Chaos Labs has parted ways with the Aave ecosystem after serving as the primary risk services provider for the cryptocurrency protocol for three years, citing a budget dispute and disagreements over how Aave should manage risk.
“This decision was not made in haste,” said Chaos Labs founder Omer Goldberg he said in the post to X on Monday. “We have been working in good faith with DAO providers. Aave Labs has demonstrated professionalism and supported increasing our budget to $5 million to retain us. However, we are leaving because the commitment no longer reflects how we believe risk should be managed.”
Aave Labs CEO, Stani Kulechov he said that Chaos did not leave on bad terms, but claimed that Chaos presented a proposal to become the sole risk provider and thus displace other partners – a compromise that Aave was not willing to accept.
Chaos played a key role in Aave’s back-end infrastructure, starting with loan pricing and risk management in the Aave V2 and V3 markets from November 2022, during which Aave’s total locked value quintupled to $26 billion.
Risk became a major topic of discussion in the Aave community after a user lost $50 million in a transaction on March 12 while interacting with the Aave interface. The following week, Aave announced that it would introduce an “Aave Shield” protection feature that will deter users from high-risk transactions.
Regarding Chaos’ departure, Goldberg said there is growing disagreement on how the parties believe risk should be managed. He noted that some Aave collaborators had left, increasing the workload, while arguing that the expanded functionality of Aave V4 introduced additional operational and legal risks that fell on Chaos’ shoulders.
“While Aave Labs is optimistic about a rapid migration to V4, history suggests these transitions take months or even years,” Goldberg said. “Until V4 fully absorbs the markets and liquidity of V3, both systems must be operated and managed simultaneously. The workload during the transition does not halve. It doubles.”
Weighing the risk of a protocol failing, Goldberg said: “There is no regulatory framework, no safe harbor, no settled law that answers the question of what a risk manager or custodian is owed when the protocol fails. If everything works, the work is invisible. If something breaks, there is no fault.”
As a result, “we are moving away from the $5 million commitment,” Goldberg said.
Chaos wanted Aave to launch LlamaRisk, Chainlink: Kulechov
Aave Labs CEO Stani Kulechov told a slightly different story, stating that Chaos wanted to be the sole risk manager and exploit its price oracles instead of Chainlink.
Meeting this request would force Aave to phase out its other risk protocol partner, LlamaRisk, and thus abandon its two-tier economic risk model.
Related: DeFi lender Aave launches Ethereum L2, X Layer owned by OKX
Kulechov added that Aave does not want to integrate price oracles built by Chaos, citing Aave’s “experience” with Chainlink services, which “users are currently more comfortable with at scale.”
He also said Chaos was “considering terminating its risk consulting services” and that Aave had offered to double its payment to $5 million to retain them.
Cointelegraph has reached out to Chaos Labs for comment.
Kulechov noted that Chaos’ departure did not disrupt the Aave protocol, its clever contracts, token lists or network integration.
Going forward, Aave said it “will work closely with LlamaRisk to ensure a smooth transition” and maintain its two-tier economic risk model.
Chaos’ departure comes after a protocol-long dispute over how much funding and revenue control Aave Labs should receive versus Aave’s decentralized autonomous organization.
Despite internal issues, Aave surpassed $1 trillion in cumulative loan origination volume at the end of February, a first for a company in the DeFi industry.
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