Aave contributor suggests exiting Polygon amid latter's 'risky' bridge proposal

The Aave community received a proposal from the contributor group Aave Chan to withdraw its lending services from Polygon’s PoS chain. This was in response to another proposal by the Polygon community to utilize over $1 billion in bridge assets for yield generation.

Aave is the largest decentralized app on Polygon by total value locked, with deposits exceeding $466 million on the PoS chain.

The proposal, authored by Marc Zeller, founder of Aave Chan, seeks to phase out Aave’s lending protocols to safeguard the protocol against potential future security risks. He asked to adjust risk parameters for version 2 and version 3 of the Aave protocols on the Polygon PoS chain to reduce possible threats associated with using bridged stablecoins and generate a return if Polygon's proposal is approved.

His proposal suggested stringent measures to offset potential risks in Aave lending markets on Polygon’s PoS chain. These included setting a 0% loan-to-value for all assets and increasing the reserve factor to 85%, effectively discouraging further deposits or preventing users from borrowing against their collateral.

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

Last week, Allez Labs, in collaboration with DeFi protocols Morpho and Yearn, drafted a Pre-Polygon Improvement Proposal. This proposal requests feedback from the Polygon community on a plan to deploy approximately $1.3 billion in stablecoin reserves (DAI, USDC, and USDT) from the Polygon PoS bridge into various lending protocols for yield-earning strategies.

The proposal stated that these funds represent an opportunity cost of around $70 million annually due to the idle $1.3 billion stablecoin reserve. The Polygon community has yet to formalize and vote on the proposal.

However, Marc Zeller opposes the plan. He highlighted the risks of rehypothecating user deposits from the canonical bridge. He noted that this practice could pose major security risks for the bridge and expose the deposits to potential bad debt when invested in liquidity pools within DeFi or lending protocols. (It’s worth noting that Morpho is a competitor to Aave.)

Zeller added that Polygon’s approach to yield generation could carry significantly higher risks than safer strategies used by other chains, such as depositing ETH in liquid staking protocols or DAI in MakerDAO’s savings rate module, as these yields are not exposed to bad debt.

This proposal remains in the initial phase, or ARFC (Aave Request for Comments). If the community response is supportive, these adjustments will proceed to a snapshot vote for preliminary approval, followed by an AIP stage for final community approval.

Meanwhile, Polygon Labs remarked its yield-generation proposal was a "pre-PIP" (preliminary proposal), and the topic is still in the early phases of discussion. It added that it will prioritize security for its ecosystem.

“Getting feedback from all stakeholders is essential, and we encourage continued conversation to ensure these proposals are fully discussed and evaluated. Polygon Labs is supportive of the community continuing to prioritize the security of the ecosystem,” a Polygon spokesperson told The Block.