Original author: Frank, PANews
As an important promoter of multi-chain interoperability, zero-knowledge proof applications, as well as the DeFi and NFT ecosystems, Polygon shone brightly during the last bull market. However, over the past year, many public chain projects, including Polygon, have failed to make 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 ecosystem partners like AAVE and Lido.
'Borrowing a hen to lay eggs' proposal raises concerns
On December 16, the Aave contributor team Aave Chan proposed a plan to withdraw its lending services from the Polygon Proof of Stake (PoS) chain. The proposal, written by Aave Chan founder Marc Zeller, aims to gradually phase out Aave's lending protocol on Polygon to guard against potential future security risks. Aave is the largest decentralized application on Polygon, with deposits exceeding $466 million on the PoS chain.
Coincidentally, on the same day, the liquid staking protocol Lido announced that it would officially cease operations on the Polygon network in the coming months. The Lido community stated that the reasons for ceasing operations on the Polygon network were a strategic refocus on Ethereum and the lack of scalability of Polygon POS.
Losing two significant ecosystem applications in one day is a painful blow for Polygon. 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 main goal of this proposal is to suggest utilizing the over $1 billion stablecoin reserves held on the PoS chain bridge to generate revenue.
It is reported that approximately $1.3 billion in stablecoin reserves are held in the Polygon PoS bridge, and the community suggested deploying these idle funds into carefully selected liquidity pools to generate revenue and promote the development of the Polygon ecosystem. Based on current lending rates, these funds could potentially yield around $70 million annually.
The proposal suggests gradually investing these funds into vaults that meet the ERC-4626 standard. Specific strategies include:
DAI: Deposits into Maker's sUSDS, which is the official yield-generating token of the Maker ecosystem.
USDC and USDT: Using Morpho Vaults as the primary source of income, with Allez Labs responsible for risk management. Initial markets include Superstate's USTB, Maker's sUSDS, and Angle's stUSD.
Furthermore, Yearn will manage the new ecosystem incentive program, using these profits to incentivize activities within the 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's data on December 17, the total TVL of Polygon 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 approximately $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 money and placing it into other lending protocols for profit. 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 of fund security.
However, Lido's withdrawal may not be related to this proposal, as Lido's proposal and voting to reassess Polygon was published a month prior; it just happened to coincide with this timing.
A helpless move amid weak ecological development
If AAVE's proposal to withdraw is officially approved, the TVL on Polygon will drop to $765 million, which would make it impossible to achieve the $1 billion capital reserve mentioned in the Pre-PIP improvement proposal. The second-largest in the ecosystem, Uniswap, has a TVL of about $390 million; if Uniswap follows AAVE's lead and proposes a similar plan, the TVL on Polygon could plummet to around $370 million. Not only would the annual goal of $70 million in yield be unattainable, but various aspects of the entire ecosystem would also be affected, such as governance token prices and active users. The losses could perhaps far exceed $70 million.
So, from this result, it seems that this proposal is not 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 what it is today. As time passed, the TVL curve of Polygon steadily declined, maintaining around $1.3 billion since June 2022, without significant fluctuations. By 2023, it even dropped to around $600 million at one point. In 2024, as the market warmed up, Polygon's TVL mostly remained below $1 billion, only barely rising above $1 billion starting in October.
In terms of active addresses, on October 29, the number of active addresses on Polygon PoS was approximately 439,000, a level that is not much different from a year ago. Although from March to August this year, the active address count on Polygon PoS saw a significant increase, reaching as high as 1.65 million, for some unknown reason it sharply cooled during the hottest market period.
The market performance of the tokens has also been poor. From March to November 2024, the price of the POL token did not follow the rise of major assets like Bitcoin but instead declined continuously, dropping from $1.3 at the beginning of the year to a low of $0.28, a decrease of over 77%. It only started to rebound in the past month or two, with recent prices rebounding to around $0.6, but it still needs to grow about five times to reach the historical peak of nearly $3.
Technological innovation + brand upgrade is not as effective as 'giving money'
Despite the weak ecological development, Polygon has not given up on technology and product development, frequently announcing technical innovations and product layouts over the past year. The standout performer has naturally been the prediction market Polymarket, which has developed significantly in the past year. Additionally, in October, Polygon announced a new unified blockchain ecosystem called AggLayer. According to the official introduction, AggLayer = Unified Chain (L1, L2, L∞), but clearly, the positioning of this new ecosystem seems difficult to understand, and the official team even published a special article to explain AggLayer in November.
Additionally, the ZK proof system toolkit Polygon Plonky 3 has become the fastest zero-knowledge proof system. Vitalik also interacted on Twitter, stating, 'You have won this race.'
Besides technology, this year many established public chains have preferred to reshape their brands through renaming and token changes. Polygon had already undergone a brand reshaping, changing its name from Matic to Polygon. Moreover, in the current market environment, non-disruptive technological innovation seems to be struggling to become a narrative advantage for a project. This is indeed a cruel reality for projects like Polygon that are still fixated on technological innovation or hope to reshape their brands through integration.
What truly attracts users and keeps their attention is often the distribution of rewards or incentive programs, such as the recently popular Hyperliquid. However, Polygon has limited cards to play in this regard; regarding on-chain fees, Polygon generates only tens of thousands of dollars in fees daily, which does not excite users. Hence, we have the previously mentioned 'borrowing a hen to lay eggs' proposal.
However, it is evident that the owner of the 'hen' disagrees with this business, and Polygon may lose even 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 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 older public chains.
