Aave Community Proposal to Withdraw from Polygon's PoS Chain

Overview

The Aave community has received a proposal from the contributor group Aave Chan to withdraw its lending services from Polygon’s PoS chain. This decision follows a controversial proposal by the Polygon community to utilize over $1 billion in bridge assets for yield generation.

Context

Aave is the largest decentralized application on Polygon, boasting deposits exceeding $466 million on the PoS chain. The proposal, authored by Marc Zeller, founder of Aave Chan, aims to phase out Aave’s lending protocols to minimize potential security risks.

Proposed Changes

Zeller has suggested adjustments to risk parameters for both version 2 and version 3 of Aave protocols on the Polygon PoS chain. These changes are designed to mitigate risks related to bridged stablecoins while also offering returns if Polygon's proposal receives approval. Key suggestions from Zeller include:
– Setting a 0% loan-to-value for all assets.
– Increasing the reserve factor to 85%, discouraging further deposits or preventing borrowing against collateral.

Zeller emphasized that these adjustments are critical in light of the upcoming proposal that could heavily influence the risk profiles of bridged assets on Polygon.

Related Proposals

Last week, Allez Labs collaborated with DeFi protocols Morpho and Yearn to draft a Pre-Polygon Improvement Proposal. This proposal seeks feedback from the Polygon community about deploying approximately $1.3 billion in stablecoin reserves (DAI, USDC, USDT) from the Polygon PoS bridge into various lending protocols for yield-earning strategies. This plan is predicted to incur an opportunity cost of about $70 million annually due to idle reserves.

However, Marc Zeller is against this plan, stating that rehypothecating user deposits from the bridge could lead to significant security risks and exposure to bad debt in liquidity pools. He argues that Polygon’s yield generation strategy is potentially riskier than safer methods seen on other chains, such as depositing in liquid staking protocols.

Current Status

The proposal remains in the ARFC (Aave Request for Comments) stage. If the community shows support, it will advance to a snapshot vote for preliminary approval, leading into an AIP stage for final approval. Meanwhile, Polygon Labs described its proposal as a "pre-PIP," emphasizing that it remains open to discussion and prioritizes ecosystem security. A spokesperson stated that gathering feedback from stakeholders is crucial, encouraging ongoing dialogue to ensure thorough evaluation of proposals.