Chaos Labs has stepped away from the Aave ecosystem after serving as its main risk adviser for the past three years, citing both a budget disagreement and differences over how risk should be handled going forward.
The split, announced on Tuesday, follows a period of negotiations between the firm and members of the Aave community.
Chaos Labs founder Omer Goldberg said the decision was carefully considered and not made suddenly. He added that Aave Labs had been supportive during discussions and even backed a proposal to increase Chaos Labs’ budget to around $5 million to continue the partnership.
Still, the company ultimately decided to move on, saying the relationship no longer matched its approach to managing risk. The departure marks a notable shift for Aave, which will now need to reassess how it oversees risk across its lending platform.
Aave clarifies its position
The founder of Aave Labs, Stani Kulechov, has tried to shed some light into the idea that the reason behind Chaos Labs’ separation from the Aave protocol was not because of a disagreement but because of differences in opinions on how risk management should be carried out as the project develops further.
While admitting that the separation can be termed professional, he said it came about due to different approaches on how to distribute responsibilities.
As explained by Kulechov, one of the major reasons why the two separated was because Chaos Labs wanted to become the only risk management provider for Aave. Moreover, the firm also wanted to set up its own pricing model as opposed to using the current one in place.
By accepting these proposals, it would mean that Aave was ready to get rid of all its other risk management partners, leaving the platform with just one such partner. However, it would be against the protocol’s principles.
Chaos Labs has had an active participation in the operations of Aave, as the firm has been operating behind the scenes, pricing loans, monitoring the risks posed by collateral, and maintaining stability in Aave’s V2 and V3 lending protocols since November of 2022.
This was a period during which the DeFi protocol experienced considerable growth, with its total value locked surging to about $26 billion, which was roughly five times higher than before. This led to the prominence of risk management, as the larger amount of money at stake entailed increased consequences if something went wrong.
The subject of risks in relation to Aave became highly debated in recent days after a particular user suffered a loss estimated at around $50 million in value while trading using the interface of the DeFi protocol.
The case raised many questions regarding risk management, with Aave community members voicing their opinion that it is necessary to implement additional measures that will allow users to gauge the level of risk involved in any trade.
As a result, Aave made an announcement about the implementation of the “Aave Shield” project, which is aimed at discouraging risky transactions through warnings.
Chaos Labs cites rising risk demands outpacing support structures
In terms of the Chaos Labs approach, the move was based on the company’s realization that demands about risk management in the industry were evolving much faster than related supporting measures.
According to the founder of the company, Omer Goldberg, the changes in the Aave ecosystem made the organization’s responsibilities increase significantly due to the departure of some contributors who worked there previously. It should be noted that in this context, it is important for the firm to start developing Aave V4 because it will be necessary to migrate to a new version of the protocol, which is always fraught with various risks and requires managing two systems at once – the previous one and the newly created.
Goldberg believes that major changes in the area of decentralized finance cannot be completed swiftly no matter how well-coordinated the process is.
Far from making things easier, that might just be adding another burden to the process and increasing the probability of some unforeseen trouble being experienced along the way. On the matter of accountability in DeFi, Kulechov mentioned that no legal guidelines yet exist defining the obligations of risk managers in case of protocol failure, resulting in considerable losses.
Nevertheless, despite all these issues, Chaos has decided to end its partnership which, at the very least, would have earned the company about $5 million per year.
As opposed to Chaos, Kulechov believes that the decision to end the cooperation with Aave is just a continuation of a larger trend which has started well before the announcement. Specifically, he mentions that Chaos has started thinking about gradually reducing its risk consultancy services.
On top of that, Kulechov claims that while Aave tried hard to convince Chaos to stay, promising to double its payments, the project will not change its stance regarding risk consultancy services and infrastructure replacement.
Kulechov further noted that there was no disruption in the basic functionality of the Aave protocol due to the exit of Chaos Labs. The lending market continues to function as usual, and the company’s smart contracts, tokens, and network integrations are safe.
For the future, Aave confirmed that it would continue working with its remaining risk partner and stick to its two-tiered risk management system.