Author: Chloe, ChainCatcher

Recently, a controversy between Aave DAO and Aave Labs has come to light. The former is responsible for governing the protocol, while the latter is the developer of Aave products.

The focus of this dispute is the issue of fees generated from the recent announcement of a deep integration with CoW Swap. An Aave DAO member using the pseudonym EzR3aL pointed out that Aave Labs recently integrated CoW Swap services, originally intended to optimize user trading paths, but on-chain data shows that the fees generated from this integration are no longer flowing into the DAO but are instead going directly to Labs' private address. If calculated at the current rate, approximately $10 million will flow out of the DAO treasury in a year.

EzR3aL raised concerns to the community: why were the fees not consulted with the DAO beforehand? They argued that these fees should belong to the DAO. Labs' position is that this is revenue from the front-end and product layer, so it belongs to Labs and is unrelated to the protocol side.

On the surface, this conflict is about the allocation of $10 million in revenue, but on a deeper level, it serves as a wake-up call regarding the governance structure of DeFi.

Fees That Should Have Entered the DAO Treasury Are Directed to Aave Labs' Controlled Private Address

On December 4, Aave Labs announced a deepened collaboration with CoW Swap, using a batch auction execution system to handle asset swaps, collateral swaps, debt swaps, and repayments with collateral, allowing users to manage various aspects of on-chain loans on a single platform. In addition to reducing gas fees, it also protects users from front-running through MEV-resistant execution methods.

According to DefiIgnas's explanation, under previous arrangements, referral income (commissions earned from partner platforms) and positive slippage (excess assets during swaps) were transferred to the Aave DAO treasury as revenue.

However, the integration with CoW Swap changed the flow of revenue. After EzR3aL investigated the direction of these funds, it was found that the fees that should have entered the DAO treasury were being directed to a private address controlled by Aave Labs. The community questioned: why was the DAO not consulted before deciding the direction of CoW Swap-related income? They argued that this revenue should belong to the DAO.

EzR3aL posted that currently, another entity, rather than Aave DAO, is receiving at least $200,000 worth of Ether weekly from this integration, estimating that this could represent a potential annual income of about $10 million that is not flowing into the DAO treasury.

Aave Labs Insists That Previous Excess Revenue Was Voluntarily Donated to the DAO, Not an Obligation

In response to the incident, DAO members believe this amounts to an "invisible privatization" of community assets. They pointed out that Aave Labs had received funding support from the DAO to develop these features, thus bearing a "fiduciary duty" to return the revenue to the funders.

On the other hand, Aave Labs insists that Aave is their independently developed and maintained "front-end product," not a protocol contract directly governed by the DAO. Labs founder Stani Kulechov emphasized in his response that the previous excess revenue from ParaSwap was voluntarily donated to the DAO, not an obligation. The switch to CoW Swap is an upgrade funded by Labs themselves, which does not affect the openness of the protocol.

Marc Zeller, founder of the Aave-Chan Initiative, a platform involved in Aave governance, described the decision to allocate CoW Swap fees specifically to Aave Labs as unacceptable.

Conflicts of Interest Between DAO and Labs Are Not New, Highlighting On-Chain Governance Dilemmas

This is not the first time friction has occurred between the DAO and Labs at Aave. Over the past few years, several deployment plans proposed by Aave Labs, after being approved by DAO votes, ultimately led to the DAO's expenditures exceeding its revenues. For example, the Horizon product sparked significant controversy; this RWA lending market proposed by Aave Labs, after receiving DAO approval, committed the DAO to invest $500,000 in incentive funds to attract users. However, Horizon has only generated about $100,000 in revenue to date, resulting in a direct loss of $400,000 on the DAO's books.

Worse still, tens of millions of GHO stablecoins were supplied to the Horizon market, but the yields obtained from these GHO were lower than the costs required to maintain GHO's peg. This means that in addition to the direct loss of $400,000, the DAO is also continuously bearing interest rate losses, with the actual total loss far exceeding the book figure.

