The coin price is falling, and the Whale is dumping and leaving the market. Observing the governance dilemma of DeFi from the power struggle in Aave.

Author: Jae, PANews

When the governance benchmark of the DeFi market collides with real commercial interests, a brutal game of “who is the master” is unfolding within the top lending protocol Aave.

As the leader in the DeFi market, Aave not only manages approximately $34 billion in assets but is also regarded as a model for on-chain governance. However, in December 2025, Aave fell into the most severe trust crisis in its 8-year history.

This controversy was not accidental. The initial spark was merely an inconspicuous allocation of front-end fees, but it unexpectedly triggered a domino effect that, through a series of key events, ultimately pushed Aave, the lending giant, into the spotlight.

This is not just a simple dispute over profit distribution; it has opened a rift, exposing the most fundamental and sensitive conflict in the DeFi space: under the narrative of decentralization, who really has the final say between the founding team that holds the code and brand and the DAO community that holds governance tokens?

This is not just a crisis for Aave; this incident raises an urgent question for the entire DeFi market: how to balance the commercial incentives of development teams with the governance rights of token holders as the protocol matures?

10 million USD “vanished”, Aave Labs accused of depriving community interests

The source of the Aave governance civil war began with an update at the technical optimization level.

On December 4, 2025, Aave Labs announced that it would replace its official frontend asset exchange service provider from ParaSwap to CoWSwap, due to better pricing and anti-MEV protection.

However, the financial changes that followed were not fully disclosed in the announcement. Community representative EzR3aL discovered through on-chain data tracking that the fees generated from user transactions, after being altered, no longer flowed into the DAO's public treasury, but instead were redirected to an address controlled by Labs. Based on historical data estimates, this missing annualized revenue could reach as high as 10 million dollars.

Aave community leader Marc Zeller pointed out: this is a form of invisible privatization of brand assets. Labs profit from the technology and brand value developed with the funding of the DAO, breaking the long-standing trust agreement.

Aave founder Stani Kulechov believes that this is a division between protocols and products. He explained that the Aave protocol, built on smart contracts, is owned by the DAO, while the front-end product app.aave.com, which incurs high operational and maintenance costs, should have its commercial interests belong to the builders, Labs. The fees that previously flowed to the DAO were merely “voluntary donations.” This perspective challenges the traditional understanding within the DeFi community, which holds that tokens should capture all economic value generated by the protocol ecosystem.

Stani's logic, from the perspective of the community, is akin to a sovereign deprivation. The frontend serves as the most important user entry point and traffic gate. If its income can be unilaterally intercepted by Labs, will future projects like Aave V4, GHO stablecoin, and Horizo​​​​n RWA also face similar income interception? In this situation, the value capture promise carried by the governance token AAVE may become an empty check.

Internal conflicts intensify, DAO proposal seeks to reclaim brand ownership

When gentle negotiations fail to reach a consensus, the radical factions within the community begin to adopt extreme gaming strategies. On December 15, a governance proposal called the Poison Pill Plan was put forward by user tulipking, proposing three highly aggressive demands:

2. Mandatory Asset Transfer: Require Labs to unconditionally transfer all code repositories, intellectual property (IP), and trademarks in its possession to the DAO, or else legal action will be initiated.
3. Equity Forfeiture and Subsidiarization: It is asserted that the DAO should acquire 100% equity of Labs, transforming the originally independent company into a wholly-owned subsidiary of the DAO, with founders and employees becoming employees of the DAO.
4. Recover Past Earnings: Seek to recover all historical front-end earnings generated from the use of the Aave brand from Labs and return them to the treasury.

This heavyweight bomb has been temporarily shelved due to procedural issues, but its deterrent intent has been achieved, indicating that the community has the ability and willingness to reverse-merge with uncooperative development teams through governance voting.

In the shadow of extreme proposals, Aave's former CTO Ernesto Boado put forward a more constructive proposal titled “Phase One - Ownership,” sounding the horn for a sovereignty recovery action: reclaiming domains like aave.com; recovering official social media accounts like X and Discord; regaining control of the GitHub repository.

Boado stated that true decentralization must include the decentralization of “soft assets”. He proposed the establishment of a legal entity controlled by a DAO to hold these brand assets, thereby obtaining recourse within traditional jurisdictions. This marks the DAO's attempt to evolve from a loose on-chain voting organization into a “digital sovereign entity” with actual legal definitions and assets.

The token has dropped, whales are cashing out, and Labs' unilateral push for voting has caused dissatisfaction.

When governance falls into internal strife, the secondary market begins to vote with its feet. Although the $34 billion in assets locked by the protocol has not shown significant fluctuations, the price of the AAVE token, which is directly related to the interests of holders, has continued to decline by over 25% within two weeks.

