The Aave community is deliberating the possibility of ceasing operations on Polygon, citing concerns over an upcoming review of the risk profile of bridged assets on the network.
A Dec. 13 proposal initiated by Aave chain founder Marc Zeller seeks the revision of risk parameters of instances in Aave v2 and Aave v3 on the Polygon network.
According to Zeller, the move is a response to a proposal on Polygon’s governance requesting to use over $1 billion in stablecoin reserves to farm on other protocols, like Morpho and Yearn.
The proposal includes a series of significant adjustments to risk parameters, such as setting loan-to-value (LTV) ratios to 0%, increasing Reserve Factors, and freezing certain reserves on Aave’s v2 and v3 deployments.
Marc Zeller’s proposal on Aave’s governance forum. Source: Aave
The LTV ratio determines how much a user can borrow against their collateral. By setting the LTV to 0%, users will no longer be able to use bridged assets as collateral to borrow funds, thus reducing the risk of cascading liquidations in the event of a bridge vulnerability.
Meanwhile, the freeze on assets would prevent users from interacting with several bridged tokens, including USD Coin Bridged (USDC.e), wrapped Ether (wETH), wrapped Staked Ether (wstETH), wrapped (wBTC), Aave (AAVE), Chainlink (LINK), Aavegotchi (GHST), Lido Staked Matic (StMATIC), and stablecoins Tether (USDT), Stasis Euro (EURS) and Dai (DAI).
Aave is one of the largest lending protocols on the Polygon network. According to data from DefiLlama, Aave’s users have $461 million in total value locked on Polygon.
On the other hand, cumulative fees generated on Polygon for the Aave chain amount to $122 million at the time of this writing.
Related: Multichain victims search for answers in $1.5B exploit as new evidence emerges
Aave’s fees by chain. Source: DefiLlama
Citing bridge vulnerabilities, Zeller said this move would mitigate risks on bridge assets and incentivize users to migrate from the Polygon network.
“The Aave ecosystem has experienced both indirect and direct impacts from bridge vulnerabilities, notably the Multichain and Harmony bridge hacks,” said Zeller.
A blockchain bridge allows users to transfer tokens between two blockchains. It typically involves locking the asset on one chain and minting an equivalent representation on the destination chain.
Bridge vulnerabilities have been a popular target for DeFi exploits, accounting for over half of all attacks onchain between 2021 and 2022.
Polygon’s bridge liquidity proposal
Behind Aave’s attempt to exit the Polygon network is a proposal initiated by Allez Labs, Morpho Association, and the Yearn protocol on Dec. 12. The governance proposal opens community discussion about maximizing yield generation for approximately $1.3 billion in idle stablecoins currently held on the Polygon PoS Bridge.
The strategy involves deploying assets into yield-generating vaults on Ethereum, specifically ERC-4626 vaults, to earn an estimated annual yield of around 7%, potentially unlocking $81 million in annual revenue for the Polygon network.
The generated yield would then be bridged back to Polygon and reinvested into its DeFi ecosystem to incentivize liquidity and stimulate projects’ growth.
Under the proposal, Morpho’s vaults and market would serve as the liquidity protocol, while Allez Labs would provide risk management, and the Yearn protocol would serve as the reward program manager.
The proposal on Polygon’s governance forum has sparked intense community discussion, with most of the users opposing the decision, citing additional security risks for stablecoin holders.
“People who currently hold stablecoins on the Polygon PoS bridge have chosen to keep their assets there because they perceive it as a low-risk environment. By placing these stablecoins into a vault, you would be compelling these holders to take on additional risk without any corresponding reward,” said a community member.
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