Aave governance mulls an exit from Polygon

The proposal comes after Polygon governance considered a controversial use of bridged liquidity for yield

article-image

Aave modified by Blockworks

share

This is a segment from the 0xResearch newsletter. To read full editions, subscribe.


Aave wants to break up with Polygon, while Lido already has.

Four days ago, a governance proposal floated the possibility of bridging $1.3 billion worth of idle stablecoins on the Polygon PoS bridge toward Aave’s lending competitor Morpho. The stablecoins would then be rehypothecated onto protocols like Sky, Angle and Robert Leshner’s Superstate.

This “Blast-like” strategy would unlock an estimated $70 million in annual yield for “ecosystem incentives” that Polygon is currently leaving on the sidewalk. 

I say Blast-like because unlike the Blast L2, Polygon users would actually have to trust a bridge, plus they wouldn’t benefit from any yield rewards (at least not directly).

In response, Aave-chan Initiative (ACI) founder Marc Zeller published seven hours ago a rather aggressive governance proposal seeking to adjust the risk parameters loan-to-value (LTV) for all assets on Aave Polygon, to 0%.

The reason for the breakup? Zeller cites reasons of risk involved with “bridge vulnerabilities,” invoking a list of historical bridge hacks such as Ronin, BNB bridge, Wormhole and more.

Zeller’s proposal would also adjust the reserve factor for all Aave assets to 85% to disincentivize deposits, cancel its upcoming Umbrella safety module deployment, migrate Aave’s v3 governance to another L2 chain, and freeze all its reserves on Polygon.

Above all, the proposal seeks to create a co-incentive program with other L2 chains, making it attractive for Aave users on Polygon to migrate liquidity elsewhere (perhaps the Avalanche C-Chain?).

Suffice to say, this would in effect kill the existence of Aave on Polygon, which is currently the top protocol by TVL ($662 million) on the sidechain.

From Aave’s perspective, Polygon’s revenues are pocket change. On a month-to-date basis, Polygon’s revenues to Aave account for a mere 3.8% ($305k) of its total revenues.

The million-dollar question here is: How would Aave have responded had Polygon chosen to deploy its bridged stablecoins to aUSDC on Aave?

“The Polygon community has only put forth a pre-PIP (preliminary proposal) at this stage, and the topic is still in the very early phases of discussion,” a Polygon spokesperson told Blockworks. “Getting feedback from all stakeholders is essential, and we encourage continued conversation to ensure these proposals are fully discussed and evaluated.”

Updated Dec. 16, 2024 at 3:10 pm ET: Added statement from Polygon.


Get the news in your inbox. Explore Blockworks newsletters:

  • Blockworks Daily: The newsletter that helps thousands of investors understand crypto and the markets, by Byron Gilliam.
  • Empire: Start your morning with the top news and analysis to inform your day in crypto.
  • Forward Guidance: Reporting and analysis on the growing intersection of crypto and macroeconomics, policy and finance.
  • 0xResearch: Alpha directly in your inbox. Market highlights, data, degen trade ideas, governance updates, token performance and more.
  • Lightspeed: Built for Solana investors, developers and community members. The latest from one of crypto’s hottest networks.
  • The Drop: For crypto collectors and traders, covering apps, games, memes and more.
  • Supply Shock: Tracking Bitcoin’s rise from internet plaything worth less than a penny to global phenomenon disrupting money as we know it.
Tags

Upcoming Events

Industry City | Brooklyn, NY

TUES - THURS, JUNE 24 - 26, 2025

Permissionless IV serves as the definitive gathering for crypto’s technical founders, developers, and builders to come together and create the future.If you’re ready to shape the future of crypto, Permissionless IV is where it happens.

Old Billingsgate

Mon - Wed, October 13 - 15, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Research

article-image

Should higher-fidelity graphics be the goal for crypto games — which result in much higher costs and risk?

article-image

From Mel B to Neil deGrasse Tyson, BTC has seen its share of strange celebrity sightings

article-image

Circle’s roadshow will be the real test for the stablecoin issuer

article-image

PitchBook’s Robert Le said crypto projects focused on institutional use cases are the focus

article-image

The decentralized AI firm designed ODS to be owned by the community in an effort to promote more decentralized AI

article-image

The non-profit’s launch and big-name hires aim to grow Solana’s footprint in Washington