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Chaos Labs exits Aave after risk clash and legal fears

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Chaos Labs exits Aave after risk clash and legal fears

Chaos Labs is ending its three‑year Aave mandate after a $27m oracle fiasco, deep governance infighting, and mounting fears over who is legally liable when DeFi risk breaks.

Summary

  • Chaos Labs is terminating its Aave mandate after three years, citing a fundamental dispute over how the $27 billion lending protocol should manage risk.
  • The move follows high‑profile exits by Aave Chan Initiative and BGD Labs, deepening governance turmoil at DeFi’s largest money market.
  • Chaos also flags undefined legal liability for DeFi risk managers after recent oracle failures triggered tens of millions of dollars in erroneous liquidations on Aave.

Chaos Labs, the risk firm that has “priced every loan initiated on Aave and managed risk across all Aave V2 and V3 markets and networks” since late 2022, is walking away from the protocol after concluding “the engagement no longer reflects how we believe risk should be managed.” In an announcement echoed by BSCN on X, the company said Monday it is “proactively terminating its engagement with DeFi’s largest lending protocol @aave, citing a fundamental disagreement over how risk should be managed,” and warning that DeFi risk managers currently operate without a clear regulatory framework or safe harbor if something breaks.

The departure lands as Aave, which has processed roughly $3.33 trillion in cumulative deposits and nearly $1 trillion in loans and recently crossed $50 billion in total value locked, faces mounting internal and external scrutiny over governance, risk, and legal exposure.

Chaos is the third core contributor to step back from Aave in recent months, after governance shop Aave Chan Initiative and core technical team BGD Labs each disclosed plans to end their mandates amid disputes over power, budgets and roadmap control inside the DAO. ACI founder Marc Zeller framed his own exit as the product of a protracted power struggle, warning that a recent vote handed Aave Labs “the largest budget in DAO history,” while BGD told tokenholders “we will not be seeking a renewal and will cease our contribution to Aave” once its contract expires. These fractures are emerging even as Aave continues to command roughly 30–40% of the DeFi lending market and nearly a quarter of sector TVL, underscoring how governance tensions can flare precisely when protocols reach systemically important scale.

Chaos Labs’ break with Aave follows a series of oracle and risk‑engine incidents that have already driven uncomfortable questions about who is accountable when automated risk systems misfire. In March, a misconfigured Chaos Labs oracle on Aave caused erroneous liquidations of around $26.9 million in positions using staked Ether collateral, after the CAPO risk agent reported an inaccurately low price ratio and pushed several accounts below their health‑factor thresholds. A separate post‑mortem and external coverage estimated roughly $27 million in forced liquidations triggered when wrapped staked Ether was undervalued by about 2.85%, affecting at least 34 high‑leverage positions before parameters were manually corrected. Chaos Labs and Aave have emphasized that no bad debt was incurred and that affected users would be reimbursed, but the episode illustrates the legal gray zone the firm now highlights: risk managers are making protocol‑wide decisions that can move tens of millions of dollars in seconds, yet operate without explicit regulatory safe harbor or clearly defined liability regimes if those decisions go wrong.

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The exits of Chaos Labs, ACI and BGD Labs leave Aave’s DAO with fewer seasoned operators just as the protocol rolls out its next‑generation v4 architecture and pushes deeper into institutional‑grade features. Aave’s total value locked sits in the tens of billions of dollars and the protocol has grown its TVL by more than 50% in certain recent quarters, outpacing the broader DeFi sector and making its risk governance choices a live concern for markets well beyond crypto‑native users. With multiple core contributors now publicly criticizing governance dynamics and risk alignment, Aave’s community will be forced to answer the question Chaos Labs has implicitly posed: who, exactly, bears responsibility when decentralized risk systems break at scale?

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Every 5 Minutes: Korea’s New Rule for Crypto Exchanges

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South Korea’s financial regulator has ordered all crypto exchanges to verify user asset balances every five minutes, following a massive overpayment incident that shook market confidence earlier this year.

One botched reward payout exposed systemic cracks across the entire industry.

What Triggered the Rules

In February, Bithumb accidentally sent 2,000 BTC per person instead of 2,000 Korean won ($1.40) during a promotional event. The error amounted to roughly $42 billion in misallocated crypto. The Financial Services Commission (FSC) launched emergency inspections across all five major Korean exchanges immediately after. What they found went far beyond a single human mistake.

