Cryptocurrency prices plummeted, whales dumped their holdings and exited the market: the DeFi governance dilemma revealed in the Aave power struggle.

Author: Jae, PANews

When the governance benchmark of the DeFi market collides with real-world commercial interests, a brutal game to determine "who is the master" is unfolding within the leading lending protocol Aave.

As a leader in the DeFi market, Aave not only manages approximately $34 billion in assets but is also considered a model of on-chain governance. However, in December 2025, Aave faced its most severe trust crisis in its eight-year history.

This controversy was no accident. What started as a seemingly insignificant front-end fee allocation unexpectedly triggered a domino effect, and through a series of key events, ultimately pushed Aave, the lending giant, into the spotlight.

This is not just a simple dispute over the distribution of profits; it has torn open a gap and exposed the most fundamental and sensitive dispute in the DeFi field: Under the decentralized narrative, between the founding team that holds the code and the brand, and the DAO community that holds the governance token, who really has the final say?

This is not only a crisis for Aave, but this event also raises an urgent question for the entire DeFi market: how to balance the commercial incentives of the development team and the governance rights of token holders as the protocol matures?

$10 million "disappears," Aave Labs accused of depriving community rights

The Aave governance civil war originated from a technical optimization update.

On December 4, 2025, Aave Labs announced that it would switch its official front-end (app.aave.com) asset exchange service provider from ParaSwap to CoWSwap due to better pricing and MEV protection.

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

Aave community leader Marc Zeller points out: This is a form of implicit privatization of brand assets. Labs is using the technology and brand value developed with DAO funding to profit itself, thus breaking the long-standing trust.

Aave founder Stani Kulechov, however, argues that this is a division between the protocol and the product. He explains that the Aave protocol, built by smart contracts, belongs to the DAO, while the commercial rights to the front-end product app.aave.com , which requires significant operational and maintenance costs, should belong to the builder Labs. Fees previously flowing to the DAO were merely "voluntary donations." This view challenges the traditional understanding within the DeFi community that tokens should capture all the economic value generated by the protocol's ecosystem.

From the community's perspective, Stani's logic is tantamount to a deprivation of sovereignty. As the most crucial user entry point and traffic gateway, if Labs can unilaterally withhold its revenue, will similar revenue withholding occur in future projects like Aave V4, GHO stablecoin, and Horizon RWA? In this scenario, the value capture promise carried by the governance token AAVE may become nothing more than an empty promise.

Related reading: Annual revenue losses of tens of millions spark governance controversy; Aave Labs accused of "backstabbing" the DAO.

Internal conflicts escalate; DAO proposes to reclaim brand ownership.

When moderate negotiations failed to reach an agreement, the community's activists began to resort to extreme game theory tactics. On December 15th, a governance proposal known as the "poison pill" was submitted by user tulipking, which included three highly aggressive demands:

1. Forced asset transfer: Labs is required to unconditionally transfer all of its codebases, intellectual property (IP), and trademarks to the DAO, or legal action will be initiated.
2. Forfeiture of Equity and Subsidiaryization: It is argued that DAO should acquire 100% of Labs' equity, transforming the originally independent company into a wholly-owned subsidiary of DAO, and turning the founders and employees into employees of DAO.
3. Reclaim past revenue: Claim all front-end historical revenue generated by Labs from the use of the Aave brand and return it to the treasury.

Although this bombshell has been temporarily shelved due to procedural issues, its deterrent effect has been achieved, demonstrating that the community has the ability and willingness to use governance votes to reverse-engineer and absorb the development team that refuses to cooperate.

In the shadow of the extreme proposal, former Aave CTO Ernesto Boado put forward a more constructive proposal, "Phase One - Ownership," sounding the clarion call for sovereignty recovery: reclaiming domains such as aave.com; reclaiming official social media accounts such as X and Discord; and reclaiming control of the GitHub codebase.

Boado stated that true decentralization must include the decentralization of "soft assets." He proposed establishing a legal entity controlled by the DAO to hold these brand assets, thereby gaining recourse in traditional jurisdictions. This signifies that the DAO is attempting to evolve from a loose on-chain voting organization into a "digital sovereign entity" with actual legal definitions and assets.

Token price drops, whales sell at a loss and exit, Labs' unilateral push for voting sparks discontent.

