Advisors leave Aave as protocol punishes competitors

Aave governance discussions have been heating up recently. Two separate groups of advisors have left, and the protocol has faced criticism regarding a controversial rewards system designed to punish those who use competing platforms.

Widely regarded as one of decentralized finance’s (DeFi) most mature governance systems, (although the bar isn’t particularly high) Aave holds over $8 billion of assets, but it’s not without its share of drama.

Aave is governed as a decentralized autonomous organisation (DAO) in which AAVE token holders vote on any changes.

Although one token equates to one vote, influential parties within DAOs often emerge, be it due to the concentration of governance token holdings (e.g. team members or early investors) or as service providers paid to advise on specific topics.

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Gauntlet calls it quits

On Wednesday, Aave’s longtime risk management service provider, Gauntlet, announced its decision to walk away from the role it held since 2020.

Risk management is especially important for lending protocols, which must decide on which collateral assets to accept and adjust protocol parameters in response to market conditions.

Outsourcing this work to dedicated service providers, Gauntlet and Chaos Labs, rather than relying on AAVE holders to keep track, cost the Aave protocol $3.2 million per year.

Gauntlet co-founder John Morrow laid out the reasons that “Gauntlet is no longer able to continue [its] work with Aave,” which included “inconsistent guidelines and unwritten objectives of the largest stakeholders.”

Morrow cites strong opposition to Gauntlet’s contract renewal in November 2023, as well as another example in which Gauntlet received strong criticism while a similar proposal by Aave’s other risk manager, Chaos Labs, went smoothly.

The examples given in Morrow’s statement are telling, in that they are all published by governance delegate Marc Zeller, representing the ACI faction of AAVE holders.

The relationship between Zeller’s ACI and Gauntlet has been strained for some time. Zeller’s recent criticisms have included Gauntlet’s slow reaction times to a fast-moving industry and perceived moonlighting for competition.

In response to Morrow’s statement, Zeller suggests that Gauntlet’s move is that of a “mercenary” looking elsewhere for a better opportunity after having benefited from the “prestigious” role with Aave.

Merits and demerits

Never shy of ruffling feathers, Zeller has also come under fire for a proposed new incentive system for Aave users.

The proposed ‘Merit programme’ would use protocol revenue to reward ‘Aave-aligned’ user behaviour, but would include dilution of any rewards for users of ‘non-aligned protocols.’

Currently, only one project has been labelled as ‘un-aligned,’ namely Morpho, whose CEO sees the move as Aave “attempting to prevent the growth of Morpho.”

Morpho’s Aave Optimizers, which Zeller refers to as a “leech,” operate on top of Aave, matching borrowers and lenders peer-to-peer. Their users would have any rewards diluted up to 100% — the stick — whilst also being eligible for a boost for migrating assets out of the optimizers and back to Aave — the carrot.

Zeller frames the 90-day pilot programme (worth $2.1 million) as a first step in the long-term redistribution of profits to users.

However, the punitive aspect doesn’t sit well with some, who feel it goes against the DeFi ethos of user choice and disincentivizes innovation.

The proposal has been moved to a Snapshot vote, an intermediary (off-chain) sentiment check, before potentially moving forward to a full on-chain vote.

Time to GHO

Last week, the resignation of a member from the GHO Liquidity Committee, known as ‘TokenBrice,’ was accompanied by a tirade about ”theater” and “newspeak” in DeFi.

Aave had tasked the Liquidity Committee with maintaining the peg of GHO, Aave’s own stablecoin, which has tended to trade below peg since its inception in July last year.

The damning resignation statement from the departing member describes inefficiencies, poorly defined scope, and the danger of “governance professionals” who may have conflicts of interest.

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These ‘DeFi politicians,’ TokenBrice claims, use the committee “like a big bag of cash … to direct to protocol they have an interest in.”

The article also discusses DeFi more widely, stating that public governance forums are “just a stage” while the actual decisions are made “backstage.”

Meanwhile, in the Aave governance forums, the show continues. Three days remain to see what will happen next.