Most exchanges were only reconciling their books once every 24 hours. Three had no automatic kill switch to halt trading when discrepancies appeared. Four lacked multi-step approval systems for high-risk manual transactions. Two exchanges hadn’t even separated their general accounts from high-risk transaction accounts — a basic safeguard.

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What Exchanges Must Now Do

The FSC announced a three-pillar reform package on April 6. Exchanges must run automated balance checks every five minutes, with alerts and automatic trading halts triggered by major mismatches. Monthly external audits replace the previous quarterly schedule, and public disclosures must now include asset-by-asset blockchain holdings rather than a simple coverage ratio.

For manual, high-risk transactions such as event payouts, exchanges must use separate accounts, deploy validity-check systems that automatically reject mismatched inputs, and require cross-verification by a third party before execution.

The FSC will also require exchanges to appoint dedicated risk management officers and establish risk management committees — standards already expected of traditional financial firms. Compliance checks move from annual to twice-yearly, with results reported to regulators.

DAXA, the industry body, will complete self-regulatory amendments this month, with systems built out by May. Key provisions will feed into Korea’s forthcoming second-phase Digital Asset Act.

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The post Every 5 Minutes: Korea’s New Rule for Crypto Exchanges appeared first on BeInCrypto.

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Chaos Labs Leaves Aave Due to Budget, Risk Disagreements

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Chaos Labs Leaves Aave Due to Budget, Risk Disagreements

Chaos Labs has parted ways with the Aave ecosystem after serving as the crypto lending protocol’s main risk service provider for three years, citing a budget dispute and disagreements over how Aave should manage risk.

“This decision was not made in haste,” Chaos Labs founder Omer Goldberg said in a post to X on Monday. “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.”

Source: Omer Goldberg

Aave Labs CEO Stani Kulechov said that Chaos didn’t depart on bad terms, but claimed that Chaos pitched a proposal seeking to become the sole risk provider and thus force out other partners — a compromise Aave wasn’t willing to accept.

Chaos played a key role in Aave’s back-end infrastructure, from pricing loans and managing risk in the Aave V2 and V3 markets since November 2022, during which Aave’s total value locked rose fivefold to $26 billion.

Risk has been a major talking point in the Aave community after a user lost $50 million in a trade while interacting with Aave’s interface on March 12. The following week, Aave said it would introduce an “Aave Shield” protection feature to deter users from high-risk trades.

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As for Chaos’ departure, Goldberg said there became an increasing misalignment over how the parties thought risk should be managed. He noted that some Aave contributors had left, raising its workload, while also arguing that Aave V4’s expanded functionality introduced additional operational and legal risks that fell on Chaos’ shoulders.

“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.”

Weighing the risk of a protocol failure, Goldberg said, “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.”

As such, “We are walking away from a $5 million engagement,” Goldberg said.

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Chaos wanted Aave to boot LlamaRisk, Chainlink: Kulechov

Aave Labs CEO Stani Kulechov told a slightly different story, stating that Chaos wanted to be the sole risk manager and use its price oracles instead of Chainlink’s.

Following that request would have forced Aave to push out its other risk protocol partner, LlamaRisk, and thus abandon its two-layer economic risk model.

Related: DeFi lender Aave launches on OKX’s Ethereum L2, X Layer

Kulechov added Aave was unwilling to integrate Chaos-built price oracles, citing Aave’s “track record” with Chainlink’s services, which its “users are currently more comfortable with at scale.”

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He also said Chaos was already “exploring winding down its risk consultancy services,” and that Aave had offered to double its payment to $5 million to retain them.

Cointelegraph reached out to Chaos Labs for comment.

Kulechov noted that Chaos’ departure hasn’t disrupted the Aave protocol, its smart contracts, token listings or network integrations.

Moving forward, Aave said it “will work closely with LlamaRisk to ensure a smooth transition” and maintain its two-layer economic risk model. 

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Source: LlamaRisk

Chaos’ departure comes amid a protocol-wide feud over how much funding and revenue control Aave Labs should receive versus Aave’s decentralized autonomous organization.

Despite the internal issues, Aave crossed the $1 trillion mark in cumulative lending volume in late February, marking a first in the DeFi industry.

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