Tokens vs. Equity: The Inside Story of the Aave Dispute

Title: Tokens vs Equity: The Full Story of the Aave Dispute

Author: Cookie

Source:

Repost: Mars Finance

On December 17, Aave founder and CEO Stani.eth announced on social media that after four years, the U.S. Securities and Exchange Commission has completed its investigation into the Aave protocol.

This was originally an inspiring milestone. However, after Web2 ended its entanglement with the SEC, and turning the page, Aave found itself in a “fire in the backyard” of Web3. Over the past two weeks, community governance disputes within Aave have been a hot topic in the English-speaking crypto community. Alongside this dispute, a series of events have unfolded, including whale sell-offs, founder “market rescue” efforts, governance and trust issues.

Let’s take a look at the full background of this event.

Cause: Revenue Distribution Dispute

On December 4, Aave Labs switched the default Swap function on its front-end interface aave.com from ParaSwap to CoWSwap.

This was initially a minor update, but senior governance participant and independent delegate EzR3aL discovered that the fee revenue generated by the default Swap function on aave.com no longer went into the Aave DAO treasury as before, but instead flowed into an address controlled by Aave Labs. According to on-chain investigation, EzR3aL stated that at the time of writing, the most recent income transfer by Aave Labs was worth at least $200,000. Based on weekly income data, it is estimated that the Aave DAO loses at least $10 million annually.

Aave Labs did not proactively mention this change in fee revenue distribution, which made many $AAVE holders feel “backstabbed.”

Aave Labs responded multiple times under EzR3aL’s post, mainly arguing:

• Protocols and products are different concepts. The front-end interface causing the revenue distribution dispute is a product operated by Aave Labs, completely independent of the protocol managed by the Aave DAO. Aave Labs has the right to decide how to operate and profit.

• Maintaining the front-end interface requires significant resources, and the Aave DAO has never been asked to bear these costs.

• In the original architecture integrating Paraswap, the donation mechanism was based on surplus. When the execution price exceeds the quote, the surplus is donated to the Aave DAO. This is not protocol fee, nor is it a mandatory payment to the DAO. With the design change, the original donation mechanism was naturally canceled.

• The new CoWSwap routing option improves execution quality, including providing MEV protection for interface users. This routing was developed by Aave Labs using its own resources, and it did not replace or disable the adapter owned by the Aave DAO at the protocol level. The DAO can allow any interface to integrate its adapters to enable Swap functions.

Escalation of Dispute: Who Owns “Aave”?

Aave Labs’ responses under EzR3aL’s post were not well understood or accepted by the community.

On December 13, @DefiIgnas published a lengthy article titled “Who Owns Aave: Aave Labs or Aave DAO?”, which sparked widespread discussion.

On December 16, Ernesto, former CTO of Aave Labs, released a governance proposal titled “$AAVE Alignment Phase 1: Ownership,” advocating that the Aave DAO and Aave token holders should explicitly control core rights such as protocol IP, branding, equity, and revenue. Representatives from Aave service providers, including Marc Zeller, publicly endorsed the proposal, calling it “one of the most influential proposals in Aave governance history.”

In the proposal, Ernesto mentioned, “Due to some past events, some previous posts and comments have been strongly hostile toward Aave Labs, but this proposal aims to remain neutral. It does not imply that Aave Labs should not be contributors to the DAO, nor does it question their contribution legitimacy or capability, but the decision should be made by the Aave DAO.”

On December 18, Stani.eth, founder and CEO of Aave, responded to the proposal, stating that he would strengthen communication between Aave Labs and the community but would vote against the proposal because it simplifies a complex legal and operational issue into a binary “yes or no” vote, lacking practical solutions, and could impact the overall development of Aave.

This further intensified the dispute.

Whale Sell-offs and Founder “Market Rescue”

On December 22, according to on-chain analyst Yu Yan monitoring, the second-largest AAVE whale address sold 230,000 AAVE tokens (approximately $38 million), causing the price to drop over 10% in a short period. During 5:40 to 7:05 AM, this whale exchanged all AAVE for 227.8 WBTC and 5869.4 stETH. The AAVE was purchased at the end of last year or early this year, with an average cost of about $223.4. The liquidation at an average price of around $165 resulted in an estimated loss of $13.45 million.

A few hours after the whale’s exit, Aave Labs announced that the issue required formal governance decision-making and officially initiated a 3-day snapshot vote.

On December 23, founder and CEO Stani.eth spent 1699 ETH (about $5.15 million) to buy 32,660 AAVE tokens at an average price of $157.78. Including this purchase, he bought a total of 84,033 AAVE within a week, with an average price of approximately $176, costing about $14.8 million.

However, after the founder’s “market rescue,” price volatility continued. On December 24, address 0x3c7, which is associated with large short positions on AAVE, opened 7x leveraged short positions worth $2.42 million at an average price of $151, with a liquidation price of $173.

Market skepticism and concerns about the founder’s “rescue” also grew. DeFi strategist and liquidity expert Robert Mullins wrote that the purpose of this buy-in was to increase Kulechov’s voting power to support a proposal that would directly harm token holders’ interests in the upcoming vote. He added, “This is a clear example showing that the token mechanism has not been sufficiently designed to effectively prevent governance attacks.”

Famous crypto KOL Sisyphus also expressed similar concerns, suggesting that Kulechov may have sold millions of dollars worth of AAVE tokens between 2021 and 2025, and questioned the economic motivation behind his recent buyback.

Outcome

On December 26, Evgeny Gaevoy, founder and CEO of Wintermute, announced that Wintermute would vote against the ARFC governance proposal to “transfer control of the AAVE brand assets to token holders.”

Gaevoy stated that the current proposal lacks specific details, and it is unclear how the entity controlling the front-end and branding would govern, whether it would be profit-oriented, and how it would operate. Token value realization is a core issue facing AAVE, and there is a clear mismatch of expectations between AAVE Labs and many token holders. Since 2022, Wintermute has invested in AAVE and participated in its governance. Gaevoy hopes AAVE Labs will seriously address the token value realization issue, which could serve as a reference for other tokens.

The voting results were announced this morning: the proposal was ultimately rejected with 55.29% voting against, 41.21% abstaining, and only 3.5% in favor.

So, is this the end of the dispute? Clearly not, because the mistrust between the community and Aave Labs remains unresolved. This seemingly communication breakdown-triggered dispute actually reflects long-standing conflicts in the crypto space over the boundaries of rights and interests between developers/operational teams and governance bodies, often lacking institutional constraints. The entanglement between Aave Labs and the Aave DAO ironically demonstrates Aave’s success, as many other projects in crypto lack the opportunity for such high-quality discussions to attempt to resolve issues (see: Why are most acquisitions in crypto now done without tokens?).

This is a problem Aave must face, and it is also an issue that the entire cryptocurrency industry will inevitably confront sooner or later.