Chaos Labs withdraws from Aave risk management role following deliberate assessment
Risk management firm Chaos Labs cited concerns over Aave V4's migration risks as reasons for departure, whereas Aave claims the firm sought exclusive control as the platform's only risk management provider.
After a three-year partnership serving as the primary risk management service provider for the crypto lending protocol, Chaos Labs has concluded its relationship with the Aave ecosystem, pointing to budgetary conflicts and fundamental differences regarding risk management approaches.
In an X post published Monday, Chaos Labs founder Omer Goldberg stated, "This decision was not made in haste." He continued, "We worked in good faith with DAO contributors. Aave Labs was professional and supported increasing our budget to $5m to retain us. However, we are leaving because the engagement no longer reflects how we believe risk should be managed."
According to Aave Labs CEO Stani Kulechov, while Chaos didn't leave under negative circumstances, the firm had submitted a proposal that would have positioned them as the exclusive risk provider, effectively eliminating other partners — a condition Aave found unacceptable.
Since November 2022, Chaos has been instrumental in Aave's backend operations, handling loan pricing and risk oversight across the Aave V2 and V3 marketplaces, a period during which Aave's total value locked experienced a fivefold increase to reach $26 billion.
Risk management has emerged as a central discussion topic within the Aave community following an incident on March 12 where a user experienced a $50 million loss during a transaction through Aave's interface. In the subsequent week, Aave announced plans to roll out an "Aave Shield" protective mechanism designed to discourage users from executing high-risk transactions.
Regarding Chaos' exit, Goldberg explained that growing misalignment developed concerning the parties' perspectives on risk management practices. He pointed out that the departure of certain Aave contributors had increased its workload burden, while simultaneously contending that the expanded capabilities of Aave V4 brought additional operational and legal liabilities that would be borne by Chaos.
"While Aave Labs is optimistic about a swift migration to V4, history suggests these transitions take months and even years," Goldberg said. "Until V4 fully absorbs V3's markets and liquidity, both systems need to be operated and managed simultaneously. The workload during the transition doesn't halve. It doubles."
When considering the possibility of protocol failure, Goldberg noted, "There is no regulatory framework, no safe harbor, and no settled law that answers the question of what a risk manager or curator owes when a protocol fails. If things work, the work is invisible. If things break, the blame is not."
Therefore, "We are walking away from a $5 million engagement," Goldberg said.
Chaos wanted Aave to boot LlamaRisk, Chainlink: Kulechov
Aave Labs CEO Stani Kulechov presented a somewhat different narrative, asserting that Chaos had requested to become the exclusive risk manager while also proposing that Aave utilize its proprietary price oracles rather than continuing with Chainlink's infrastructure.
Agreeing to such demands would have required Aave to remove its other risk protocol collaborator, LlamaRisk, consequently dismantling its dual-layer economic risk framework.
Kulechov further stated that Aave was not prepared to incorporate Chaos-developed price oracles, referencing Aave's proven "track record" with Chainlink's offerings, which its "users are currently more comfortable with at scale."
He additionally revealed that Chaos was already "exploring winding down its risk consultancy services," and that Aave had proposed doubling its compensation to $5 million in an effort to keep them onboard.
Cointelegraph reached out to Chaos Labs for comment.
Kulechov emphasized that Chaos' exit has not caused any disruption to the Aave protocol, its smart contracts, token listings or network integrations.
Looking ahead, Aave stated it "will work closely with LlamaRisk to ensure a smooth transition" and preserve its dual-layer economic risk framework.
The departure of Chaos occurs during an ongoing protocol-wide dispute regarding the allocation of funding and revenue authority between Aave Labs and Aave's decentralized autonomous organization.
Notwithstanding the internal challenges, Aave surpassed the $1 trillion milestone in cumulative lending volume during late February, achieving an industry first within the DeFi sector.