Aave faces key exits as Chaos Labs flags V4 upgrade risks

• Chaos Labs said it is exiting Aave after three years, citing misalignment on risk management following the V4 protocol upgrade.
• The firm said it will work to ensure the Aave DAO remains well-positioned after its departure.
• Chaos Labs' departure follows exits by BGD Labs and ACI amid Aave's V4 transition.

Chaos Labs announced on Monday that it will step down from its risk management role in Aave, according to a governance forum post by CEO Omer Goldberg.

The firm, which has overseen risk management across all Aave V2 and V3 markets and networks since November 2022, was responsible for pricing loans across the protocol. 

During its tenure, Aave reported zero material bad debt, while total value locked (TVL) grew from $5.2 billion to over $26 billion. Cumulative deposit volume also surpassed $2.5 trillion, with liquidations exceeding $2 billion.

Chaos Labs raises concerns over Aave V4 architecture and risk design

Chaos Labs stated that it engaged with DAO contributors "in good faith," noting that Aave Labs had proposed increasing its budget to $5 million to retain its services. However, the engagement ultimately ended due to what it described as a "fundamental misalignment" in risk management strategy.

"The more we discussed the path forward, the clearer that gap became," Goldberg wrote.

He highlighted several factors that drove the decision, including the departure of key contributors, which significantly increased the operational workload and risk.

The rollout of Aave V4 also expanded the scope of responsibilities, introducing greater operational and legal demands on an architecture not built by Chaos Labs. In addition, the firm noted it had operated the partnership at a loss for three years, even after the proposed budget increase.

Chaos Labs said it will work to "offboard in an orderly fashion" and ensure the DAO remains well-positioned after its departure. The firm added that it will submit a structured proposal outlining the transition timeline, scope of responsibilities to be handed off and measures to maintain continuity during the process.

The launch of Aave V4 on the Ethereum mainnet introduced a hub-and-spoke architecture with unified liquidity to improve capital efficiency.

Chaos Labs' departure adds to a series of recent exits by key service providers within the Aave ecosystem. In February, BGD Labs, the core engineering team behind Aave V3, announced plans to end its collaboration after April 1, citing significant changes to the DAO's structure. 

The Aave Chan Initiative (ACI), a major governance and business development delegate, also said it would wind down its operations. ACI founder Marc Zeller pointed to disagreements over transparency, voting power and budget proposals from Aave Labs.

AAVE is up 3% over the past 24 hours as of writing despite the announcement.