Aave's Governance Crisis and Liquidity Risks Amid Founder vs. DAO Tensions

The Aave protocol, a cornerstone of decentralized finance (DeFi), has long been celebrated for its innovation in lending and borrowing. However, the governance crisis of 2025 has exposed deep fractures between Aave Labs, the protocol's founding team, and the Aave DAO, raising critical questions about the long-term investment viability of AAVE. This analysis examines the interplay of governance dysfunction, liquidity risks, and technical progress, while evaluating whether Aave can reconcile its decentralized ethos with the practical demands of financial infrastructure.

Governance Tensions: Founder Control vs. DAO Autonomy

The 2025 crisis centered on AaveLabs' alleged mismanagement of the DAO treasury and its controversial proposal to transfer key brand assets-such as domains and social media handles-to the DAO via a Snapshot vote. Critics, including former CTO Ernesto Boado and Aave Chan Initiative leader Marc Zeller, accused AaveLabs of bypassing governance norms and orchestrating a "hostile takeover attempt." The integration of CowSwap into the Aave frontend, which redirected swap fees away from the DAO treasury, further intensified tensions, with estimates suggesting up to $10 million in annual revenue was siphoned without token holder approval.

Stani Kulechov, Aave's founder, defended these actions as necessary to align with community governance principles. Yet, the timing of the vote during a holiday period raised concerns about low participation and transparency. Polymarket odds indicated only a 25% chance of the proposal passing, underscoring the DAO's skepticism toward centralized control. This standoff highlights a broader challenge: while the Aave DAO theoretically democratizes decision-making, its reliance on large token holders and risk management firms has created a de facto oligarchy, undermining decentralization.

Liquidity Risks and the Limits of Overcollateralization

Aave's governance crisis has also exposed vulnerabilities in its risk management framework. The protocol's reliance on overcollateralized lending-a core DeFi mechanism-has proven insufficient when dealing with illiquid assets. For example, the Curve Finance crisis of 2023, where a $70 million hack triggered a 90% price drop in CRV, demonstrated how even overcollateralized systems can face systemic collapse if collateral lacks liquidity.

Aave's Horizon RWA Instance, launched in Q3 2025, aims to mitigate this by unlocking real-world assets (RWAs) as collateral. While this diversifies fee streams and enhances GHO's utility, it introduces new risks. RWAs, such as real estate or corporate debt, are inherently less liquid than crypto assets, potentially amplifying exposure to market shocks. The success of Horizon hinges on Aave's ability to balance innovation with prudent risk management-a task complicated by the ongoing governance disputes.

Market Impact and Price Projections

The governance crisis has already had tangible effects on AAVE's price. A 10% sell-off in late 2025 followed revelations about the CowSwap integration and treasury redirection. Analysts on platforms like Polymarket and Chainplay have offered mixed projections for AAVE's future. By December 2025, the token is expected to trade between $188.31 and $209.31, with a potential 12.1% return on investment. Optimistic scenarios suggest an average price of $280 by 2026 and $1,000 by 2030, driven by technical progress in Aave V4 and increased institutional adoption.

However, these projections assume a resolution of governance tensions. If the DAO fails to assert control or if further controversies emerge, AAVE could face prolonged volatility. Historical precedents, such as the FTX collapse, show how governance failures in major protocols can trigger cascading sell-offs and regulatory scrutiny. South Korea's pro-crypto policies under President Lee Jae-myung may offer some stability, but institutional adoption alone cannot insulate Aave from governance-driven risks.

The Path Forward: Governance Reforms and Investor Caution

Aave's long-term viability depends on its ability to reconcile decentralization with operational efficiency. Proposals like Hyperliquid's revenue reinvestment model-where profits fund token buybacks and team compensation-could serve as a blueprint for aligning incentives. However, Aave's fragmented governance structure, where technical development (Aave V4) and risk management coexist with founder-led initiatives, remains a liability.

For investors, the key risks are twofold: (1) the DAO's inability to enforce accountability, and (2) the systemic risks of overreliance on code-based governance. While Aave's technical roadmap is robust, its governance model must evolve to address centralization concerns. Until then, AAVE remains a high-risk, high-reward asset, with its price trajectory hinging on the resolution of these foundational tensions.