AAVE DAO Threatens to Leave Polygon Over Controversial $1B Bridge Funds Proposal

Once ranked within the top 10 cryptocurrencies by market capitalization, the Polygon blockchain ecosystem has struggled to return to the limelight in recent months. Matters also do not seem to be improving, especially with the community now divided on a proposal backed by the Polygon Foundation.

At the heart of the debate is a move that intends to unlock $1 billion of stablecoin reserves locked on the Polygon bridge. The proposal, championed by Polygon-based projects Allez Labs, Morpho Association, and Yearn, wants to use the funds locked on the bridge to generate additional rewards for investors.

Today @AllezLabs, @MorphoLabs & @Yearnfi posted a pre-PIP for a Polygon PoS Bridge Liquidity Program.

This community-led proposal discusses activating stablecoin reserves on the PoS Bridge & directing yield into new incentive programs.

Give feedback:https://t.co/QtQJgqyI7D

— Polygon Foundation (@0xPolygonFdn) December 12, 2024

While the proposal has gained support from the protocols and few within the community that are profit-oriented, it has attracted a backlash from others. The primary concern of those against the proposal is the high risk that such operations might place on investor funds.

In recent years, cross-chain bridge hacks have dominated headlines, with one of the main highlights being Ronin Network’s $625 million loss in 2022. Some community users fear that the underlying smart contracts to be introduced by the team to generate yield from Polygon’s bridge $1 billion stablecoin reserves might expose users to risks in the future.

Additionally, they argue that keeping funds on a bridge protocol guarantees that users can securely move funds across the chain with confidence that the stablecoins maintain a 1:1 backing. Moving bridge funds for the purpose stated in the controversial proposal will eliminate that safety net for investors.

AAVE DAO Plans Move Away from Polygon

It is worth noting that the Polygon Foundation-backed proposal is still a pre-Polygon Improvement Proposal (PIP), meaning it may not scale through. However, the AAVE DAO, which oversees the lending protocol, has moved to express its displeasure at the proposal.

More than that, the AAVE community has begun debating a new proposal to move its lending operations away from the Polygon network if the earlier move by the Polygon Foundation scales through. AAVE plans to restrict users’ ability to borrow with assets on Polygon, incentivize users to stop depositing assets and migrate its voting structure to another layer-2 network.

For context, AAVE is the biggest lending platform on Polygon, with over $455 million worth of assets. Moving away from the Polygon ecosystem will evidently be a big blow for the already struggling network.

It remains to be seen whether the original pre-PIP passes and whether AAVE follows through on its plan. However, the growing tensions do not do Polygon (POL) investors any good, as many will hope the community unites soon enough to mount a challenge back into the top tier of the crypto market.