Aave Contributor Proposes Exit from Polygon over ‘Risky’ Bridge

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As an analyst with over a decade of experience in the crypto space, I’ve seen my fair share of security concerns and their impact on the DeFi ecosystem. The proposal by Aave to adjust risk parameters on its protocols on the Polygon network seems like a prudent move given the potential risks associated with bridged assets.

The Aave community is discussing a plan to discontinue using their lending services on the Proof-of-Stake (PoS) chain of Polygon, as they have safety issues related to interconnected assets in bridges that are causing concern.

The idea, stemming from the Polygon community, suggests employing over a billion dollars worth of bridge assets for generating yields, sparking worries about potential risks due to increased vulnerabilities. Aave, being the largest decentralized application on Polygon with deposits exceeding $466 million, expresses concerns that such changes might elevate risk levels for its users.

Marc Zeller, the creator of Aave Chan, wrote a plan to tweak the risk settings for both Aave’s Version 2 and Version 3 systems within the Polygon network.

As a crypto investor, I’m proactively taking measures to safeguard our protocol from potential future security breaches, learning from past incidents that have significantly impacted the DeFi ecosystem. These include high-profile attacks on bridges like Ronin, BNB “Bridge,” Nomas, Multichain, Harmony, and Wormhole, which resulted in substantial losses.

According to Zeller, the adjustments are being made to address a future plan which is expected to greatly alter the risk levels associated with assets connected by bridges in the Polygon network.

The proposal suggests making significant adjustments to reduce security risks and encourage migration from the Polygon network.  It includes setting the loan-to-value (LTV) for all assets on Aave V2 and V3 on Polygon to 0%, making borrowing impossible.

Option A: The reserve will increase to 85%, acting as a deterrent for deposits and encouraging withdrawals instead. Additionally, Aave intends to discontinue the Safety Module support for Aave V3 on Polygon, and terminate the umbrella deployment on this network.

Furthermore, the plan suggests shifting Aave Governance V3 voting to a safer Layer 2 platform, locking reserves for essential assets such as USDC.e, USDT, wETH, wstETH, DAI, wBTC, AAVE, LINK, GHST, EURS, and StMATIC. Over time, it also proposes a gradual decrease in LTV for bridged assets to bolster security and encourage users to transition away from Polygon.

Recently, Allez Labs teamed up with DeFi platforms Morpho and Yearn to suggest a strategy for investing approximately $1.3 billion in stablecoins through the Polygon Proof-of-Stake (PoS) bridge into lending platforms to generate returns. This plan aims to tackle an annual opportunity cost of around $70 million from the idle reserves. At present, though, the Polygon community has not cast their votes on this proposal.

Zeller raises issues regarding potential security hazards when utilizing resources from the canonical bridge. He cautions that rehypothecation of user deposits within liquidity pools might subject them to bad debt and considerable dangers. On the other hand, safer tactics like liquid staking or MakerDAO’s savings rate are employed by other chains.

Even though the Polygon proposal is currently under early discussions, Polygon Labs has made it clear that they prioritize security when implementing any strategies for generating returns.

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2024-12-16 20:22