for."
The value of the Aave brand does not come from a logo.
Its value comes from:
· The DAO prudently managing risk
· Token holders bearing protocol risk
· The DAO paying fees to service providers
· The DAO surviving multiple crises without collapsing
· The protocol earning a reputation for being secure and reliable
This is what EzR3aL refers to as the "brand that the DAO has paid for."
Not in a legal sense of payment, but in an economic sense of paying through investment of funds, governance, risk, and time.
Does that sound familiar?
Once again, we are back to the Uniswap Labs and Foundation regarding a similar issue on Uniswap frontend fees. Ultimately, Uniswap realigned equity and token holder incentives, completely removing the frontend fee.
This is why Equity/DAO dynamics are harmful (as I found out from the Telegram group chat).
The content above is as follows:
“The Equity issued a token and distributed these tokens to themselves and others. If the DAO generates profits, Equity can earn a portion of the profit through the token share it holds in the DAO.
· However, Equity does not bear the product's losses; these losses are borne by the DAO.
· Equity also does not manage risk; risk management is the responsibility of the DAO.
Users do not directly interact with the ‘contract’ but rather with specific implementation versions that have specific risk parameters and liquidity tied to that specific implementation.
If Equity wants to earn additional revenue beyond the profits generated from the tokens it originally minted and distributed to itself, everyone agrees it can very well go develop a separate product to offer services to users, much like how DeFi Saver is a standalone product and charges for its unique services.
Access to a product should not be restricted to a single frontend.”
At the time of writing, the only acknowledgment by Aave Labs of the critics’ point was on the communication front.
· The real fair criticism here is the communication. Or lack thereof.
Things were complicated enough, and now they are worse.
Aave Labs proposed Horizon as an exclusive RWA instance.
Initially, the proposal included something that immediately raised DAO alarms: a new token with diminishing yield shares.
Representatives of various factions strongly opposed this (including the author), believing that introducing a separate token would dilute AAVE's value proposition and undermine cohesion.
The DAO prevailed, and Aave Labs was forced to concede. The new token plan was scrapped.
But this has sparked even greater division.
Despite numerous concerns (including one specifically pointing out Aave Labs' and the DAO's clear responsibilities), Horizon went live. This was the most contentious vote win yet.
I voted against deployment, advocating for a friendly agreement to avoid future escalation of conflicts. And that's exactly the current situation. The economic issue has rapidly become the focal point of the conflict.
According to data cited by Marc Zeller, so far, Horizon has generated about $100,000 in total revenue, while the Aave DAO has allocated $500,000 in incentive funds, leaving its net assets at approximately -$400,000 on the books.
And that's not even taking into account other factors.
Marc also points out that tens of millions of GHO have been supplied to Horizon, but the returns are lower than the cost needed to maintain the GHO's pegged price.
If these opportunity costs are factored in, the DAO's true economic situation may be even worse.
This has prompted ACI to raise an issue beyond Horizon itself:
If a project funded by the DAO has directly poor economic performance, is that the whole story?
Or are there additional benefits, integration costs, or off-chain arrangements that token holders are not seeing?
Over the years, deployments and plans proposed by multiple Labs have ultimately resulted in the DAO's costs exceeding its returns.
Days after Aave Labs proposed a DAO motion to deploy Aave V3 on MegaETH, discussions ensued.
In return, "Aave Labs will receive 30 million points from MegaETH".
Then, "these points may be distributed as incentives on the Aave V3 MegaETH market following Aave DAO's GTM strategy."
The issue lies in the transparency and assurance of incentive distribution according to the agreement when a product is operated by a private entity using DAO-backed assets.
Source: Aave
The surprising aspect of this proposal has another reason:
The Aave DAO collaborates with multiple service providers, particularly ACI, which proposed a deployment on MegaETH as early as March. The relevant discussions are still ongoing.
Source: Aave
As Marc commented on the forum:
"During the discussions, we were very surprised to find that Aave Labs decided to bypass all precedents, abandon all ongoing progress, and reach out directly to MegaETH. We only found out about this when the proposal was posted on the forum."
Treasury
Another part of this debate is related to the Aave Treasury.
The Aave Treasury is an application-level product built and funded by Aave Labs. Technically, they are ERC-4626 Treasury Wrappers built on top of the Aave protocol to abstract position management for users.
Stani explained this very clearly:
"The Aave Treasury is simply a 4626 Treasury Wrapper built and funded by Aave Labs."
From Aave Labs' perspective, this should not be a point of contention.
Treasuries are not protocol components. They do not impact the protocol's revenue.
They are optional, and users can always interact directly with the Aave markets or use third-party Treasuries.
· "For Aave V4, this Treasury is not mandatory... Users can interact with Aave V4 directly through Hubs."
And since Treasuries are products, Aave Labs believes they are entitled to profit from them.
· "It is perfectly fine for Aave Labs to profit from their products, especially since they do not involve the protocol itself."
So why was the Treasury brought into this fight?
The reason lies in the distribution channel.
If the Treasury becomes the default user experience for Aave V4, then a Labs-owned, Aave-branded product could serve as a bridge between users and the protocol, leveraging the reputation, liquidity, and trust built upon the DAO to capture fees.
Despite the adoption of Aave’s product, the AAVE token will still be affected.
Again, the author argues that this issue falls into the same category as the debate between Uniswap Labs and the Foundation over front-end products.
In conclusion, CowSwap, Horizon, MegaETH, and Aave Vaults all face the same issue.
Aave Labs sees themselves as independent builders operating a product with subjective views on top of a neutral protocol.
The DAO increasingly sees the protocol’s value being realized outside its direct control.
The Aave DAO does not own intellectual property, but it has been authorized to use the Aave brand and visual identity for protocol-related purposes.
This debate is crucial because the upcoming Aave v4 explicitly aims to shift complexity from the user side to the abstraction layer.
More routes, more automation, and more products between users and the core protocol.
More abstraction means more user experience control, and user experience control is precisely where value creation/extraction lies.
This article seeks to maintain neutrality. However, consensus is still hoped to be reached regarding value capture for $AAVE token holders.
The consensus the author hopes for is beneficial not only for Aave itself but also because Aave has set an important precedent for how equity and tokens can coexist.
Uniswap Labs has already gone through this process and ultimately made it beneficial for $UNI holders.
Aave should do the same.
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