Author: Chloe, ChainCatcher
Recently, a dispute has surfaced between Aave DAO and Aave Labs. The former is responsible for the governance protocol, while the latter is the developer of Aave products.
The focus of this dispute is the issue of fees arising 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 the CoW Swap service, intending to optimize user transaction paths, but on-chain data shows that the fees generated by this integration no longer flow into the DAO, but directly into Labs' private address. At the current rate, approximately $10 million will flow out of the DAO treasury annually.
EzR3aL raised concerns with the community: why wasn't the DAO consulted beforehand regarding the fees? He argued that these fees should belong to the DAO. Labs' position was that these were revenues from the front-end and product layers, therefore belonging to Labs and unrelated to the protocol side. This conflict, superficially about the ownership of $10 million in revenue, is, at a deeper level, a wake-up call for DeFi governance structures. Fees that should have gone into the DAO treasury were redirected to a private address controlled by Aave Labs. On December 4th, Aave Labs announced a deepened partnership with CoW Swap, using a bulk auction execution system to handle asset swaps, collateral swaps, debt swaps, and collateral repayments, allowing users to manage all aspects of on-chain lending 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' explanation, under the previous setup, excess fees such as referral fees (commissions received from partner platforms) and positive slippage (excess assets generated during the swap process) were transferred to the Aave DAO treasury as revenue. However, the integration of CoW Swap changed the flow of these revenues. Following an investigation by EzR3aL, it was discovered that these fees, which should have gone into the DAO treasury, were being directed to a private address controlled by Aave Labs. The community questioned why the DAO was not consulted before deciding on the destination of CoW Swap-related revenues and argued that these revenues should belong to the DAO. EzR3aL posted that an entity other than Aave DAO is currently receiving at least $200,000 worth of Ether weekly from this integration, estimating that this could represent approximately $10 million annually in potential revenue that is not flowing into the DAO treasury. Aave Labs insists that the previous surplus revenue was a voluntary donation to the DAO, not an obligation. Regarding this incident, DAO members believe this amounts to a “hidden privatization” of community assets. They point out that Aave Labs received funding from the DAO to develop these features and therefore has a “fiduciary responsibility,” emphasizing the need to return the proceeds to the funders. On the other hand, Aave Labs insists that Aave is a "front-end product" independently developed and maintained by them, rather than a protocol contract directly governed by the DAO. Labs founder Stani Kulechov emphasized in his response that any surplus revenue from ParaSwap in the past was voluntarily donated to the DAO, not obligated. This switch to CoW Swap is an upgrade funded by Labs at its own expense and does not affect the protocol's openness. Meanwhile, Marc Zeller, founder of the Aave-Chan Initiative, a delegated platform involved in Aave governance, described the decision to allocate CoW Swap fees specifically to Aave Labs as unacceptable. This isn't the first time a conflict of interest has arisen between the DAO and Labs, highlighting the challenges of on-chain governance. This isn't the first time friction has occurred between Aave's DAO and Labs. In recent years, several deployment plans proposed by Aave Labs, after being approved by the DAO, have ultimately resulted in the DAO's expenditures exceeding its revenues. For example, the Horizon product has sparked significant controversy. This RWA lending market, proposed by Aave Labs, received DAO approval, with the DAO promising to invest $500,000 in incentive funds to attract users. However, Horizon has only generated approximately $100,000 in revenue to date, resulting in a direct loss of $400,000 for the DAO. Worse still, tens of millions of GHO stablecoins were supplied to the Horizon market, but the yield these GHOs received was lower than the cost required to maintain the GHO peg. This means that in addition to the direct loss of $400,000, the DAO is continuously suffering from interest rate differential losses, with the actual total loss far exceeding the on-paper figures. Aave Labs proposes projects, and the DAO provides funding, but when projects underperform, 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 revenue). The core question raised by DAO members is: if the DAO bears the risks and costs, why are there no corresponding returns? DAO members believe the brand's value stems from the DAO's conservative risk governance, token holders assuming protocol risk, the DAO paying service provider fees, and the protocol's reputation for security gained through its survival through multiple crises. However, Aave Labs is now leveraging the brand and user trust built with DAO funding to independently monetize its front-end interface and product, without these revenues flowing back to the DAO? As EzR3aL stated, the value of the Aave brand is accumulated by the DAO over many years through funding, governance, and risk-taking. "These costs can only arise if the Aave brand becomes widely known and accepted by the market, and this brand is built at a price paid by the Aave DAO." Uniswap has also experienced governance issues, which ultimately manifested in its token price? If this model continues, AAVE token holders will face a paradoxical situation: increased usage of Aave products will not lead to a corresponding increase in token value, because the value will be captured by Labs outside the protocol. This is why DAOs are willing to take risks to bring the controversy to the forefront; they are defending the brand and intellectual property that they have been building, because ultimately, only token holders will suffer. YCC founder Duo Nine stated that Aave Labs redirected revenue to its own pockets, rather than to AAVE token holders or the DAO treasury, without informing anyone, claiming only that they owned the IP and frontend and could do whatever they wanted with it. "In this case, AAVE's governance is just a smokescreen." This 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 transactions of certain tokens (ETH, USDC, WBTC, and other mainstream cryptocurrencies and stablecoins). This move sparked controversy because the Uniswap protocol, Uniswap Labs, and Uniswap Foundation operate independently. This policy would first harm the interests of UNI holders. The Uniswap protocol originally planned to charge fees on transactions through a "fee switch," with the revenue distributed to UNI token holders. However, since Labs had already started charging front-end fees, activating protocol fees would result in users incurring double charges, making the protocol fee switch even more difficult to implement. Consequently, UNI holders would lose the opportunity to receive dividends. Secondly, in the fiercely competitive DEX market, platforms are lowering transaction fees to attract users. Uniswap Labs, however, is charging an additional 0.15% fee, forcing users to switch to free third-party Uniswap front-ends or other aggregators, making Labs' actual revenue highly uncertain. Duo Nine, commenting on the Aave incident, believes that Aave is following the same path as Uniswap, namely, opaque team revenue distribution. "If Aave wants to avoid the Uniswap situation, it needs to solve this problem as soon as possible. Otherwise, if Labs can arbitrarily redirect revenue and make AAVE holders bear the losses, then holding AAVE tokens is meaningless." However, the situation took a significant turn in November of this year. Uniswap Labs and the Uniswap Foundation have jointly proposed a governance proposal for UNIception, finally preparing to launch the long-awaited fee on/off mechanism. The core of the proposal includes: burning UNI tokens using protocol fees; directly burning 100 million UNI tokens in the vault (symbolizing revenue that would have been burned if the fee mechanism had been launched); and crucially, Uniswap Labs will cease earning fees from its interface, wallet, and API, directly addressing the aforementioned controversy surrounding the 0.15% front-end fee. Furthermore, the proposal will integrate the governance structure, with the Uniswap Foundation merging into Uniswap Labs, resulting in a single team responsible for ecosystem development. According to the latest news, the proposal has garnered over 63,000,000 UNI tokens in the initial Snapshot vote, with virtually no opposition. The earlier controversies surrounding Aave and Uniswap reflect the current dilemma facing DeFi governance: when the boundaries of responsibility between protocols, products, and brands are blurred, conflicts of interest become inevitable. In the early stages of a project, this ambiguity might foster flexible cooperation, but it easily leads to disputes when it comes to actual profit distribution. The core issue in the Aave incident is the lack of a clear profit distribution mechanism and transparent decision-making process between the DAO and Labs. If this issue is not properly resolved, it will not only affect the value of the AAVE token, but may also undermine the community's confidence in governance.
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