As an important promoter of multi-chain interoperability, zero-knowledge proof applications, and DeFi and NFT ecosystems, Polygon has shined in the last bull market cycle. However, in the past year, many public chain projects such as Polygon have failed to achieve new breakthroughs, but have gradually been submerged in the light of new competitors such as Solana, Sui or Base. When Polygon returned to social media discussions, it was not because of any major update, but because of the withdrawal of ecological partners such as AAVE and Lido.
"Borrowing chickens to lay eggs" proposal raises concerns
On December 16, Aave contributor team Aave Chan released a proposal in the community to withdraw its lending service from Polygon’s Proof of Stake (PoS) chain. The proposal, written by Aave Chan founder Marc Zeller, aims to phase out Aave’s lending protocol on Polygon to prevent possible future security risks. Aave is the largest decentralized application on Polygon with over $466 million in deposits on the PoS chain.
Coincidentally, on the same day, the liquidity staking protocol Lido announced that it would officially discontinue its services on the Polygon network in the coming months. The Lido community stated that the strategic focus has shifted back to Ethereum and that the lack of scalability in Polygon POS is the reason for discontinuing Lido on the Polygon network.
Losing two major important ecosystem applications in one day, Polygon has indeed suffered a painful blow. The main reason stems 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 stablecoin reserves of over $1 billion held on the PoS bridge to generate earnings.
Image source: PANews
It is understood that the Polygon PoS cross-chain holds about $1.3 billion in stablecoin reserves, and the community suggests deploying these idle funds into carefully selected liquidity pools to generate earnings and promote the development of the Polygon ecosystem. According to current lending rates, these funds could potentially bring about $70 million in earnings annually.
The 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: used through Morpho Vaults as the main source of income, with Allez Labs responsible for risk management. Initial markets include Superstate's USTB, Maker's sUSDS, and Angle's stUSD.
In addition, Yearn will manage the new ecosystem incentive program, using these earnings to incentivize activities within Polygon PoS and the broader AggLayer ecosystem.
It is worth noting that the signatories of this proposal are Allez Labs, Morpho Association, and Yearn. According to Defillama data on December 17, Polygon's total TVL is $1.23 billion, of which the TVL on AAVE 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 security reasons.
Clearly, from AAVE's perspective, this proposal is about taking AAVE's money and putting it into other lending protocols to earn interest. As the largest application of funds for the Polygon POS cross-chain bridge, AAVE cannot benefit from such a proposal and would instead bear the risk of fund safety.
However, Lido's withdrawal may not be related to this proposal, as Lido's proposal and vote to reassess Polygon were published a month ago; it just happened to be released at this time.
A helpless move in the face of weak ecosystem development
If the proposal for AAVE to withdraw is officially passed, the TVL on Polygon will drop to $765 million, and the goal of achieving a $1 billion capital reserve stated in the Pre-PIP improvement proposal will no longer be feasible. The second-ranking Uniswap in the ecosystem has a TVL of about $390 million; if Uniswap also follows with a proposal similar to AAVE, the TVL on Polygon will plummet to about $370 million. Not only will the annual interest target of $70 million not be met, but all aspects within the ecosystem, such as governance token prices and active users, will also be affected. The losses may far exceed $70 million.
From this result, it seems that this proposal is not a wise move. Why did the Polygon community propose this plan? What is the current state of the Polygon ecosystem over the past year?
The Polygon ecosystem was at its most prosperous in June 2021, when the total TVL reached $9.24 billion, which is 7.5 times that of today. Over time, Polygon's TVL curve has declined, maintaining around $1.3 billion since June 2022, with no significant fluctuations. By 2023, it even dropped to about $600 million. In 2024, as the market warmed up, Polygon's TVL mostly remained below $1 billion, only barely rising above $1 billion starting in October.
Image source: PANews
As for the number of active addresses, on October 29, the number of active addresses on Polygon PoS was about 439,000, a level not much different from data a year ago. Although from March to August this year, the number of active addresses on Polygon PoS saw a significant increase, reaching 1.65 million at one point, for some unknown reason, it rapidly cooled down during the market's hottest period.
Image source: PANews
The market performance of the token is also poor. From March to November 2024, the price of the $POL token did not follow the rise of Bitcoin and other major indices but instead fell continuously, dropping from $1.3 at the beginning of the year to a low of $0.28, a decline of over 77%. It only started to rebound in the last month or two, with recent prices rebounding to around $0.6, but still needing to grow about five times to reach the nearly $3 historical peak.
Technical innovation + brand upgrade is less effective than 'giving away money'
With weak ecosystem development, Polygon has not given up on technology and products. In the past year, it has repeatedly announced innovations in technology and product layouts. The most remarkable performance has been the development of the prediction market Polymarket over the past year. Additionally, in October, Polygon released a new unified blockchain ecosystem called AggLayer, which the official description states is Agglayer = 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.
Additionally, the ZK proof system toolkit Polygon Plonky3 has become the fastest zero-knowledge proof system. Vitalik also interacted on Twitter, stating, 'You won this race.'
Apart from technology, this year many old public chains like to reshape their brand through renaming and relaunching tokens. Polygon has already undergone brand reshaping, changing its name from Matic to Polygon. In the current market environment, non-disruptive technological innovations seem to be difficult to become a narrative advantage for a project, which is indeed a cruel reality for projects like Polygon that are still obsessed with technological innovation or hope to reshape their brand through integration.
What can truly attract users and maintain attention is often the reward distribution or incentive programs, such as the recently popular Hyperliquid. However, Polygon has few cards available for reform in this area. In terms of on-chain fees, Polygon generates only tens of thousands of dollars in fees daily, and this income does not interest users. Thus, the 'borrowing hen to lay eggs' proposal mentioned at the beginning came about.
However, it is clear that the owner of the 'mother hen' disagrees with this business, and Polygon may lose more because of it. Overall, the fundamental reason for the stagnation of the Polygon ecosystem's development is the lack of sufficient user incentives and new narrative drivers. In the face of intensified market competition, Polygon needs to seek more attractive market strategies beyond technological innovation. This is also a common dilemma for most old public chains at present.
【Disclaimer】The market has risks, and investment should be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views, or conclusions contained in this article align with their specific circumstances. Invest at your own risk.
This article is reprinted with permission from: (PANews)
Original author: Frank, PANews
'Polygon Ecosystem Crisis! Aave and Lido collectively withdraw, all due to the 'borrowing hen to lay eggs' proposal' was first published in 'Crypto City.'