When governance becomes mired in internal strife, the secondary market begins to react negatively. Although the $34 billion in assets locked in the protocol did not show significant fluctuations, the price of AAVE tokens, which are directly related to the interests of token holders, continued to fall by more than 25% within two weeks.

On December 22nd, the second-largest AAVE holder sold off their entire stake at a loss. Having accumulated 230,000 AAVE tokens at an average price of around $223, they liquidated their holdings at approximately $165 amidst the governance turmoil, resulting in an estimated paper loss of $13.45 million. This whale's departure is a negative commentary on AAVE's current governance chaos and a deep skepticism about its future value capture capabilities: if returns can be easily stripped away, the token's past valuation models become invalid.

To make matters worse, Labs unilaterally accelerated the proposal to the Snapshot voting stage without the original author Boado's consent, sparking strong protests from the community. Several representatives criticized the move as violating normal governance procedures.

Crypto KOL 0xTodd pointed out two issues: 1) The voting period is set for December 23-26, which may lead to a decrease in voting participation as many users will be on holiday during the Christmas season; 2) Boado's proposal is currently still in the discussion stage. Usually, a discussion post needs to go through 3-6 months of repeated communication and optimization before it can enter the voting stage.

Stani, however, responded that voting on the new ARFC proposal was entirely in line with the governance framework, and that voting was the best way to solve problems and the ultimate form of governance. This demonstrates a divergence between the DAO's emphasis on procedural correctness and the Labs' focus on efficiency and results.

However, on the other hand, absolute procedural correctness can also stifle efficiency. If the development team is completely deprived of commercial rewards, Labs' motivation to push forward with the protocol V4 upgrade will significantly decrease. If the brand is managed through a DAO, in the event of legal disputes, the lack of a direct responsible person could hinder a rapid response and could even lead to the brand being shut down by regulatory agencies.

As of now, only 3% of the votes are in favor, indicating a one-sided situation. The community may once again enter the "proposal-vote" process, or even worsen into a vicious cycle. In fact, Aave has already wasted a significant amount of time in its governance deadlock.

However, this crisis of trust is likely just a temporary problem, and a necessary "coming-of-age ceremony" for Aave as a leader in DeFi.

Many seasoned DAO participants have stated that even Aave, a benchmark for on-chain governance, is on the verge of splitting up. Perhaps the DAO governance model itself is not feasible. However, the fact that such transparent, intense, and evenly matched debates could occur within Aave itself demonstrates its extremely high degree of decentralized governance. This collective ability to correct course is precisely the value of decentralized governance.

A more crucial turning point came from external regulation. On December 20, the U.S. Securities and Exchange Commission (SEC) concluded its four-year investigation without taking any enforcement action against Aave. This was widely interpreted as tacit approval from regulators for highly decentralized governance models like Aave.

Despite the storm, Aave's fundamentals remain highly resilient. Founder Stani not only continues to respond to criticism, personally increasing his AAVE holdings by a total of $15 million, incurring a paper loss of over $2 million, but also announced a "three-pillar" strategy to rebuild community consensus and trust. However, Stani's move has also drawn skepticism from the community, who believe he intends to increase his own voting power. Even so, simply increasing Labs' influence in governance remains a superficial solution.

Governance evolution: Hybrid organizations may become a path for interest restructuring

As the controversy unfolds, a path of governance evolution may emerge: Aave may transform from a single on-chain protocol into a "hybrid organization".

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

1. DAO possesses sovereignty: it owns not only smart contracts, but also brands, domain names, trademarks, and user distribution channels;
2. Labs as a professional service provider: Labs no longer profits as an "owner," but rather as a top-level service provider authorized by the DAO. Fees charged by Labs at the front end should be based on the DAO's authorization and may require a sharing ratio determined with the DAO to cover development costs and contribute to token value.
3. Contractual governance: All distribution of benefits is no longer based on "voluntary donations", but on on-chain service agreements.

In fact, this controversy bears a striking resemblance to the 2023 incident where Uniswap Labs' front-end fees sparked community discontent. Ultimately, Uniswap reached an agreement with the community by defining Labs' commercial rights and the decentralization of the protocol layer.

Aave may go a step further, attempting to address the legal question of "who owns the brand" through a "Phase One - Ownership" proposal. If the proposal passes, any commercialization move by Labs will require authorization from the DAO at the procedural level, which will fundamentally end the possibility of "implicit privatization."

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

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