Aave governance mulls an exit from Polygon

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Aave wants to break up with Polygon, while Lido already has.

Four days ago, a governance proposal floated the possibility of bridging $1.3 billion worth of idle stablecoins on the Polygon PoS bridge toward Aave’s lending competitor Morpho. The stablecoins would then be rehypothecated onto protocols like Sky, Angle and Robert Leshner’s Superstate.

This “Blast-like” strategy would unlock an estimated $70 million in annual yield for “ecosystem incentives” that Polygon is currently leaving on the sidewalk. 

I say Blast-like because unlike the Blast L2, Polygon users would actually have to trust a bridge, plus they wouldn’t benefit from any yield rewards (at least not directly).

In response, Aave-chan Initiative (ACI) founder Marc Zeller published seven hours ago a rather aggressive governance proposal seeking to adjust the risk parameters loan-to-value (LTV) for all assets on Aave Polygon, to 0%.

The reason for the breakup? Zeller cites reasons of risk involved with “bridge vulnerabilities,” invoking a list of historical bridge hacks such as Ronin, BNB bridge, Wormhole and more.

Zeller’s proposal would also adjust the reserve factor for all Aave assets to 85% to disincentivize deposits, cancel its upcoming Umbrella safety module deployment, migrate Aave’s v3 governance to another L2 chain, and freeze all its reserves on Polygon.

Above all, the proposal seeks to create a co-incentive program with other L2 chains, making it attractive for Aave users on Polygon to migrate liquidity elsewhere (perhaps the Avalanche C-Chain?).

Suffice to say, this would in effect kill the existence of Aave on Polygon, which is currently the top protocol by TVL ($662 million) on the sidechain.

From Aave’s perspective, Polygon’s revenues are pocket change. On a month-to-date basis, Polygon’s revenues to Aave account for a mere 3.8% ($305k) of its total revenues.

The million-dollar question here is: How would Aave have responded had Polygon chosen to deploy its bridged stablecoins to aUSDC on Aave?

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