Author: Chen Mo cmDeFi

Recently, there has been a heated debate regarding Aave DAO vs Aave Labs, focusing on the governance power dispute between the protocol layer and the product layer, which reflects the governance dilemma faced by the entire industry. I have sorted out this issue. Who exactly is the owner of Aave?

1. The Origin of the Issue

Aave Labs replaced the front-end integrated ParaSwap with CoW Swap, and the resulting fees flowed to Labs' private address. An anonymous DAO member, EzR3aL, exposed this matter on the governance forum, accusing Labs of "privatizing" the protocol's value. Labs' position is that this belongs to front-end and product layer revenue, owned by Labs, and is unrelated to the core of the protocol.

2. First, Let's Break Down Who Aave DAO and Aave Labs Are

• DAO represents Protocol (protocol layer)
• Labs represents Project (product layer)

The core controversy is whether Aave is a Protocol (managed by DAO) or a Project (built by Labs)? And how it affects the rights to revenue.

Aave DAO is easy to understand; it is a governance organization unique to the crypto world, composed of holders of the $AAVE token, who vote to exercise power within the DAO organization. Almost 90% of crypto projects have this structure, and the definition of "governance token" comes from this. Its greatest power is to vote on project proposals, deciding whether to implement certain updates and developments, as well as the future direction.

Aave Labs, on the other hand, is a development team responsible for the construction, updating, and maintenance of the protocol (such as the front-end interface and mobile app). They also typically maintain the Aave brand and IP, so on social media and in the market, Aave Labs is often assumed to be Aave. Its founders also have significant influence on social media.

Generally speaking, Aave Labs and Aave DAO need to collaborate. For example, Labs will propose many development plans, optimize certain features, and even upgrade versions V3 and V4. These plans are led by Aave Labs but ultimately decided by DAO votes. Usually, when both parties have aligned interests, they support each other, forming Aave together.

3. What Core Resources Do They Control?

Once conflicts of interest arise, if we strictly separate these two roles, it can be done because they are independent entities. Let's look at the core resources and powers each possesses:

Aave DAO controls the underlying core, such as smart contracts and treasury control, which is in the hands of the DAO. Although Labs can propose development plans, they need DAO votes to implement them. Therefore, it is a Protocol, and any product can operate on top of it. Theoretically, multiple front-end products can be built on a Protocol, such as Aave? Bave? Cave? All are possible.

Aave Labs controls the front-end, brand, product marketing, and partnerships. Thus, it directly communicates with users and represents a well-functioning product.

Therefore, supporters of Labs generally believe that the integration of CoW Swap is purely a front-end action, unrelated to Aave's underlying architecture. Labs could even unilaterally decide not to integrate it, and any resulting revenue would naturally belong to Labs. Conversely, DAO supporters argue that this is a form of plunder because, with the existence of the AAVE governance token, all benefits should first flow to AAVE holders or remain in the treasury to be decided by DAO votes. Additionally, the previous income from ParaSwap would continuously flow into the DAO, and the new CoW Swap integration changed this status, further leading the DAO to view it as a form of plunder.

Both sides hold their ground.

4. Governance Dilemma

This reflects a rather awkward governance and power dilemma. From the perspective of $AAVE holders, they usually stand on the side of the DAO because income entering the treasury benefits token holders. Although Labs has corresponding expenses each year, they can report these through the DAO. If they could open a separate channel for profit, it seems that community power is gradually being consumed.

However, from Aave Labs' perspective, although the theoretical core control lies with the DAO, plans must ultimately be voted on to be implemented. From the first version of Aave to now, Labs has played a unifying role, making significant contributions to the project's growth. As Stani said, "If it weren't for Emilio convincing me to adopt the design direction of the Aave protocol in 2018-2019, when we were still working on ETHLend, I think the Aave protocol might not exist at all."

Who is the true owner of Aave?

5. Power Struggle

This governance dilemma exists in most projects. Governance tokens are bought with real money, and ideally, these holders collectively decide the project's future. When the team no longer holds voting rights, they can even forcibly replace Labs.

However, the gap between reality and the ideal state is significant. Even for projects with a certain market share, when internal issues or disputes arise, they can lose market presence after the drama, such as Sushi, which is a good example. The DAO can exercise power, and the project can change personnel. Although thanks to the design of smart contracts, even if a project undergoes a major overhaul, the original stability of product functionality can be perfectly retained. However, based on past cases, the results of splits usually lead to unfavorable outcomes.

The core issue here is that, currently, the DAO's characteristic is that it is a decentralized organization. Although it has voting rights, it is difficult to operate efficiently. The community may have independent developers, VCs, and large holders. Once each role begins to fully exercise its power, a proposal may undergo multiple rounds of drafting, modification, and negotiation from the start. The success of a project requires a professional team and continuity. The DAO can hire a new team, but it may struggle to quickly connect and iterate, easily losing market position. Therefore, Labs' existence appears to be an entity that can "control" the protocol (which needs to collaborate with the DAO).

Personally, I tend to favor a solution that balances the distribution of interests between the two. However, everything is still under discussion, and no governance vote has occurred. The potential hidden danger behind this is that even if a reconciliation is ultimately reached, this incident has already exposed the divergence of expectations between the founding team and token holders.

In the long run, I remain optimistic about Aave's development because it is one of the few DeFi projects that have been validated by the market and possess a strong moat. The contradiction of governance power is a problem that the entire industry needs to face. How Aave handles this incident may become a model case for the industry in the future.

6. Voices and Discussions

In the argument, Emilio believes that some are maliciously belittling Aave Labs' contributions and value. ACI team members pointed out that Aave Labs has repeatedly attempted to exploit the DAO and has been exposed.

Community members' suggestions for Labs:

• In the future, Labs should announce in advance that the revenue from the products they build will flow to Labs, not the DAO.
• Or clearly define the revenue-sharing ratio between the DAO and Labs.
• Establish a transparent page on the Aave main website or Labs website to provide clear information to help investors interested in the $AAVE token (especially institutions or funds) make judgments.

Although the DAO model is controversial, the token holders of Aave DAO are the most active and vocal group, demonstrating the community's vitality. The front-end, website, and applications are the focal points of the dispute, where "each side holds its ground" easily occurs, lacking clear definitions.

Zeller's accusations against Labs for extracting protocol value:

The projects he listed (Portals, Credit Delegation Vault, Lens, etc.) indeed indicate that many exploratory initiatives by Aave Labs have not directly translated into protocol revenue or significant adoption rates.

He also mentioned the V4 version, stating that the DAO has spent $15 million so far, and compared to the liquidity moat of V3, the value proposition is unclear, expressing concerns about whether this is a new trap for extracting revenue.

In the process of innovation, failure is inevitable. Not every feature or product can succeed. The DAO is, to some extent, investing in Aave Labs' R&D capabilities. My understanding is that Zeller is not denying contributions but is calling for higher standards of accountability, transparency, and value alignment.

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