Aave could leave Polygon over plan to use bridge funds for yield farming

Aave governance delegate Marc Zeller has aired concerns over the future of the decentralized finance (DeFi) lending platform on Polygon in the wake of a controversial proposal to use funds locked in the network’s bridge to earn yield elsewhere.

Aave is the largest protocol on Polygon, accounting for over a third of the chain’s total value locked (TVL) at $467 million, according to data from DeFiLlama.

Read more: Advisors leave Aave as protocol punishes competitors

The proposal to create a “Polygon PoS Bridge Liquidity Program” is currently in pre-PIP status and, in the four days since publication, has generated discussion between concerned and yield-hungry users alike.

While some point to the potential boon to the ecosystem of the program’s profits being “strategically deployed… to incentivize liquidity and stimulate project growth,” others raised security worries.

Many users pointed out that stablecoin holders are especially risk-averse and adding layers of risk onto a “stable” product is precisely the opposite of why users hold these assets. 

The $1.3 billion worth of idle stablecoins would be bridged for use on Ethereum via Aave competitor Morpho, with vaults being “curated” by the proposal authors AllezLabs. A “conservative” yield of 7% would be targeted, potentially earning over $90 million per year.

The resulting lending interest would then be funneled back to Yearn on Polygon, where it would be distributed among yield farming vaults to incentivize activity on the chain.

In Zeller’s own discussion thread on Aave’s governance forum, he cites examples of bridge hacks such as Ronin, BNB Bridge, Wormhole, and Multichain as making up many of the largest losses in DeFi over recent years. He proposes to “set loan-to-value (LTV) for all assets on Aave V2 and V3 Polygon to 0%,” essentially disabling new borrowing, as well as incentivizing the migration of already-deposited assets to other networks.

Read more: Explained: How $600M was stolen from Binance’s BNB chain

However, the fact that the proposal would see funds funneled to Morpho likely also doesn’t sit well. Aave and Morpho haven’t been on the best of terms since risk manager Gauntlet jumped ship from the former to the latter.

Tensions flared again when Zeller accused Gauntlet and Morpho of not doing enough to protect users in the wake of a depeg of restaking token ezETH in April.

Read more: Depeg of $3B restaking token ezETH causes over $60M in DeFi liquidations

Meanwhile, Aave has been riding the wave of the recent DeFi renaissance, breaking its all-time high of $38 billion worth of net deposits. Even a President-elect Donald Trump-linked address has been buying the AAVE governance token ahead of the planned launch of World Liberty Financial (also Trump-linked, despite a lengthy disclaimer) as an Aave instance on Ethereum.

Perhaps Polygon needs Aave more than Aave needs Polygon.

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