In-depth Analysis of Aave Internal Conflict: The Power Struggle Between Protocol and Frontend

Author: Chloe, ChainCatcher

Recently, the controversy between Aave DAO and Aave Labs has been exposed. The former is responsible for governance protocols, while the latter develops Aave products.

The focus of this dispute is the fee issue arising from the recent announcement of 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. However, on-chain data shows that the fees generated from this integration are no longer flowing into the DAO but are directly sent to a private address controlled by Labs. At the current rate, approximately $10 million per year would be drained from the DAO treasury.

EzR3aL raised concerns to the community: why was there no prior consultation with the DAO regarding the fee matter? And they argued that these fees should belong to the DAO. Labs’ position is that these are revenues from the frontend and product layers, so they belong to Labs and are unrelated to the protocol layer.

This conflict appears to be about the ownership of $10 million in revenue, but more deeply, it serves as a warning bell for DeFi governance structures.

Fees that should have entered the DAO treasury are being directed to a private address controlled by Aave Labs.

On December 4th, Aave Labs announced a deepening partnership with CoW Swap, utilizing a batch auction execution system to handle asset swaps, collateral swaps, debt swaps, and collateralized debt repayment, allowing users to manage all aspects of on-chain loans on one platform. Besides reducing Gas fees, it also employs anti-MEV execution methods to protect users from frontrunning.

According to DefiIgnas, under the previous setup, the referral income (referral fees earned from partner platforms) and positive slippage (extra assets gained during swaps) were transferred into the Aave DAO treasury as revenue.

However, the integration with CoW Swap changed the flow of income. After investigating the source, EzR3aL found that the fees that should have gone into the DAO treasury are being directed to a private address controlled by Aave Labs. The community questioned: why was there no consultation with the DAO before deciding the destination of CoW Swap-related income? And they insisted that these earnings should belong to the DAO.

EzR3aL posted that currently, another entity—rather than Aave DAO—is earning at least $200,000 worth of ETH weekly from this integration, estimating that this could amount to about $10 million annually in potential revenue that is not flowing into the DAO treasury.

Aave Labs claims that the surplus income was voluntarily donated to the DAO, not an obligation.

In response to this event, DAO members believe this is equivalent to a “covert privatization” of community assets. They pointed out that Aave Labs previously received funding support from the DAO to develop these features, thus bearing a “fiduciary duty” to give back the profits to the funders.

On the other hand, Aave Labs insists that Aave is an independently developed and maintained “frontend product,” not directly governed by the DAO protocol contracts. Labs founder Stani Kulechov emphasized that the surplus income from ParaSwap in the past was voluntarily donated to the DAO, not an obligation. The switch to CoW Swap is an upgrade funded by Labs’ own investment and does not affect the openness of the protocol.

Marc Zeller, founder of the Aave governance delegate platform Aave-Chan Initiative, described the decision to allocate CoW Swap fees exclusively to Aave Labs as unacceptable.

Conflicts of interest between DAO and Labs are not new, highlighting governance dilemmas on-chain.

This is not the first time Aave has experienced friction between DAO and Labs. Over the past few years, many deployment plans proposed by Aave Labs, after being approved by DAO votes, have ultimately resulted in DAO expenditures exceeding revenues. For example, the Horizon product caused significant controversy. This RWA lending market, proposed by Aave Labs and approved by DAO votes, saw the DAO commit $500,000 in incentives to attract users. However, Horizon has only generated about $100,000 in revenue so far, resulting in a direct loss of $400,000 on the DAO’s books.

Worse still, tens of millions of GHO stablecoins have been supplied to the Horizon market, but the yields earned from these GHO are lower than the costs needed to maintain GHO’s peg. This means that, besides the direct $400,000 loss, the DAO is also continuously suffering from interest rate spread losses, with total actual losses far exceeding the accounting figures.

