Consultants leave Aave as protocol punishes competitors

Discussions over Aave’s governance have heated up recently. Two separate groups of advisors have left, and the protocol has been criticized for a controversial rewards system designed to punish those who use competing platforms.

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

Aave is governed as a decentralized autonomous organization (DAO) where AAVE token holders vote on any changes.

While one token equals one voteInfluential actors often emerge within DAOs, either due to concentration of holdings in governance tokens (e.g. team members or early investors) or as service providers paid to provide advice on specific topics.

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Read more: Curve exploit shows DeFi is still far from being decentralized in 2023

Gauntlet says enough

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

Risk management is especially important for lending protocols, which must decide 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, it costs the Aave protocol $3.2 million per year.

Gauntlet co-founder John Morrow explained the reasons why “Gauntlet is no longer able to continue [its] working with Aave,” which included “inconsistent guidelines and unwritten objectives from major stakeholders.”

Morrow cites strong opposition to renewing Gauntlet’s contract in November 2023, as well as another example where Gauntlet received strong criticism while a similar proposal from Aave’s other chief risk officer, Chaos Labs, fared well.

The examples provided in Morrow’s statement are significant, as they are all published by governance delegate Marc Zeller, who represents the ACI faction of AAVE holders.

The relationship between Zeller’s ICA and Gauntlet has been tense for some time. Zeller’s recent criticisms have included Gauntlet’s slow reaction time to a rapidly changing industry and the perception of moonlighting for the 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 benefiting from the “prestigious” role with Aave.

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Merits and demerits

Never shy to ruffle feathers, Zeller has also been criticized for proposing a new incentive system for Aave users.

The proposed “merit program” would use protocol revenue to reward the behavior of “Aave-aligned” users, but would include dilution of any rewards for users of “non-aligned protocols.”

Currently, only one project has been labeled “non-aligned”, namely Morpho, whose CEO sees the move as an “attempt by Aave to impede Morpho’s growth”.

Morpho’s Aave Optimizers, which Zeller calls a “leech,” operate on Aave, matching borrowers and lenders peer-to-peer. Their users would have all rewards diluted up to 100% (the stick), while still being entitled to a boost for migrating assets from optimizers and back to Aave (the carrot).

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

However, the punitive aspect is disliked by some, who believe it goes against the DeFi ethos of user choice and disincentivizes innovation.

The proposal was moved to a Snapshot vote, an intermediate (off-chain) sentiment check, before potentially moving to a full on-chain vote.

It’s time for GHO

Last week, the resignation of a member of the GHO Liquidity Committee, known as “TokenBrice,” was accompanied by a rant about “theater” and “new language” in DeFi.

Aave had instructed the Liquidity Committee to maintain the peg of GHO, Aave’s stablecoin, which has they tended to trade below the reference level since its inception in July last year.

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

I resigned from my position on the Aave/$GHO Liquidity Committee

I can’t relate to the way decisions are made and things are done there, but the majority of the committee members are satisfied with the current state, so I’m out

For more information check out the next blog post tweet👇

— tokenbrice.eth (🐜,🐔) (@TokenBrice) February 8, 2024

Read more: Here’s why decentralized finance is actually very centralized

These “DeFi politicians,” TokenBrice argues, use the committee “like a big money bag… to direct the protocol they have an interest in.”

The article also discusses DeFi more broadly, stating that public governance forums are “just a phase” while actual decisions are made “behind the scenes.”

Meanwhile, in the Aave governance forums, the show goes on. Three days left to see what happens next.

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