Author: Jae, PANews
Compared to the external pressures of the bear market, a "black swan" event actually emerged within Aave itself.
Aave, which has long held the throne in the lending industry, is experiencing the most severe ecosystem upheaval since its inception. There are no hacker attacks, no code vulnerabilities, only a loss of control over power and a falling out of interests.
From the resolute departure of technology pillar BGD Labs to the public break with governance pioneer ACI (Aave Chan Initiative), and then to the official announcement of severing ties with risk management steward Chaos Labs, a "great retreat" of service providers is unfolding.
This game is far more profound than a cooperation dispute; it has triggered the ultimate paradox of DAOs (Decentralized Autonomous Organizations): the conflict between the founder's will and distributed governance, the contradiction between protocol long-termism and capital's short-term profit-seeking, and the balance between decentralized faith and centralized efficiency in the scaling-up phase of blue-chip protocols.
Can Aave continue winning?
What's the story behind Chaos Labs abandoning its risk control responsibilities?
On April 7, Chaos Labs, which had been deeply involved in Aave V2/V3 for three years and achieved "zero major bad debts," announced that it was severing ties with Aave. The departure of this top-tier risk management institution directly hit Aave's safety red line.
Chaos Labs cited three reasons: long-term losses, the departure of major contributors BGD Labs and ACI, and fundamental differences in risk management philosophy with Aave Labs in the context of the launch of Aave V4.
The main point of contention lies with V4's "hub-and-spoke" architecture: Chaos Labs points out that while this design improves capital efficiency, it also exponentially amplifies risk. In an environment where legal liability is unclear, the risk control team has to shoulder twice the workload of maintaining both the massive V3 and V4 systems simultaneously.
Aave Labs expressed respect for this and thanked them for their years of contributions, stating that the protocol's smart contracts and network deployment remain unaffected. However, there are other reasons behind this parting of ways.
Aave Labs disclosed that it had held multiple rounds of negotiations with Chaos Labs regarding a renewal plan. It supports increasing its risk management fees from the current level to $5 million, but does not support a plan to increase them directly to $8 million without additional terms. Aave Labs also explicitly opposes the following three exclusivity clauses: making Chaos Labs the sole risk manager, replacing Chainlink with Chaos Labs oracles, and making the unaudited Chaos Labs vault the default vault for all B2B integrations.
In short, Chaos Labs wants to expand its control and commercial interests. However, for a DeFi protocol, over-reliance on a single provider for risk management significantly increases systemic risk and weakens the protocol's governance independence. For Aave, the potential risks are too great.
Moreover, in March of this year, the Aave CAPO oracle managed by Chaos Labs caused wstETH to be undervalued by about 2.85% due to an on-chain configuration error, which erroneously triggered the forced liquidation of approximately $27 million in healthy positions.
Aave Labs emphasized that it will continue to adhere to its two-tier risk management model and introduce a third-tier technology risk management mechanism led by Aave Labs. During the transition period, LlamaRisk will assume more risk coverage responsibilities, replacing Chaos Labs. Aave Labs will support LlamaRisk's team expansion and budget, and provide engineering and analytical resources to ensure a smooth transition.
Regarding Aave V4, its architecture introduces isolated risk markets, new liquidation logic, and a governance-controlled parameter mechanism through Spokes, enabling DAOs to manage the risks of different markets and assets more granularly. In the short term, Aave Labs will work closely with LlamaRisk to ensure a smooth transition in risk management and uninterrupted protocol operation.
Both technology and governance have failed, exacerbating internal risks within Aave.
In addition to its security defenses, Aave's technology and governance have also failed in the past two months.
On April 1st, BGD Labs, the technical service provider for Aave V3, announced the termination of all technical contributions, and this was not an April Fool's joke. As the main development team for V3, BGD accused Aave Labs of "artificially restricting" V3 feature development, "maliciously devaluing" its value, and even forcing users to migrate through parameters in order to push the immature V4.
