Polygon’s $1B yield plan under fire from former employee

A former Polygon employee, via an X post, flagged the blockchain’s risky incentive injection to boost its Aggregation Layer (AggLayer) ecosystem. He suggests that the Polygon community is evaluating a proposal to generate yield from over $1 billion in stablecoin reserves held on the PoS Chain bridge.

The AggLayer is a decentralized protocol that aggregates ZK proofs from all connected chains and ensures safety for near-instant cross-chain transactions. The proposal came when Polygon recently transitioned from MATIC to POL, its new native token. POL is serving as the gas and staking token for Polygon’s proof-of-stake chain while supporting the network’s ambitious 2.0 roadmap.

Polygon’s $1B yield proposal sparks debate

Pranav Maheshwari in an X post mentioned that the proposal to generate yield from stablecoin reserves was presented by the Allez Labs in collaboration with DeFi protocols. The plan suggests approximately $70 million in annual opportunity costs from the idle reserves.

Polygon Bridge locks the stable reserves through multiple processes. First of all, a user decides to initiate the transfer of tokens from Ethereum to Polygon. After this, tokens are being locked in a smart contract on Ethereum which serves as an escrow. It ensures that the tokens remain secure until the process is complete.

The former Polygon employee highlighted that these locked tokens are the assets that the side chain is looking to use as collateral to generate yield for the ecosystem. However, Validators on Polygon are notified of the locked tokens in the process while equivalent tokens are minted on the network.

Here comes the main thing – How will the yield be generated from here? Maheshwari added that around $1.3 billion in stablecoin is sitting idle on the Polygon Pos Bridge. These funds would be bridged to Ethereum and deposited into ERC-4626 vaults (Morpho Labs, Sky Ecosystem) to generate 7% APY which will eventually yield $91 million annually. 

The yield will return to the Polygon ecosystem and will reward depositors via Yearnfi vaults for USDC, USDT, and DAI.

While the proposal promises liquidity, decentralization, and ecosystem growth, risks loom. He warns that any hack or attack on the yield protocols could jeopardize the bridge’s stability, endangering user assets. 

Security Concerns & measures

In theory, this approach seems ideal, but in practice, it carries significant risks.

If any underlying yield-generating protocol experiences a hack or financial attack, it could compromise the value of the Polygon assets secured by the bridge,…

— Pranav Maheshwari (@impranavm_) December 16, 2024

He added that the security assurances have been made, but the community must weigh innovation against potential fallout. If this process turns out to be successful, it could set a trend for native liquidity solutions in DeFi.

Aave governance raises concerns

Aave governance delegate Marc Zeller has raised concerns over the controversial plan as it could affect Aave’s future on Polygon. It is the largest protocol on Polygon. It holds over a third of the chain’s total value locked (TVL) at $467 million (DeFiLlama).

Some users have argued that the program’s profits could help incentivize liquidity and fuel ecosystem growth. But Marc Zeller and many others are wary as adding extra layers of risk to “stable” assets could backfire.

If any yield protocols face issues, it could destabilize Polygon’s bridge and harm the ecosystem. Stablecoins are meant to be stable, and this could undermine that trust.

As of now, POL (ex-MATIC) (POL) recorded a correction after registering a fun upward run. POL price is down by around 10% in the last 7 days while it is still up by 62% over the past 60 days. POL is trading at an average price of $0.59, at the press time. Its 24-hour trading volume is up by 26% to stand at $289 million.

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