Aave contributor proposes abandoning Polygon amid its ‘risky’ bridge proposal

The Aave community is caught between a rock and a hard place after contributor group Aave Chan advocated withholding lending services from Polygon’s poS chain. This is in response to another Polygon community request to use over $1 billion in bridge assets for yield generation.

Marc Zeller, founder of Aave Chan, proposed slowing down Aave’s lending processes to protect it from potential future security issues.

His proposal called for strict steps to mitigate risks in Aave lending markets on Polygon’s PoS network. These included establishing a 0% loan-to-value for all assets and raising the reserve factor to 85%,  discouraging future deposits, or banning customers from borrowing against their collateral.

Marc Zeller asserted, “The adjustments are in response to an upcoming proposal that will significantly impact the risk profiles of bridged assets within the Polygon network.”

Aave is Polygon’s largest decentralized app in terms of total value locked, with over $466 million in PoS deposits. This demonstrates that it is a major blow to Polygon; what does this imply for the two entities?

Aave Chan’s proposal to the Aave community

Marc Zeller requested that risk parameters be adjusted for versions 2 and 3 of the Aave protocols on the Polygon PoS chain to cub risks associated with employing bridging stablecoins and create a return if Polygon’s proposal is accepted.

Allez Labs, in collaboration with DeFi protocols Morpho and Yearn, presented the proposal that is responsible for Aave’s contemplation of withdrawal. 

They composed a Pre-Polygon Improvement Proposal that requires approximately $1.3 billion in stablecoin reserves from the Polygon PoS bridge to be deployed into various lending protocols for yield-earning strategies. 

Marc Zeller, on the other hand, is opposed to the plan. He emphasized the potential risks of rehypothecating user deposits from the canonical bridge.

He explained his observation that the practice could pose significant security risks for the bridge and expose the deposits to potential bad debt when invested in liquidity pools within DeFi or lending protocols. 

Also, Marc Zeller claimed that Polygon’s yield generation strategy could be more risky than the safer strategies employed by other chains, such as depositing ETH in liquid staking protocols or DAI in MakerDAO’s savings rate module, as these yields are not subject to bad debt.

The proposal has sparked a dispute within the Polygon community

The proposal suggests a very gradual deployment of bridge liquidity for USDC, USDT, and DAI into a corresponding ERC-4626 vault. All vault reserves are to be stored in Maker’s sUSDS, the canonical yield-bearing container for the Maker ecosystem, on DAI.

The Polygon community is assured that it will be able to use the bridge liquidity dashboard and APIs to see the bridge’s liquidity, daily flows and transactions, and other measures. 

In the absence of native yield-bearing wrappers, Morpho Vaults are to serve as the standard source of yield for USDC and USDT. Also, they are to serve as primary yield sources for the bridge collateral curated by Allez Labs. 

In addition, all risk-taking choices for raising market capitalizations and establishing new markets are to be subject to a 72-hour time lock. 

The Polygon Protocol Council is to retain veto power via the guardian function. On the other hand, Allez is to do a risk analysis on the assets and publish their recommendations on the forum. 

Then, all yield generated is to be directed to a new Polygon Ecosystem Incentives program managed by Yearn. Yearn plans to create 3 Polygon Ecosystem Vaults for USDC, USDT, and DAI whose deposits will be deployed across Polygon PoS and AggLayer DeFi. 

In addition, the yield earned from the Morpho Markets and sUSDS strategy is to be used to reward depositors of these new Polygon Ecosystem Yearn Vaults.

Morpho is a competitor of Aave; could this be a way of getting the entity out of the picture? 

The community’s take

A user said, “Let’s get this straight: You want stablecoin holders who trust Polygon with their assets to bear many layers of risk and then transfer the reward for that risk to… a different set of stakeholders?”

He added, “Stablecoin holders seek to minimize risk. You’d create a large honeypot of these risk-averse holders’ assets and give them zero reward for it? And you still expect them to use the chain? This is a ridiculous proposal and I hope it is voted down for the sake of the Polygon ecosystem.”

Another user said, “I am strongly in support of the direction this Pre-PIP proposes, and the conversation that I hope will come out of it in the coming PPGCs.”

Although the majority of individuals are opposed to risky projects, which is why the community has rejected several proposals, the proposal is still in progress, as they continue to provide responses to those who are hesitant.

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