Author: Frank, PANews
As an important promoter of multi-chain interoperability, zero-knowledge proof applications, as well as DeFi and NFT ecosystems, 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 such as Solana, Sui, or Base. When Polygon re-entered discussions on social media, it was not due to any major updates but rather the exit of ecosystem partners like AAVE and Lido.
The 'borrowing a chicken to lay eggs' proposal has raised concerns.
On December 16, the Aave contributor team Aave Chan released a proposal in the community to withdraw its lending services from the Polygon Proof of Stake (PoS) chain. This proposal was written by Aave Chan founder Marc Zeller and aims 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 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 strategic focus is shifting back to Ethereum, and the lack of scalability of Polygon POS is the reason for stopping Lido on the Polygon network.
Losing two major ecosystem applications in one day has dealt a heavy blow to 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 main goal of this proposal is to suggest using the more than $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 has suggested 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 potentially yield about $70 million annually.
The proposal suggests gradually investing these funds into vaults that comply with the ERC-4626 standard. Specific strategies include:
DAI: Deposit sUSDS into Maker, which is the official yield-bearing token of the Maker ecosystem.
USDC and USDT: Used through Morpho Vaults as the main source of yield, with risk management handled by Allez Labs. The initial market includes Superstate's USTB, Maker's sUSDS, and Angle's stUSD.
Additionally, Yearn will manage the new ecosystem incentive program, using these returns to incentivize activities in the Polygon PoS and the broader AggLayer ecosystem.
It is worth noting that 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 the TVL on AAVE is about $465 million, accounting for about 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 for yield. As the largest application of funds on the Polygon POS cross-chain bridge, AAVE cannot benefit from such a proposal, and instead must bear the risk of fund security.
However, Lido's withdrawal may not be related to this proposal, as Lido's proposal and voting on reassessing Polygon was released a month ago, just coinciding with this timing.
A helpless move amid weak ecosystem 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 reserve mentioned in the Pre-PIP improvement proposal. The second-ranking Uniswap in 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 will plummet to about $370 million. Not only will the annual $70 million yield target be unachievable, but all aspects of 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 state of the Polygon ecosystem over the past year?
The Polygon ecosystem was most prosperous in June 2021, when the total TVL reached $9.24 billion, which is 7.5 times that of today. However, over time, the TVL curve of Polygon has been declining, maintaining around $1.3 billion since June 2022, with no significant fluctuations. By 2023, it even dropped to about $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.
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 $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, with the recent price rebounding to around $0.6, but it still needs to grow about five times to reach its historical peak of nearly $3.
Technological innovation + brand upgrade is not as good as 'giving away money'.
With weak ecosystem development, Polygon has not given up on technology and product aspects, and has repeatedly announced technological innovations and product developments over the past year. The most notable performance has naturally been the growth of the prediction market Polymarket in the past year. Furthermore, in October, Polygon announced a new unified blockchain ecosystem called AggLayer, which, according to the official introduction, means unified chain (L1, L2, L∞); however, this new ecosystem's positioning seems difficult to understand. In November, the official even published an article to explain 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."
Beyond technology, many established public chains this year have sought to reshape their brands through renaming and rebranding. Polygon has long undergone brand transformation, changing from Matic to Polygon. Given the current market environment, non-disruptive technological innovations seem to have difficulty becoming a narrative advantage for a project. This is indeed a harsh reality for projects like Polygon that are still focused on technological innovation or hope to reshape their brand through integration.
What truly attracts users and keeps their attention are often reward distributions or incentive programs, such as the recently popular Hyperliquid. However, Polygon has limited options for reform in this area; the on-chain fees amount to only tens of thousands of dollars per day, which cannot pique user interest. Thus, the 'borrowing a chicken to lay eggs' proposal was initiated.
However, it is clear that the owner of the 'mother hen' disagrees with this business, and Polygon may lose even more as a result. Overall, the fundamental reason for the stagnation of the Polygon ecosystem's development is its lack of sufficient user incentives and new narrative driving forces. Faced with increasing market competition, Polygon needs to find more attractive market strategies beyond technological innovation. This is a common dilemma for most old public chains.