BGD claims that V3 contributed 98% of Aave's code and almost all of its TVLs, generating over $100 million in annual revenue, making it the "crown jewel" of the protocol. Aave Labs shut down V4 development, marginalizing external teams. BGD Labs had no say and received no reasonable compensation, leaving them only to protest this "radical transformation" and its irresponsibility regarding user asset security by leaving.
ACI, the governance service provider led by Marc Zeller, also plans to leave in July, directly triggered by the departure of BGD Labs. Marc Zeller slammed Aave Labs for launching a "slow-motion coup": on-chain data shows that it controls 23% of the AAVE token supply, and its whale holdings crushed community proposals.
ACI's withdrawal signifies that Aave governance has shifted from "checks and balances" to "centralized control," forcing third-party service providers to become mere decorations.
Although Aave was once a model of distributed collaboration in the DeFi market—Aave Labs set the direction, third-party service providers handled development, governance, and risk control, with multiple parties complementing each other to support its leading lending position—this golden combination, which had been running for several years, is now showing more and more cracks in its system.
Painful recovery or terminal illness? Aave faces a test of investor trust.
In this complex and chaotic battle, the interests and demands of the two sides present a completely different picture.
From the perspective of Aave Labs and its founder Stani Kulechov, they hope to transform the protocol from a loose, multi-party collaboration into a more cohesive and effective closed-loop ecosystem through V4 and the "Aave Will Win" framework.
The business logic behind this transformation is that DeFi has entered a stage of scaling up, and loose collaboration alone is insufficient to meet institutional demand and global financial competition.
By concentrating resources on developing high-profit products and unifying brand ownership, Aave can improve execution efficiency, reduce fragmented decision-making, and enhance the value capture capability of the AAVE token.
Of course, this is also a problem that mature DeFi protocols will need to face in the scaling-up stage in the future. As a leading lending platform, Aave's internal turmoil has been amplified, becoming a mirror image of the entire DeFi governance model.
However, the increased efficiency of this "strongman rule" is seen as coming at the cost of sacrificing the decentralized reputation of the DAO.
Service providers essentially rely on their expertise to secure funding from DAOs. When Aave Labs attempts to marginalize them, or offers insufficient compensation to offset the growing legal and operational risks, they will inevitably choose to leave. This also reveals that under the current DAO service provider model, even top teams face the challenge of sustaining their business model.
For Aave, will the exodus of service providers be a short-term pain or a long-term incurable disease?
From an optimistic perspective, the wave of departures from service providers may be a "growing pain" in Aave's transformation process.
- Streamlined decision-making chain: With the departure of multiple external stakeholders, Aave Labs can more smoothly advance V4. This allows for a shorter product launch cycle in the face of intense market competition.
- Front-end revenue return: If the "Aave Will Win" proposal can ultimately achieve 100% front-end revenue return to the DAO, the AAVE token will transform from a simple "governance token" into a true "revenue certificate";
- Unified Technological Paradigm: V4's "hub-and-spoke" architecture solves the fragmentation problem of V3's multi-chain architecture. By unifying the liquidity hub, Aave is poised to gain a competitive edge in the RWA and institutional lending markets.
However, most positive expectations are based on the assumption that "everything is going well," while the negative realities are more pressing.
- Security downgrade: The complexity of V4 necessitates more stringent risk control mechanisms. With the loss of Chaos Labs, Aave now only has LlamaRisk as its primary risk management service provider, and this single point of failure significantly increases systemic risk under extreme market conditions.
- Experience vacuum: Service providers leaving take with them three years' worth of historical operational data and experience. If unexpected issues arise with the agreement, new teams like LlamaRisk may respond slowly due to a lack of in-depth involvement.
- Reputation Damage: Aave Labs' actions of interfering with voting through massive token holdings are essentially depleting the protocol's reputation assets. If the DAO loses its checks and balances, its appeal to new developers will be significantly reduced.
This negative impact is also raising concerns about funding. Although Aave has not experienced any major safety incidents in the past, the uncertainty of the risks is increasing, and the community is beginning to question its execution and risk control capabilities. Some have even bluntly stated, "Don't put all your assets on board before the veteran crew members disembark and the new crew members are familiar with the route."
Aave is currently at a critical crossroads.
