The Aave community is currently evaluating a proposal to withdraw the lending protocol from Polygon’s Proof-of-Stake (PoS) chain. The proposal, put forth by Marc Zeller, founder of Aave Chan, aims to protect Aave from potential risks associated with Polygon’s plans to rehypothecate its stablecoin reserves. Zeller suggests adjusting risk parameters for Aave’s V2 and V3 deployments on the Ethereum layer-2 blockchain and eventually exiting the network entirely to reduce long-term security threats.
Aave is currently the largest decentralized application (dApp) on Polygon, accounting for $468 million—around 40% of the Ethereum layer-2 network’s $1.3 billion total locked value (TVL). However, the proposed withdrawal would only impact 2% of Aave’s overall TVL and 1.5% of its fee revenue. This decision comes in response to a controversial yield generation proposal on the Polygon network, which has raised security concerns within the Aave community.
The yield generation proposal on Polygon involves deploying the stablecoin reserves of DAI, USDC, and USDT from the Polygon PoS Portal Bridge into curated liquidity pools. The authors argue that this strategy could potentially generate up to $70 million in returns and create new ecosystem incentives to boost Polygon’s DeFi landscape. However, Zeller has identified significant risks associated with this approach, citing past bridge-related security breaches as a cause for concern.
Zeller has criticized Polygon’s proposal as riskier than alternative options like Ethereum liquid staking or MakerDAO’s DAI savings module. He questions the logic of risking potential bad debt amounting to billions for what he considers to be negligible revenue. The Aave community has expressed support for Zeller’s cautious approach in protecting users’ funds, with many highlighting the inherent risks posed by bridges and cautioning against introducing staking mechanisms for chain profits.
Crypto investor Adam Cochran has called Polygon’s move a miscalculation, emphasizing the risks associated with bridges and the added danger of staking mechanisms. Legal analyst Gabriel Shapiro commended Aave’s response as a demonstration of the influence decentralized apps can have in shaping governance decisions. He predicts that Aave’s firm stance could deter Polygon’s yield proposal and set a precedent for prioritizing responsible practices in the DeFi space.
In conclusion, the Aave community’s evaluation of withdrawing from Polygon’s PoS chain showcases the importance of prioritizing security and responsible practices in the DeFi sector. By considering potential risks and taking a cautious approach, Aave aims to protect its users’ funds and maintain its position as a leading lending protocol in the decentralized finance ecosystem.
