Key Takeaways
- After serving as Aave’s primary risk management provider for three years, Chaos Labs has terminated the partnership due to compensation and strategic conflicts.
- According to the company, Aave’s upcoming V4 protocol upgrade creates double the workload without proportional budget allocation.
- Chaos Labs claims it operated at a financial loss despite a proposed $5M annual budget from Aave.
- Aave’s leadership counters that Chaos Labs sought exclusive risk provider status and wanted to replace Chainlink’s oracle system—both requests were declined.
- Protocol operations remain unaffected, with LlamaRisk now handling expanded risk management responsibilities.
The decentralized lending protocol Aave has parted ways with Chaos Labs, its primary risk management partner for the past three years. This separation comes on the heels of exits by other major contributors including ACI and BGD Labs, raising questions about organizational cohesion within the Aave ecosystem.
Omer Goldberg, who founded Chaos Labs, announced the split via X, emphasizing that the choice “was not made in haste.” He explained that despite collaborative efforts with Aave’s decentralized autonomous organization, the partnership ultimately failed to align with the firm’s vision for proper risk management protocols.
Chaos Labs began its engagement with Aave in November 2022, providing risk oversight across the protocol’s lending platforms. Throughout this collaboration, Aave experienced remarkable expansion—its total value locked surged from approximately $5 billion to more than $26 billion, all without experiencing significant bad debt incidents.
The upcoming V4 iteration of Aave’s platform emerged as a primary point of contention, according to Goldberg. He explained that this new version substantially broadens risk management requirements, creating a situation where teams must simultaneously maintain both V3 and V4 during the migration period.
“History suggests these transitions take months and even years,” Goldberg wrote. “The workload during the transition doesn’t halve. It doubles.”
The financial arrangement proved problematic as well. Chaos Labs maintained that even with Aave’s offer to increase compensation to $5 million annually, the engagement would result in negative margins for the firm.
Liability and Regulatory Concerns
Goldberg highlighted additional worries regarding legal exposure. He pointed out the absence of established regulatory guidelines defining a risk manager’s liability when protocol failures occur.
“If things work, the work is invisible. If things break, the blame is not,” he wrote.
These concerns gained relevance following a March 12 incident where a user sustained a $50 million loss during a transaction on Aave’s platform. In response, Aave subsequently unveiled an “Aave Shield” mechanism designed to restrict potentially dangerous trading activity.
Aave Leadership Provides Alternative Perspective
Stani Kulechov, CEO of Aave Labs, presented a contrasting narrative regarding the separation. According to Kulechov, Chaos Labs had submitted a proposal seeking exclusive status as Aave’s only risk management provider while simultaneously requesting that the protocol transition away from Chainlink’s price oracle infrastructure in favor of Chaos Labs’ own solution.
Aave’s governance rejected both proposals. Kulechov emphasized the protocol’s successful history with Chainlink and stated that eliminating LlamaRisk would undermine Aave’s deliberately designed dual-layer risk management architecture.
Kulechov further revealed that Chaos Labs had already begun considering an exit from risk consulting services prior to the formal separation.
He assured stakeholders that the departure hasn’t impacted Aave’s smart contract functionality, asset onboarding processes, or blockchain network integrations.
Moving forward, Aave will rely on LlamaRisk alongside internal risk management teams to ensure continuous protocol oversight.
This transition occurs during a period of sustained growth for Aave. The protocol achieved a significant milestone in late February by surpassing $1 trillion in aggregate lending volume—a historic first within the decentralized finance sector.
