AAVE Collapse and Internal Governance Conflict – When Decentralization Meets Business Reality

When DeFi protocols grow to gigantic sizes, the question “who really rules” ceases to be an academic discussion and becomes a matter of billions of dollars. Aave – a colossus managing $34 billion in locked assets – has found itself at the epicenter of a fundamental conflict between the business ambitions of the development team and the rights of the decentralized community.

Unprecedented tension in governance structure – causes of trust breakdown

It all started with what seemed like a marginal technical change. In December 2025, Aave Labs switched the swap service provider from ParaSwap to CoWSwap, claiming that this solution offers better prices and MEV manipulation protection. However, chain data analysis revealed a hidden side of this decision – transaction fee revenues, which historically went to the public treasury of the DAO, were redirected to addresses controlled directly by Labs.

A community spokesperson traced the paper trail and estimated that the annual losses for the DAO could reach around $10 million. Marc Zeller, a well-known voice in the Aave ecosystem, described this as “hidden privatization of value created by the trademark and technology funded by the DAO.” Protocol creator Stani Kulechov defended himself, arguing that this is a justified separation – the protocol belongs to the DAO, but the frontend app.aave.com, which incurs huge operational costs, should be freely owned by Labs. Previous revenues to the treasury were merely “voluntary donations.”

This logic was a frontal attack on the traditional DeFi community belief – that governance tokens should capture the entire economic value generated by the ecosystem. If Labs can unilaterally retain profits from the frontend, the main access point to the protocol, what prevents doing the same in the future with Aave V4, the GHO stablecoin, or RWA Horizon products?

Proposals for radical extreme measures – community attempts to regain sovereignty

When talks failed to produce a breakthrough, the radical part of the community resorted to extraordinary measures. User pseudonym tulipking presented in mid-December the so-called “poison plan” – a package of three aggressive demands:

1. Mandatory transfer of all assets – Labs to be compelled to unconditionally transfer the entire codebase, intellectual rights, and trademarks to the DAO, under threat of legal action

2. Takeover of 100% of Labs’ capital – DAO would become the owner of the entire company, transforming an independent firm into a branch of a decentralized organization, with employees becoming DAO employees

3. Claim for the return of historical profits – Labs should return all previous frontend revenues accumulated thanks to the Aave brand to the treasury

Although formally postponed for procedural reasons, the proposal achieved its intended effect – clearly demonstrating that the community has both the tools and the determination to take full control over the reluctant Labs team through voting.

Behind this escalation, Ernesto Boado (, former CTO of Aave), presented a more constructive plan – “Phase One – Sovereignty.” He proposed that the DAO regain control of domains such as aave.com, official social media accounts, and GitHub repositories. Boado emphasized that authentic decentralization must also include “soft assets” – suggesting the creation of a legal entity managed by the DAO that would hold these assets. This means a transformation – an evolution from a loose organization conducting on-chain votes into a “digital sovereign entity” with a real legal status.

Market reacts with mass sell-off – whales abandon investments

As internal tensions grew, the secondary market delivered a merciless verdict through prices. With $34 billion remaining locked in smart contracts, the AAVE price plummeted. Latest data shows a price of $163.50, down 5.86% in 24 hours.

An even more significant gesture was the mass sell-off by the second-largest holder. An investor who accumulated 230,000 AAVE tokens at an average price of $223 desperately sold them at around $165 amid the management chaos – realizing an estimated loss of about $13.45 million. This whale move was not just a regular transaction – it was a vote of no confidence in the protocol’s ability to protect value. If revenues can be unilaterally seized, the previous valuation models for the token lose their fundamental logic.

Worse still, Labs accelerated the proposal to a Snapshot vote without the author Boado’s consent, sparking a wave of criticism. Well-known analyst 0xTodd pointed out two serious procedural issues: the voting period (December 23-26) coincided with the holidays, minimizing participation, and such a change typically requires 3-6 months of dialogue before being put to a vote. Stani’s response – that voting is the proper way and aligns with governance frameworks – revealed a fundamental divergence: DAO emphasizes procedures, Labs emphasizes results.

Currently, support for Boado’s proposal stands at just 3%, indicating an almost unipolar dominance of the Labs camp.

Hybrid organizations – the future model of decentralized business?

Amid distrust, a possible way out of the impasse appears. Boado proposed a model that fundamentally redefines the relationship between both sides:

Level one – DAO holds full sovereignty over the smart code, brand, domains, trademarks, and distribution channels

Level two – Labs operates as a service provider authorized by the DAO, not as an owner-beneficiary. Fees collected from the frontend would need DAO approval and could require revenue sharing

Level three – formalization through agreements – all profit splits encoded in smart contracts, not based on voluntary donations

Aave’s situation is not unique. Uniswap faced a similar conflict in 2023 and ultimately negotiated the boundaries of Labs’ trading rights and protocol decentralization. Aave has a chance to go further – solving at the root the legal question of “who is the actual owner of the brand.”

Deeper meaning of the conflict – the direction of DeFi evolution

Fundamentally, the Aave conflict reflects a universal dilemma of all decentralized protocols: does the market desire an effective “product” with potential recentralization, or a decentralized “protocol” with the risk of lower efficiency?

The fact that the community conducts such a transparent, intense debate (instead of quietly fleeing) is paradoxically evidence of a high level of actual decentralization. The ability for collective self-correction is a key value of the decentralized governance model.

A significant external turn came when, on December 20, the SEC concluded a four-year examination without any enforcement actions against Aave. This is widely seen as a silent regulator sanction for this form of decentralized governance.

Despite the turmoil, the fundamentals of Aave remain stable. Stani personally bought more AAVE for $15 million (incurring a paper loss of over $2 million), and Labs announced a “three pillars” strategy to rebuild trust. However, this was also met with accusations that Stani is deliberately consolidating influence over voting.

One of the biggest lessons from this current crisis is that no model is perfect, but transparency of conflict and the ability for collective problem-solving through code are truly a “blueprint for tension reduction” in decentralized ecosystems. The DeFi experiment worth over $30 billion now teeters on the edge – the real test for the entire movement is yet to come in upcoming votes.