On December 22, the second-largest holder of AAVE liquidated their position, having accumulated 230,000 AAVE tokens at an average price of around $223, but they cleared their holdings at about $165 amid governance chaos, expected to incur a paper loss of up to $13.45 million. The exit of the whale is a negative statement on the current governance turmoil of Aave and raises deep doubts about its future value capture ability: if profits can be easily stripped away, the past valuation models of the token will also become ineffective.

What exacerbates the situation is that Labs unilaterally advanced the proposal to the Snapshot voting stage without the consent of the original author Boado, which has provoked strong protests from the community, with multiple representatives criticizing this action as a violation of normal governance procedures.

Crypto KOL 0xTodd pointed out 2 issues: 1) The voting date is set for December 23-26, and many users will be on vacation during Christmas, which may lead to a decrease in voting participation; 2) Currently, Boado's proposal is still in the discussion stage, and typically a discussion post needs to go through 3-6 months of repeated communication and optimization before entering the voting stage.

However, Stani responded that the new ARFC proposal voting is fully in line with the governance framework, and voting is the best way to solve the problem, as well as the ultimate path of governance. It can be seen that the DAO emphasizes the spirit of procedural correctness in the process, which diverges from Labs' emphasis on efficiency as the ultimate result.

However, from another perspective, absolute program correctness may also stifle efficiency. If the development team's commercial returns are completely stripped away, the motivation for Labs to advance the Protocol V4 upgrade will clearly decline. If the brand is managed through a DAO, in the event of a legal dispute, the absence of direct responsible parties may hinder a quick response and could also lead to the brand being directly shut down by regulatory authorities.

As of now, the affirmative votes only account for 3%, showing a one-sided situation. The community may once again enter the “proposal-voting” process, and it may even worsen into a deadlock. In fact, Aave has already wasted a lot of time in this governance stalemate.

However, this crisis of trust is likely just a temporary issue and a “rite of passage” for Aave as a leading player in DeFi.

Many experienced DAO participants have stated that even the on-chain governance benchmark Aave is on the verge of splitting, perhaps the DAO governance model is inherently unfeasible. However, the fact that such transparent, intense, and evenly matched debates can occur internally within Aave itself proves its extremely high level of decentralized governance. This collective ability to correct itself is precisely the value of decentralized governance.

The more critical turning point comes from external regulation. On December 20, the U.S. SEC concluded a four-year investigation without taking any enforcement action against Aave. This is widely interpreted as the regulators' tacit approval of governance models like Aave's that are highly decentralized.

In the midst of the storm, Aave's fundamentals remain highly resilient. Founder Stani not only continues to respond to doubts but has personally increased his holdings by a total of $15 million AAVE, enduring over $2 million in paper losses, and has announced a “three-pillar” strategy to rebuild community consensus and trust. However, Stani's actions have also faced scrutiny from the community, who believe he aims to increase his voting power. Even so, merely increasing Labs' influence in governance is still a superficial solution.

Governance evolution, mixed organizations or paths of interest reconstruction

As the turmoil evolves, a governance evolution pathway may emerge: Aave may transform from a single on-chain protocol into a “hybrid organization.”

Returning to the latest content of the proposal itself, the model proposed by Boado essentially redefines the relationship between the two parties from three aspects.

2. DAO has sovereignty: not only owns smart contracts, but also owns brand, domain names, trademarks, and user distribution channels;
3. Labs as a Professional Service Provider: Labs no longer profits as a “owner,” but rather as a top service provider authorized by the DAO. The fees collected by Labs at the front end should be based on the authorization of the DAO and may require determining the sharing ratio with the DAO to cover development costs and replenish token value;
4. Contractual Governance: All profit distribution is no longer based on “voluntary donations,” but rather on service agreements on the chain.

In fact, this controversy is highly similar to the events in 2023 when Uniswap Labs faced community dissatisfaction over front-end fees. Ultimately, Uniswap reached an agreement with the community by defining Labs' commercialization rights and the decentralization of the protocol layer.

Aave may take further steps to address the issue of “who is the brand owner” from a legal perspective through its “Phase One - Ownership” proposal. If the future proposal is approved, any commercialization actions by Labs will have to obtain authorization from the DAO at the procedural level, which will fundamentally eliminate the possibility of “invisible privatization.”

Aave's dilemma is a common contradiction faced by all decentralized protocols. Does the market want a highly efficient but potentially centralized “product,” or a decentralized but possibly inefficient “protocol”? This not only concerns the boundary of governance token authority but also determines the evolution direction of DeFi.

Currently, this $30 billion DeFi experiment is at a crossroads, and the future direction will gradually be revealed through each on-chain vote.

(The above content is excerpted and reprinted with the authorization of partner PANews, original link __)

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Disclaimer: This article is intended to provide market information. All content and opinions are for reference only and do not constitute investment advice, nor do they represent the views and positions of Blockchain. Investors should make their own decisions and trades; the author and Blockchain will not bear any responsibility for any direct or indirect losses incurred by investors' transactions.
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Tags: Aave Aave V4 CoWSwap DAO DeFi ParaSwap Lending Cryptocurrency Decentralized Governance