Polygon Ecological Crisis: AAVE and Lido quit collectively, causing the "Borrowing the Chicken to Lay the Egg" proposal

Author: Frank, PANews

As an important promoter of multi-chain interoperability, zero-knowledge proof applications, and DeFi and NFT ecosystems, Polygon has shined in the last bull market cycle. However, in the past year, many public chain projects such as Polygon have failed to achieve new breakthroughs, but have gradually been submerged in the light of new competitors such as Solana, Sui or Base. When Polygon returned to social media discussions again, it was not because of any major update, but because of the withdrawal of ecological partners such as AAVE and Lido.

'Borrowing a chicken to lay an egg' proposal raises concerns

On December 16, Aave contributor team Aave Chan released a proposal in the community to withdraw its lending service from Polygon’s Proof of Stake (PoS) chain. The proposal, written by Aave Chan founder Marc Zeller, aims to phase out Aave’s lending protocol on Polygon to prevent possible future security risks. Aave is the largest decentralized application on Polygon, with over $466 million in deposits on the PoS chain.

Coincidentally, on the same day, the liquidity staking protocol Lido announced that in the next few months, Lido on the Polygon network will be officially deactivated. The Lido community cited a strategic renewed focus on Ethereum, as well as the lack of scalability of Polygon POS, as reasons for discontinuing Lido on the Polygon network.

Losing two large and important ecological applications in one day is a heavy blow to Polygon. The main reasons all stem from the "Polygon PoS Cross-chain Liquidity Plan" Pre-PIP improvement proposal released by the Polygon community on December 13. The main goal of the proposal is to generate revenue by utilizing the over $1 billion in stablecoin reserves held on the PoS chain bridge.

It is understood that the Polygon PoS bridge holds approximately $1.3 billion in stablecoin reserves, and the community recommends deploying these idle funds into carefully selected liquidity pools to generate revenue and promote the development of the Polygon ecosystem. Based on current loan rates, these funds could generate approximately $70 million per year.

The proposal proposes gradually investing these funds into ERC-4626 compliant vaults. Specific strategies include:

DAI: sUSDS deposited into Maker, which is the official revenue-generating token of the Maker ecosystem.

USDC and USDT: With Morpho Vaults as the main source of income, Allez Labs is responsible for risk management. Initial markets include Superstate’s USTB, Maker’s sUSDS, and Angle’s stUSD.

Additionally, Yearn will manage a new ecosystem incentive program, using these proceeds to incentivize activity within Polygon PoS and the broader AggLayer ecosystem.

It is worth noting that the signatures of this proposal are Allez Labs, Morpho Association, and Yearn. According to Defillama data on December 17, Polygon’s total TVL is US$1.23 billion, of which the TVL on AAVE is approximately US$465 million, accounting for approximately 37.8%. Yearn Finance’s TVL ranks 26th in the ecosystem, with a TVL volume of approximately US$3.69 million. This may explain why AAVE proposed to withdraw from Polygon due to security reasons.

Obviously, from AAVE's perspective, this proposal is to take AAVE's money and put it into other lending agreements to earn interest. As the largest application of Polygon POS cross-chain bridge funds, AAVE cannot benefit from such a proposal, but has to bear the risk of fund security.

However, Lido’s withdrawal may have nothing to do with this proposal. After all, Lido’s proposal and vote on re-evaluating Polygon were released a month ago, but just happened to be released at this time.

Weak ecological development is a helpless move

If the AAVE withdrawal proposal is formally passed, the TVL on Polygon will drop to US$765 million, which will no longer be able to achieve the US$1 billion fund reserve mentioned in the Pre-PIP improvement proposal. Uniswap, which ranks second in the ecosystem, has a TVL volume of approximately US$390 million. If Uniswap also follows up and proposes a similar solution to AAVE, the TVL volume on Polygon will plummet to approximately US$370 million. Not only will the annual interest-earning target of US$70 million fail to be achieved, but all aspects of the entire ecosystem will be affected, such as governance token prices, active users, etc. The loss may be far more than $70 million.

So, judging from this result, this proposal does not seem to be a wise move. Why did the Polygon community propose this plan? In the past year of development, what is the status of the Polygon ecosystem?

The most prosperous time for the Polygon ecosystem was in June 2021, when the total TVL amount reached US$9.24 billion, 7.5 times that of today. As time goes by, Polygon's TVL curve has been declining, and has remained at around US$1.3 billion since June 2022, without much ups and downs. By 2023, it once fell to about US$600 million. In 2024, when the market picks up, Polygon's TVL volume is still below US$1 billion in most cases, and has only barely risen to more than US$1 billion since October.

In terms of the number of active addresses, the number of active addresses of Polygon PoS on October 29 was approximately 439,000. This level is almost the same as the data a year ago. Although from March to August this year, the number of active addresses of Polygon PoS was once There has been a significant increase, once reaching 1.65 million. But for some unknown reason, the market cooled down very quickly when it was at its hottest.

The market performance of tokens has also been poor. From March to November 2024, the price of POL tokens did not follow the rise of Bitcoin and other markets. Instead, it fell all the way, from the lowest of $1.3 at the beginning of the year to $0.28, a drop of more than 77 %. It has only started to rebound in the past month or two. The price has recently rebounded to around US$0.6, but it still needs to increase by about 5 times from the historical high of nearly US$3.

Technological innovation + brand upgrade are not as good as “making

money”

Ecological development is weak, but Polygon has not given up on technology and products. In the past year, it has made many announcements about technological innovation and product layout. The most eye-catching performance is naturally the development of the prediction market Polymarket in the past year. In addition, in October, Polygon released the new unified blockchain ecosystem AggLayer. According to the official introduction, Agglayer = unified chain (L1, L2, L∞), but obviously the positioning of this new ecosystem does not seem to be easy to understand. , in November the official also published a special article explaining AggLayer.

In addition, the ZK proof system toolkit Polygon Plonky3 in the ecosystem has become the fastest zero-knowledge proof system. Vitalik also interacted on Twitter and said, "You won this game."

In addition to technology, many established public chains like to rebrand this year by changing their names and exchanging coins. Polygon has already rebranded and changed its name from Matic to Polygon. And in the current market environment, it seems difficult for non-disruptive technological innovation to become a project's narrative advantage. This is indeed a problem for projects such as Polygon that are obsessed with technological innovation or hope to reshape their brands through integration. A cruel fact.

What can really attract users and keep their attention is often reward distribution or incentive plans, such as Hyperliquid, which has been in the limelight recently. Polygon wants to reform in this area, but there are obviously not many cards available. In terms of on-chain fees, Polygon's daily fees are only tens of thousands of dollars, and these incomes cannot interest users. Hence, the “borrowing a chicken to lay an egg” proposal mentioned at the beginning.

But obviously, the owner of the "hen" does not agree with this business, and Polygon may lose more because of this. Overall, the fundamental reason for Polygon's stagnant ecological development is its lack of sufficient user incentives and new narrative driving force. Faced with intensifying market competition, Polygon needs to find more attractive market strategies in addition to technological innovation. And this is also the common predicament of most husband chains today.