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Decentralized finance (DeFi) giant Aave has lost its top risk manager of more than three years, Chaos Labs, in a setback that triggered a near 6% drop in the value of its native token.
Chaos Labs founder Omer Goldberg cited a "fundamental misalignment" over risk management as the reason for parting ways with the largest DeFi network. He said the Aave engagement was never profitable and that the protocol’s growing scale and risk exposure led to the decision to leave.
Banking for the unbanked
DeFi started as a way for crypto users to access liquidity without selling their assets. The promise of banking services on the blockchain with no third-party intervention quickly made the sector a mainstay for crypto natives, who were often excluded from traditional banking. DeFi protocols attracted billions of dollars in deposits, growing to sizes comparable to regional banks.
To avoid overreach and preserve decentralization, most onchain finance protocols, including Aave, are governed by decentralized autonomous organizations (DAOs). These act as a form of online governance where token holders vote on major decisions, which are then enforced via smart contracts. Without strong mechanisms to veto proposals, many DAOs have struggled with overscaling and following popular trends.
The road ahead
Aave remains the largest DeFi protocol with over $24bn in total value locked, according to DeFiLlama. Its recent V4 upgrade significantly increased the protocol’s risk exposure, which would require substantially more resources to manage. Aave had raised its budget for Chaos Labs to $5mn, Goldberg said in a post on X.
"Money solves many problems, but not all of them," he said. "The deeper issue is a fundamental misalignment on how risk should be managed at Aave. The more we discussed the path forward, the clearer that gap became."
Unlike traditional banks, which benefit from internal risk departments and external oversight, DeFi protocols rely heavily on specialist risk managers. These firms act as auditors and advisors, and their departure can significantly impact a protocol’s risk management capabilities.
Aave’s native token has dropped nearly 6% since the announcement, falling from around $97.70 at 16:00UTC on 6 Apr to about $92.20 by 09:30UTC on 7 Apr.