As an analyst with years of experience in the crypto space, I’ve witnessed numerous twists and turns, and the recent developments surrounding Aave and Polygon have certainly caught my attention. The proposal to revise risk parameters on Aave v2 and v3 on the Polygon network, initiated by Aave chain founder Marc Zeller, is a strategic move that underscores the growing concerns over bridge assets’ security on the network.
The Aave community is discussing the potential shutdown of their operations on Polygon, as they have expressed worries about a forthcoming assessment of the risk associated with assets transferred to the network.
On December 13, a proposition put forth by Marc Zeller, founder of Aave Chain, aims to adjust the risk settings for instances within both Aave v2 and Aave v3 on the Polygon network. In simpler terms, this proposal suggests tweaking certain safety measures in both versions of Aave deployed on the Polygon platform.
As per Zeller’s statement, this action is a reaction to a suggestion within Polygon’s governance, which proposes employing more than a billion dollars worth of stablecoins for yield farming across other platforms such as Morpho and Yearn.
The proposal includes a series of significant adjustments to risk parameters, such as setting loan-to-value (LTV) ratios to 0%, increasing Reserve Factors, and freezing certain reserves on Aave’s v2 and v3 deployments.
The LTV ratio determines how much a user can borrow against their collateral. By setting the LTV to 0%, users will no longer be able to use bridged assets as collateral to borrow funds, thus reducing the risk of cascading liquidations in the event of a bridge vulnerability.
Meanwhile, the freeze on assets would prevent users from interacting with several bridged tokens, including USD Coin Bridged (USDC.e), wrapped Ether (wETH), wrapped Staked Ether (wstETH), wrapped (wBTC), Aave (AAVE), Chainlink (LINK), Aavegotchi (GHST), Lido Staked Matic (StMATIC), and stablecoins Tether (USDT), Stasis Euro (EURS) and Dai (DAI).
On the Polygon network, Aave ranks among the top lending platforms, with DefiLlama’s statistics indicating that a combined total of approximately $461 million is currently secured within it by Aave’s users.
Referring to potential weaknesses in bridges, Zeller stated that this action would reduce risks associated with bridge resources and encourage users to transition from the Polygon network by offering incentives.
According to Zeller, the Aave ecosystem has faced both indirect and direct consequences due to weaknesses in bridges, particularly the hacking incidents on the Multichain and Harmony bridges.
A blockchain bridge facilitates moving digital assets from one blockchain to another. This process usually entails securing the original asset in one blockchain while creating a corresponding counterpart in the receiving blockchain.
In the realm of Decentralized Finance (DeFi), bridges have emerged as a common point of attack by hackers, making up more than half of the total on-chain assaults that occurred from 2021 to 2022.
Polygon’s bridge liquidity proposal
Aave is considering leaving the Polygon network following a proposal started by Allez Labs, Morpho Association, and Yearn protocol on December 12. This governance proposal aims to stimulate community dialogue about optimizing yield generation for roughly $1.3 billion in idle stablecoins that are currently bridged on the Polygon Proof-of-Stake (PoS) Bridge.
This approach entails placing resources within Ethereum‘s yield-providing depositories, particularly ERC-4626 wallets, to anticipate a roughly 7% yearly return. This could theoretically generate approximately $81 million in yearly income for the Polygon network.
The generated yield would then be bridged back to Polygon and reinvested into its DeFi ecosystem to incentivize liquidity and stimulate projects’ growth.
According to the plan, Morpho’s depositories and marketplace will act as the foundation for the liquidity system. Allez Labs will be responsible for ensuring safety and managing risks, while the Yearn protocol will oversee the rewards management program.
As a crypto investor, I’ve been closely following the debate on Polygon’s governance forum. It seems that the majority of us are expressing concerns over the proposed decision, as we believe it may introduce extra security risks for stablecoin holders.
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2024-12-16 20:32