Polygon's Stablecoin Standoff

Polygon’s largest application by total value locked has threatened to abandon the Network if a recent governance proposal receives approval.

What’s the Scoop?

• Reach for Yield: On December 12, risk manager Allez Labs submitted a Polygon governance proposal with Morpho and Yearn that seeks to deploy stablecoin collateral held within Polygon’s native bridge to Morpho lending markets, and then deposit the receipts into Yearn automated vault managers.
• Collateral Holdings: An estimated $70M per year could be generated from the strategy, and the resulting yield would be utilized as rewards on three “Polygon Ecosystem Vaults,” which would further rehypothecate stablecoin deposits throughout Polygon PoS and AggLayer DeFi.
• Aave Angst: In response, Aave contributor Marc Zeller countered with a governance proposal to his community that would gradually unwind Aave’s Polygon lending markets, citing concern that the move would redefine the risk profile of bridged assets on the Polygon network.

Bankless Take:

Although migrating idle stablecoins from the Polygon bridge into DeFi would produce a new source of ecosystem rewards, such strategies do not come without risks; depositors are exposed to losses and illiquidity even during normal operations, meanwhile, a hack of either Morpho or Year could result in the instantaneous and total loss of funds.