#AAVEdrop20%

AAVE DAO Conflict Explained: Why AAVE Dropped ~20%

According to a well-followed researcher on X (134k followers), AAVE has declined around 20% amid accusations of “revenue capture” and a governance process perceived as rushed and confrontational.

This situation extends beyond AAVE itself. It raises a broader question about the future of token value accrual, especially for protocols operating alongside equity-backed entities.

Aave has long been considered one of DeFi’s clearest winners, leading in TVL and trusted by both individual whales and institutions. However, AAVE holders are now witnessing an internal conflict between the DAO and Aave Labs, with the token bearing the cost.

What triggered the conflict?

In early December, community delegates noticed that Aave Labs switched the official frontend swap integration from ParaSwap to CoW Swap.

Previously, excess fees and referral revenue from ParaSwap (roughly $200k per week, or over $10M annually) were directed to the DAO treasury. After the switch, these fees began flowing to wallets controlled by Aave Labs, bypassing the DAO entirely. This sparked strong backlash, with some community members calling it revenue extraction or even a potential DAO rug.

The criticism is not without merit. The frontend benefits directly from DAO-owned liquidity, reputation, and brand, yet the change was made without prior DAO discussion or approval.

Aave Labs responded by stating that frontend and interface revenue is separate, as Labs independently funds and operates these components. They also emphasized that previous contributions to the DAO were voluntary, partly due to legal risk considerations.

This quickly escalated into a deeper question: Who truly owns Aave? The DAO and token holders, or Aave Labs, which controls off-chain assets such as the brand and intellectual property?

What happens next?

A “brand alignment” proposal, initially drafted by Ernesto Boado of BGD Labs, has been pushed to a Snapshot vote. The proposal aims to transfer key assets such as brand and IP into an entity controlled by the DAO.

While this may appear pro-decentralization on the surface, the likelihood of approval is low. The proposal was pushed forward rapidly after limited forum discussion. Ernesto himself stated it was submitted under his name without consent. Zeller from Aave Chan Initiative criticized the timing and process, calling it procedural overreach during a holiday period. Many believe the proposal is a power move, with Aave Labs able to block it regardless. Aave founder Stani has publicly opposed stronger alignment versions, citing the need for nuanced incentives to keep Labs innovating.

According to Polymarket, the probability of the proposal passing is only around 25%.

Market reaction

The market response has been decisive. AAVE is down roughly 20% over two weeks, with about a 10% drop occurring immediately after the Snapshot vote began.

If Aave Labs were to disengage, it would likely be negative for AAVE long term, as Labs has been a key driver of Aave’s dominance. Conversely, if control remains with Labs, unresolved questions around value capture and incentive alignment for AAVE holders persist.

Despite the turmoil, Aave remains one of the most successful DAOs in practice and a strong example that decentralized governance can function at scale.

Personal view

If tokens are to become truly “pristine assets” in the future, they must capture the full economic value of the protocols they represent. Tokens cannot continue leaking value to equity-based entities. While this is easy to say and difficult to execute, it is a battle that must be fought and ultimately won. Otherwise, over the long term, the token’s value trends toward zero.