Polygon Ecological Crisis: AAVE and Lido Collective Exit, Triggered by the "Borrowing Chickens to Lay Eggs" Proposal

Author: Frank, PANews

As an important driver of multi-chain interoperability, zero-knowledge proof applications, and the DeFi and NFT ecosystems, Polygon shone brightly during the last bull market cycle. However, over the past year, many public chain projects, including Polygon, have failed to achieve new breakthroughs and have gradually been overshadowed by new competitors such as Solana, Sui, or Base. When Polygon re-entered discussions on social media, it was not due to any major updates, but rather the exit of ecosystem partners like AAVE and Lido.

"Borrowing Chickens to Lay Eggs" Proposal Raises Concerns

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

Coincidentally, on the same day, the liquid staking protocol Lido announced that it would officially discontinue its services on the Polygon network in the coming months. The Lido community stated that the strategic refocus on Ethereum and the lack of scalability of Polygon PoS were the reasons for discontinuing Lido on the Polygon network.

Losing two major ecosystem applications in one day is a significant blow to Polygon. The main reason stems from the "Polygon PoS Cross-Chain Liquidity Plan" Pre-PIP improvement proposal released by the Polygon community on December 13. The primary goal of this proposal is to suggest using the over $1 billion stablecoin reserves held on the PoS chain bridge to generate yields.

It is understood that the Polygon PoS bridge holds approximately $1.3 billion in stablecoin reserves, and the community suggests deploying these idle funds into carefully selected liquidity pools to generate yields and promote the development of the Polygon ecosystem. Based on current lending rates, these funds could potentially yield around $70 million annually.

The proposal suggests gradually investing these funds into vaults that meet the ERC-4626 standard. Specific strategies include:

• DAI: Deposit into Maker's sUSDS, which is the official yield-bearing token of the Maker ecosystem.
• USDC and USDT: Use Morpho Vaults as the primary source of yield, with Allez Labs 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, utilizing these yields to incentivize activities within the Polygon PoS and the broader AggLayer ecosystem.

Notably, the proposal is signed by Allez Labs, Morpho Association, and Yearn. According to Defillama data from December 17, Polygon's total TVL is $1.23 billion, with AAVE's TVL at approximately $465 million, accounting for about 37.8%. Yearn Finance's TVL ranks 26th in the ecosystem, with a TVL of about $3.69 million. This may explain why AAVE proposed an exit from Polygon due to security concerns.

Clearly, from AAVE's perspective, this proposal involves taking AAVE's funds and placing them into other lending protocols for interest. As the largest application of funds on the Polygon PoS cross-chain bridge, AAVE cannot benefit from such a proposal and instead bears the risk of fund security.

However, Lido's withdrawal may not be related to this proposal, as Lido's proposal to reassess Polygon was published a month earlier, coincidentally coming to light at this time.

A Reluctant Move Amid Weak Ecosystem Development

If AAVE's withdrawal proposal is officially approved, the TVL on Polygon will drop to $765 million, making it impossible to achieve the $1 billion fund reserve mentioned in the Pre-PIP improvement proposal. The second-largest in the ecosystem, Uniswap, has a TVL of about $390 million; if Uniswap follows suit with a proposal similar to AAVE's, the TVL on Polygon could plummet to around $370 million. Not only would the annual yield target of $70 million be unachievable, but all aspects of the ecosystem, such as governance token prices and active users, would also be affected. The losses could far exceed $70 million.

From this outcome, it seems that this proposal may not be a wise move. Why did the Polygon community propose this plan? What has been the state of the Polygon ecosystem over the past year?

The Polygon ecosystem was at its most prosperous in June 2021, when the total TVL reached $9.24 billion, 7.5 times that of today. As time passed, the TVL curve of Polygon has been on a downward trend, maintaining around $1.3 billion since June 2022, with little fluctuation. By 2023, it even dipped to around $600 million. In 2024, as the market warmed up, Polygon's TVL mostly remained below $1 billion, only barely rising above $1 billion starting in October.

In terms of active addresses, on October 29, Polygon PoS had approximately 439,000 active addresses, a level not much different from a year ago. Although from March to August this year, the number of active addresses on Polygon PoS saw a significant increase, reaching 1.65 million at one point, it inexplicably cooled down rapidly during the market's peak.

The market performance of the token has also been poor. From March to November 2024, the price of the POL token did not follow the upward trend of Bitcoin and other major cryptocurrencies, but instead fell from $1.30 at the beginning of the year to a low of $0.28, a decline of over 77%. It has only recently started to rebound, with the price now around $0.60, but still needs to grow about five times to reach the historical high of nearly $3.

Technical Innovation + Brand Upgrade Not as Effective as "Distributing Money"

With weak ecosystem development, Polygon has not given up on technology and product innovation, frequently announcing technical innovations and product layouts over the past year. The most notable performance has been from the prediction market Polymarket in the past year. Additionally, in October, Polygon launched a new unified blockchain ecosystem called AggLayer, which the official introduction describes as Agglayer = unified chain (L1, L2, L∞). However, the positioning of this new ecosystem seems difficult to understand, and in November, the official team even published an article specifically explaining AggLayer.

Moreover, the ZK proof system toolkit Polygon Plonky3 has become the fastest zero-knowledge proof system. Vitalik also interacted on Twitter, stating, "You won this race."

In addition to technology, many established public chains this year have sought to reshape their brands through renaming and rebranding. Polygon has already undergone a brand transformation, changing its name from Matic to Polygon. Given the current market environment, non-disruptive technological innovations seem increasingly difficult to serve as a narrative advantage for a project. This is indeed a harsh reality for projects like Polygon that are still focused on technological innovation or hope to reshape their brand through integration.

What truly attracts users and maintains attention often revolves around reward distribution or incentive programs, such as the recently popular Hyperliquid. However, Polygon has limited options for reform in this area; the daily fees generated on-chain are only a few tens of thousands of dollars, which fails to pique user interest. Thus, the aforementioned "Borrowing Chickens to Lay Eggs" proposal emerged.

However, it is clear that the "chicken" owner does not agree with this business, and Polygon may end up losing even more. Overall, the fundamental reason for the stagnation of Polygon's ecosystem development is its lack of sufficient user incentives and new narrative driving forces. In the face of intensified market competition, Polygon needs to seek more attractive market strategies beyond technological innovation. This is a common dilemma faced by most established public chains today.