Chaos Labs ended its 3-year-long risk management partnership with Aave. This isn’t a sudden backout; the official announcement came amid rising misalignment with Chaos Labs and Aave’s strategic direction, particularly around the expanded risk responsibilities introduced by the protocol’s upcoming V4 upgrade.
Since November 2022, Chaos Labs has been securing Aave’s billions in TVL (total value locked). Chaos Labs isn’t just any contributor to Aave Labs; they were the ones pricing every single loan on Aave. After their partnership, Aave’s TVL went from around $5 billion to over $50 billion. Aave managed risk across 250+ markets and 19 distinct blockchains and handled almost $1 trillion in loans and $2 billion in liquidations without incurring a single instance of bad debt.
What changes with Aave V4?
The exit centers on Aave’s V4 upgrade. This upgrade is all about a new model called hub-and-spoke. Where liquidity from all users is pooled in central, secure liquidity hubs, which serve as a large shared reservoir of funds.
Users then interact with separate Spokes and borrowing markets that can have their own custom risk rules, collateral requirements, and lending conditions. This setup improves capital efficiency by keeping all the money in one shared pool while still allowing each spoke to manage risk independently. As a result, Aave can more easily add new features like real-world assets, structured loans, and services for big institutions without splitting up liquidity or reducing overall safety.
What led to the exit?
Chaos Labs argues that V4 is a total zero-to-one rebuild that expands operational and legal risks. They believe that maintaining both the old V3 and new V4 systems at the same time would double their workload at a time when other key contributors, like BGD Labs and the Aave Chan Initiative (ACI), have also exited.
Chaos CEO Omer Goldberg stated that continuity of brand is not the same thing as continuity of system.
Beyond the technical issues, the split is deeply financial. Chaos Labs revealed they have been operating at a loss for years. Even with a proposed budget increase to $5 million, they claimed they would still be running at a loss.
The firm estimated that safely managing the V3-to-V4 transition requires a minimum of $8 million. They pointed out that while Aave earns massive revenue, projected at $142 million for 2025, it only allocates about 2% to risk management. In contrast, traditional banks spend 6-10% on compliance and risk. Chaos Labs argued they were left with two unacceptable options: deliver subpar safety or continue subsidizing the protocol with their own company funds.
Aave’s Response to the announcement
Aave founder Stani Kulechov has taken to social media, thanking Chaos Labs for their years of work and assuring the community that the protocol will face no disruptions. Aave plans to lean on its other risk partner, LlamaRisk, and internal teams to fill the place.
There are signs of a power struggle. Aave stated that Chaos Labs was seeking a larger role, potentially replacing existing partners like Chainlink with its own systems. The protocol pushed back on this, viewing it as a risky move that could introduce a single point of failure.