Aave Labs proposes projects, and the DAO funds support them, but when projects underperform, all losses are borne by the DAO and token holders, while Labs may profit from other channels (such as service fees related to Horizon or partnership revenues). The core question from DAO members is: if the DAO bears the risks and costs, why are the revenues not flowing back correspondingly?

DAO members believe that the brand's value comes from the DAO's conservative risk governance, the token holders bearing protocol risks, the DAO paying service provider fees, and the protocol surviving multiple crises to earn a reputation for safety. However, Aave Labs is now leveraging the brand and user trust built with DAO funding to independently profit at the front-end interface and product level, but these revenues do not flow back to the DAO?

As EzR3aL stated, the value of the Aave brand is accumulated over years through the DAO's use of funds, governance, and risk-bearing, "These fees could only arise when the Aave brand is well-known and accepted by the market, and this brand was built at the cost of Aave DAO."

Uniswap Also Faced Governance Issues, Ultimately Reflecting in Token Prices?

If this pattern continues, AAVE token holders will face a paradox: the usage of Aave products increases, but the value of the tokens cannot grow correspondingly because the value is captured by Labs outside the protocol. This is also why the DAO, despite bearing the risks, wants to bring the controversy to light; they are defending the brand and intellectual property that the DAO has managed all along, as the only ones who will ultimately suffer are the token holders.

Duo Nine, founder of YCC, stated that Aave Labs redirected income into their own pockets without informing anyone, rather than to AAVE token holders or the DAO treasury, merely arguing that they own the IP and front-end, so they can handle it as they wish, "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 began charging a 0.15% fee on front-end trades for specific tokens (mainstream coins and stablecoins like ETH, USDC, WBTC), which sparked controversy because the Uniswap protocol, Uniswap Labs, and Uniswap Foundation operate independently.

This policy would primarily harm UNI holders' interests, as the Uniswap protocol originally planned to charge transaction fees through a "fee switch," with revenues distributed to UNI token holders. However, Labs had already started collecting front-end fees, and if the protocol fees were activated, users would face double charges, making it more difficult to implement the protocol fee switch, and UNI holders would lose the opportunity to receive dividends.

Furthermore, in a fiercely competitive DEX market, where platforms are lowering fees to attract users, Uniswap Labs' decision to impose a 0.15% fee would force users to turn to free third-party Uniswap front-ends or other aggregators, leading to significant uncertainty in Labs' actual revenue.

Duo Nine commented on the Aave incident, suggesting that Aave is following in Uniswap's footsteps, with the team's revenue distribution lacking transparency, "If Aave wants to avoid the Uniswap situation, it must resolve this issue quickly. Otherwise, if Labs can redirect income at will and make AAVE holders bear the losses, then holding AAVE tokens becomes meaningless."

However, a significant turnaround occurred 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 switch mechanism by the community.

The core content of this proposal includes: using protocol fees to burn UNI tokens, directly burning 100 million UNI tokens in the treasury (symbolizing the revenue that should have been burned if the fee mechanism had been activated in previous years), and crucially, Uniswap Labs will stop earning fees from interfaces, wallets, and APIs, directly addressing the earlier controversy over the 0.15% front-end fee. Additionally, the proposal will integrate governance structures, with the Uniswap Foundation merging into Uniswap Labs, creating a single team responsible for ecological development.

According to latest news, this proposal has received support from over 63,000,000 UNI tokens in the preliminary Snapshot vote, with almost no opposition.

Whether it is Aave or the earlier controversies surrounding Uniswap, they reflect the real dilemmas facing current DeFi governance: when the boundaries of responsibilities and rights among the protocol side, product side, and brand side are blurred, conflicts of interest become unavoidable. In the early stages of a project, this ambiguity may promote flexible cooperation, but when it comes to actual revenue distribution, it is prone to controversy.

The core issue of the Aave incident lies in the lack of a clear revenue distribution mechanism and transparent decision-making process between the DAO and Labs. If this issue cannot be properly resolved, it will not only affect the value of AAVE tokens but may also undermine the community's confidence in governance.

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