Author: Frank, PANews

As an important promoter of multichain interoperability, zero-knowledge proof applications, and the DeFi and NFT ecosystem, Polygon shone brightly during the last bull market cycle. However, over the past year, many public chain projects including Polygon have failed to achieve new breakthroughs and have gradually been overshadowed by new competitors like Solana, Sui, or Base. When Polygon returned to discussions on social media, it was not due to any major updates but rather the exit of ecological partners like AAVE and Lido.

The 'borrowing a chicken to lay eggs' proposal raises concerns

On December 16, the Aave contributor team Aave Chan released a proposal in the community to withdraw its lending services from Polygon's Proof of Stake (PoS) chain. This proposal was written by Aave Chan founder Marc Zeller, aiming to gradually phase out Aave's lending protocol on Polygon to prevent potential future security risks. Aave is the largest decentralized application on Polygon, with deposits on the PoS chain exceeding $466 million.

Coincidentally, on the same day, the liquid staking protocol Lido announced that it would officially deactivate Lido on the Polygon network in the coming months. The Lido community stated that the strategic refocus on Ethereum and the lack of scalability in Polygon POS are reasons for deactivating Lido on the Polygon network.

Losing two major ecological applications in one day is a painful blow for Polygon. The main reason comes from the 'Polygon PoS Cross-Chain Liquidity Plan' Pre-PIP improvement proposal released by the Polygon community on December 13. The primary goal of this proposal is to suggest using the over $1 billion of stablecoin reserves held on the PoS chain bridge to generate income.

According to reports, the Polygon PoS bridge holds about $1.3 billion in stablecoin reserves. The community suggests deploying these idle funds into carefully selected liquidity pools to generate returns and promote the development of the Polygon ecosystem. Based on current lending rates, these funds could potentially bring in about $7 million in annual revenue.

This proposal suggests gradually investing these funds into vaults that meet the ERC-4626 standard. Specific strategies include:

DAI: Deposited into Maker's sUSDS, which is the official yield-bearing token of the Maker ecosystem.

USDC and USDT: Through Morpho Vaults as the main source of yield, Allez Labs is responsible for risk management. Initial markets include Superstate's USTB, Maker's sUSDS, and Angle's stUSD.

Additionally, Yearn will manage the new ecosystem incentive program, using these earnings to incentivize activities within the Polygon PoS and the broader AggLayer ecosystem.

Notably, this proposal is signed by Allez Labs, Morpho Association, and Yearn. According to Defillama data from December 17, Polygon's total TVL is $1.23 billion, of which AAVE's TVL is about $465 million, accounting for approximately 37.8%. Yearn Finance's TVL ranks 26th in the ecosystem, with a TVL of about $3.69 million. This may explain why AAVE proposed to exit Polygon for safety reasons.

Clearly, from AAVE's perspective, this proposal is about taking AAVE's funds and putting them into other lending protocols for interest. As the largest application of funds on the Polygon POS cross-chain bridge, AAVE cannot benefit from such a proposal and instead has to bear the risk to fund security.

However, Lido's withdrawal may not be related to this proposal, as Lido's proposal for reassessing Polygon was published over a month ago, coincidentally released at this time.

A helpless move due to weak ecological development

If the proposal for AAVE's withdrawal is officially approved, the TVL on Polygon will drop to $765 million, making it impossible to achieve the $1 billion fund reserve mentioned in the Pre-PIP improvement proposal. The second-ranked Uniswap within the ecosystem has a TVL of about $390 million; if Uniswap also follows suit with a proposal similar to AAVE's, the TVL on Polygon could plummet to around $370 million. Not only will the annual interest income target of $70 million be unachievable, but all aspects within the ecosystem will also be affected, such as governance token prices and active users. The losses may far exceed $70 million.

So, from this outcome, this proposal does not seem to be a wise move. Why did the Polygon community propose this plan? What has been the state of the Polygon ecosystem over the past year?

The most prosperous time for the Polygon ecosystem was in June 2021, when the total TVL reached $9.24 billion, which is 7.5 times today's figure. As time has passed, the TVL curve of Polygon has been on a steady decline, maintaining around $1.3 billion since June 2022 without significant fluctuations. By 2023, it even dipped to around $600 million at one point. In 2024, with the market warming, Polygon's TVL mostly remained below $1 billion until it barely recovered to over $1 billion starting in October.

In terms of active addresses, on October 29, there were about 439,000 active addresses on Polygon PoS, a level that is not much different from a year ago. Although between March and August of this year, the number of active addresses on Polygon PoS saw a significant increase, reaching as high as 1.65 million. For some reason, however, it rapidly cooled off during the hottest market period.

The market performance of the token has also been poor. From March to November 2024, the price of the POL token did not follow the rise of major coins like Bitcoin but instead fell from a high of $1.3 at the beginning of the year to a low of $0.28, a decline of over 77%. It has only begun to rebound in the last month or two, with recent prices bouncing back to around $0.6, but it still needs to increase about five times to reach its historical peak of nearly $3.

Technological innovation + brand upgrade is not as effective as 'distributing money'

Despite weak ecological development, Polygon has not given up on technology and products and has repeatedly announced technological innovations and product layouts over the past year. The most eye-catching development is naturally the prediction market Polymarket in the past year. Additionally, in October, Polygon released a new unified blockchain ecosystem called AggLayer, which, according to official sources, means unified chain (L1, L2, L∞), but clearly, the positioning of this new ecosystem seems difficult to understand. In November, the official even published an article specifically explaining AggLayer.

Moreover, the ZK proof system toolkit Polygon Plonky3 has become the fastest zero-knowledge proof system. Vitalik also interacted on Twitter saying, 'You won this race.'

Aside from technology, many established public chains this year have liked to reshape their brands through renaming and rebranding. Polygon had already undergone brand reshaping, changing from Matic to Polygon. Given the current market environment, non-disruptive technological innovations seem to struggle to become a narrative advantage for a project. This is indeed a harsh reality for projects like Polygon, which are still fixated on technological innovation or hope to reshape their brand through integration.

What really attracts users and maintains attention is often reward distribution or incentive programs, such as the recently popular Hyperliquid. However, Polygon has limited options for reforming in this area; its on-chain fees generate only a few tens of thousands of dollars per day, and this income does not pique user interest. Hence, the earlier mentioned proposal of 'borrowing a chicken to lay eggs' emerged.

But clearly, the owner of the 'hen' does not agree with this business, and Polygon may end up losing more as a result. Overall, the fundamental reason for the stagnation of Polygon's ecological development is its lack of sufficient user incentives and new narrative driving forces. In the face of intensified market competition, Polygon needs to seek more attractive market strategies beyond technological innovation. This is also a common predicament faced by most established public chains today.