Aave Labs proposed the project, and the DAO funded it, but when the project underperforms, all losses are borne by the DAO and token holders, while Labs may profit from other channels (such as Horizon-related service fees or partnership revenues). The core question from DAO members is: if the DAO bears the risk and costs, why aren’t the profits flowing back accordingly?

DAO members believe that the value of the brand is due to the DAO’s conservative risk governance, token holders bearing protocol risks, the DAO paying service provider fees, and the protocol surviving multiple crises, earning a reputation for security. However, now Aave Labs is leveraging this DAO-funded brand and user trust to independently profit at the frontend and product layers, but these profits are not flowing back to the DAO.

As EzR3aL said, the value of the Aave brand was built over years through DAO funding, governance, and risk-taking. “These fees can only be generated when the Aave brand is widely recognized and accepted by the market, and this brand was built at the cost of the Aave DAO.”

Uniswap also experienced governance issues, ultimately reflected in token price?

If this model continues, AAVE token holders will face a paradox: usage of Aave products increases, but the token’s value cannot grow correspondingly because the value is captured outside the protocol by Labs. This is why the DAO must expose these disputes publicly—defending the brand and intellectual property it has managed all along—because ultimately, token holders are the ones who suffer.

Duo Nine, founder of YCC, said that Aave Labs redirected income into their own pockets without informing anyone, rather than to AAVE token holders or the DAO treasury, claiming they own the IP and frontend, so they can handle it as they wish. “In this case, AAVE governance is just a smokescreen.”

This incident with Aave echoes the situation with Uniswap in 2023.

In October of that year, Uniswap Labs charged a 0.15% fee on front-end trades for certain tokens (mainstream tokens like ETH, USDC, WBTC, and stablecoins), sparking controversy because Uniswap’s protocol, Uniswap Labs, and the Uniswap Foundation operate independently.

This policy initially harmed UNI holders’ interests. The original plan was to use a “fee switch” to charge users, with the revenue distributed to UNI token holders. But Labs had already started collecting front-end fees. If the protocol fee switch was also activated, users would face double charges, making it harder to implement the fee switch and depriving UNI holders of dividend opportunities.

Second, in a highly competitive DEX market, platforms are lowering fees to attract users. Uniswap Labs started charging an additional 0.15% fee, forcing users to switch to free third-party front-ends or other aggregators, leading to unpredictable actual earnings for Labs.

Duo Nine commented on the Aave incident, saying that Aave is following Uniswap’s footsteps, with opaque profit distribution. “If Aave wants to avoid Uniswap’s situation, it must resolve this issue quickly. Otherwise, if Labs can redirect income at will, forcing AAVE holders to bear losses, then holding AAVE tokens becomes meaningless.”

However, a major turning point occurred in November 2023. Uniswap Labs and the Uniswap Foundation jointly proposed the UNIfication governance proposal, finally preparing to activate the long-awaited fee switch mechanism.

The core of this proposal includes: using protocol fees to burn UNI tokens, directly burning 100 million UNI from the treasury (symbolizing the revenue that should have been burned if the fee mechanism had been activated that year), and importantly, Uniswap Labs will stop earning fees from the interface, wallet, and API, directly addressing the controversy over the 0.15% front-end fee. Additionally, the governance structure will be integrated, with the Uniswap Foundation merging into Uniswap Labs, managed by a single team responsible for ecosystem development.

Latest reports indicate that the proposal has received support from over 63 million UNI tokens in the initial Snapshot vote, with almost no opposition.

Both the earlier disputes involving Aave and Uniswap reflect the current governance challenges in DeFi: when the boundaries of responsibilities among protocol, product, and brand are blurred, conflicts of interest are inevitable. In early stages, this ambiguity might promote flexible cooperation, but when it comes to actual revenue sharing, disputes are likely to arise.

The core issue in the Aave case is the lack of a clear revenue-sharing mechanism and transparent decision-making process between DAO and Labs. If this problem is not properly addressed, it could not only impact the value of AAVE tokens but also weaken community confidence in governance.