Original title: (Polygon Ecological Crisis: AAVE and Lido Exit Collectively, Triggered by 'Borrowing Chickens to Lay Eggs' Proposal)
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 in 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 re-entered discussions on social media, it was not due to any significant updates, but rather due to the exit of ecological partners like AAVE and Lido.
'Borrowing Chickens 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, authored by Aave Chan founder Marc Zeller, aims to gradually eliminate Aave's lending protocol on Polygon to prevent 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 will officially discontinue its service on the Polygon network in the coming months. The Lido community stated that the strategic refocus on Ethereum, as well as the lack of scalability in Polygon POS, are the reasons for discontinuing Lido on the Polygon network.
Losing two major ecological applications in one day is a heavy blow for Polygon. The main reason stems from the 'Polygon PoS Cross-Chain Liquidity Initiative' Pre-PIP improvement proposal released by the Polygon community on December 13. The main goal of the proposal is to suggest using over $1 billion in stablecoin reserves held on the PoS chain bridge to generate returns.
It is understood that the Polygon PoS bridge holds about $1.3 billion in stablecoin reserves, and 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 loan interest rates, these funds could generate about $70 million in annual returns.
The proposal suggests gradually investing these funds into vaults that comply with the ERC-4626 standard. Specific strategies include:
DAI: Deposit Maker's sUSDS, which is the official yield-bearing token of the Maker ecosystem.
USDC and USDT: The main source of income through Morpho Vaults, 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 in the Polygon PoS and the broader AggLayer ecosystem.
Notably, this proposal is signed by Allez Labs, Morpho Association, and Yearn. According to Defillama's data on December 17, Polygon's total TVL is $1.23 billion, of which TVL on AAVE is about $465 million, accounting for about 37.8%. Yearn Finance's TVL ranks 26th within the ecosystem, with a TVL of about $3.69 million. This might explain why AAVE proposed an exit from Polygon for security reasons.
Clearly, from AAVE's perspective, this proposal is to take AAVE's money and put it into other lending protocols to earn 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 of fund security.
However, Lido's withdrawal may not be related to this proposal, as Lido's proposal to reassess Polygon was released over a month ago, coincidentally at this time.
A helpless move amidst weak ecological development.
If the proposal for AAVE's withdrawal is officially approved, the TVL on Polygon will drop to $765 million, which will no longer 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, and if Uniswap also follows with a similar proposal to AAVE, then the TVL on Polygon will plummet to around $370 million. Not only will the annual interest target of $70 million be unachievable, but all aspects of the ecosystem will be affected, such as governance token prices and active users. The losses may far exceed $70 million.
So, from this result, this proposal does not seem to be a wise move. Why did the Polygon community propose this plan? What is the current state of the Polygon ecosystem after nearly a year of development?
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 level. However, over time, Polygon's TVL curve has been declining, maintaining around $1.3 billion since June 2022, with little fluctuation. By 2023, it even briefly dropped to around $600 million. In 2024, as the market warmed up, Polygon's TVL mostly remained below $1 billion, only barely recovering to above $1 billion starting in October.
In terms of active addresses, on October 29, Polygon PoS had about 439,000 active addresses, a level that is not much different from 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 off during the hottest market period.
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 markets but instead declined from $1.3 at the beginning of the year to a low of $0.28, a drop of over 77%. It only began to rebound in the last month or two, and the recent price has rebounded to around $0.6, but it still needs to grow about five times to reach the nearly $3 historical high.
Technical innovation and brand upgrades are not as effective as 'giving away money'.
With weak ecological development, Polygon has not given up on technology and products. Over the past year, it has repeatedly released news of technological innovations and product layouts. The most notable performance is naturally the prediction market Polymarket's development over the past year. Additionally, in October, Polygon launched a new unified blockchain ecosystem called AggLayer, which the official introduction claims is Agglayer = unified chain (L1, L2, L∞), but it seems that the positioning of this new ecosystem is not easy to understand. In November, the official even published an article explaining AggLayer.
Additionally, 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 rebrand by changing names and tokens. Polygon has already undergone a rebranding, changing from Matic to Polygon. Given the current market environment, non-disruptive technological innovation seems to be very difficult to become a narrative advantage for a project. This is indeed a cruel fact for projects like Polygon, which are still obsessed with technological innovation or hope to reshape their brand through integration.
What can truly attract users and maintain interest is often reward distribution or incentive programs, such as the recently popular Hyperliquid. However, Polygon has not many cards to play in this regard. In terms of on-chain fees, Polygon generates only tens of thousands of dollars in fees daily, and this income does not excite users. Hence, the previously mentioned 'Borrowing Chickens to Lay Eggs' proposal came about.
However, it is clear that the 'hen' owner does not agree with this business, and Polygon may lose more as a result. Overall, the fundamental reason for the stagnation of Polygon's ecological development is the lack of sufficient user incentives and new narrative driving forces. In the face of intensifying market competition, Polygon needs to seek more attractive market strategies beyond technological innovation. This is a common dilemma faced by most established public chains.
Original link.
