30s Summary
Aave’s founder, Marc Zeller, has proposed a halt to the firm’s operations on the Polygon network due to upcoming risk review concerns. Among the proposed changes, Zeller recommends reducing Loan-to-Value ratios, increasing Reserve Factors and freezing funds in certain reserves. Blockchain bridge risks, enabling tokens to move between chains and targeted by over half of all DeFi attacks in 2021-22, are seen as the key concern. The proposal comes as an Allez Labs/Morpho/Yearn-initiated plan seeks to utilize $1.3 billion in idle stablecoins held in the Polygon PoS Bridge to generate yield, causing sécurité fears.
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The folks over at Aave are considering halting their operations on the Polygon network, and it’s all due to worries about an upcoming risk review of assets on the network.
Aave’s founder, Marc Zeller, sparked off this debate when he launched a proposal on Dec. 13. Basically, he’s asking to change the risk levels of a ton of stuff on both Aave v2 and v3 that exist on the Polygon network.
Why, you might ask? Zeller is responding to a suggestion by some folks on the Polygon board. They want to put over a billion dollars in stablecoin reserves to work farming on other systems, like Morpho and Yearn.
Zeller’s proposal has a bunch of serious changes attached, like taking Loan-to-Value (LTV) ratios down to 0%, pumping up Reserve Factors, and putting a freeze on specific reserves in both of Aave’s setups.
What does this all mean? Well, LTV ratios decide how much a user can borrow against their collateral. If the LTV hits 0%, users can’t use the bridged assets since they can’t borrow anything against them – it reduces the risk of a bunch of liquidations happening at once if the bridge has a snag.
The asset freeze essentially means users won’t be able to touch several bridged tokens, like USDC.e, wETH, wstETH, wBTC, AAVE, LINK, GHST, StMATIC, and stablecoins like USDT, EURS and DAI.
It’s important to note, Aave is a major player on the Polygon network. Data from DefiLlama shows Aave users have locked in $461 million on the network. But on the flip side, the total fees pulled in on Polygon for the Aave chain are at $122 million.
With this in mind, Zeller believes these changes would be a good idea to lower the risks on bridge assets and to encourage users to move away from the Polygon network. This is largely due to some pretty nasty incidents with bridge vulnerabilities.
In simple terms, a blockchain bridge allows users to move tokens between two blockchains. It usually needs the asset to be locked on one chain and then an equal value is created on the other chain. Bridge vulnerabilities have been a hot target for DeFi attacks, making up more than half of all on-chain attacks between 2021 and 2022.
Behind all this fuss about Aave potentially leaving Polygon is another proposal. This one was initiated by Allez Labs, Morpho Association, and the Yearn protocol. Released on Dec. 12, it’s all about using $1.3 billion in idle stablecoins from the Polygon PoS Bridge to maximize yield generation.
The plan is to send assets into yield-generating vaults on Ethereum to earn an estimated annual yield about 7%, which could release an extra $81 million in annual revenue for Polygon. The yield would then come back to Polygon and be reinvested into its DeFi to give liquidity a boost and help projects grow.
But this has sparked a huge discussion in the community. Most folks are against the decision due to the added security risks for stablecoin holders. As one community member puts it, if people are keeping their stablecoins on the Polygon PoS bridge, it’s because they see it as a low-risk environment. By putting these stablecoins in a vault, you’re forcibly making holders assume more risk, and with no reward to sweeten the deal.