Forward The Original Title: Polygon Ecosystem Crisis: AAVE and Lido’s Mass Exodus Triggered by the “Borrowing Chickens to Lay Eggs” Proposal

As a key 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 like Solana, Sui, and Base. When Polygon returned to discussions on social media, it wasn’t due to any significant updates but rather the departure of ecosystem partners such as AAVE and Lido.

‘Borrowing Chickens to Lay Eggs’ Proposal Raises Concerns

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

Coincidentally, on the same day, the liquidity staking protocol Lido announced that in the next few months, Lido on the Polygon network will be officially deactivated. The Lido community cited a strategic renewed focus on Ethereum, as well as the lack of scalability of Polygon POS, as reasons for discontinuing Lido on the Polygon network.

Losing two major ecosystem applications in a single day was a heavy blow to Polygon. The primary cause seems to be linked to the “Polygon PoS Cross-Chain Liquidity Plan” Pre-PIP improvement proposal announced by the Polygon community on December 13. The main objective of this proposal is to leverage over $1 billion in stablecoin reserves held in the PoS chain bridge to generate yields.

It is reported that the Polygon PoS bridge holds approximately $1.3 billion in stablecoin reserves, and the community recommends deploying these idle funds into carefully selected liquidity pools to generate revenue and promote the development of the Polygon ecosystem. The funds could bring in about $70 million a year based on current loan rates.

The proposal suggests gradually allocating these funds into vaults compliant with the ERC-4626 standard. Specific strategies include:

DAI: Depositing into Maker’s sUSDS, the official yield-bearing token in the Maker ecosystem.

USDC and USDT: Utilizing Morpho Vaults as the primary yield source, with risk management overseen by Allez Labs. Initial markets include Superstate’s USTB, Maker’s sUSDS, and Angle’s stUSD.

In addition, Yearn will manage a new ecosystem incentive program, using these proceeds to incentivize activity within Polygon PoS and the broader AggLayer ecosystem.

Notably, the proposal was co-authored by Allez Labs, Morpho Association, and Yearn. According to DefiLlama’s data on December 17, Polygon’s total TVL stood at $1.23 billion, with approximately $465 million of that on AAVE, accounting for 37.8%. Yearn Finance’s TVL ranked 26th within the ecosystem, with a value of around $3.69 million. This might explain why AAVE proposed withdrawing from Polygon due to security concerns.

Obviously, from AAVE’s perspective, this proposal is to take AAVE’s money and put it into other lending agreements to earn interest. As the largest application of Polygon POS cross-chain bridge funds, AAVE cannot benefit from such a proposal, but has to bear the risk of fund security.

However, Lido’s withdrawal may have nothing to do with this proposal. After all, Lido’s proposal and vote on re-evaluating Polygon were released as early as a month ago, but it just happened to be released at this time.

A Helpless Move Amidst Ecosystem Stagnation

If AAVE’s withdrawal proposal is officially passed, the total value locked (TVL) on Polygon will drop to $765 million, falling short of the $1 billion reserve mentioned in the Pre-PIP improvement proposal. The second-largest protocol in the ecosystem, Uniswap, currently has a TVL of approximately $390 million. Should Uniswap follow AAVE’s lead with a similar proposal, Polygon’s TVL could plummet to around $370 million. This would not only render the $70 million annual yield target unattainable but also impact various aspects of the ecosystem, such as governance token prices and active user metrics. The overall losses could far exceed the projected $70 million.

Given this potential outcome, the proposal doesn’t seem like a wise decision. Why, then, did the Polygon community put forward this plan? How has the Polygon ecosystem been performing over the past year?

Polygon’s ecosystem was at its peak in June 2021, when its total TVL reached $9.24 billion—7.5 times higher than it is today. However, TVL began a steady decline, and since June 2022, it has hovered around $1.3 billion with no significant fluctuations. By 2023, TVL even fell to as low as $600 million at one point. Although the market started to recover in 2024, Polygon’s TVL mostly remained below $1 billion, only barely surpassing this threshold in October.

In terms of active addresses, on October 29, 2024, Polygon PoS had around 439,000 active addresses, a figure roughly the same as the previous year. Between March and August this year, Polygon PoS did see a sharp increase in active addresses, peaking at 1.65 million. However, for reasons unclear, activity rapidly cooled during the market’s hottest period.

The performance of Polygon’s token, POL, has also been disappointing. From March to November 2024, the token’s price did not follow Bitcoin and other major cryptocurrencies in their market rallies. Instead, POL declined steadily, dropping from $1.30 at the beginning of the year to a low of $0.28—a staggering 77% drop. Only in the past one to two months has POL started to rebound, recently climbing back to around $0.60. However, this is still far from its all-time high of nearly $3, requiring a 5x increase to reach that level. In 2022, MATIC (POL’s predecessor) was once ranked among the top ten cryptocurrencies by market capitalization. Today, its market cap has fallen out of the top 100.

Technical Innovation + Brand Upgrades Fall Short Compared to “Giving Out Money”

Amid ecosystem stagnation, Polygon has not abandoned its efforts in technology and product development, frequently announcing innovations and new initiatives over the past year. The most notable development has been the growth of the prediction market Polymarket. In October, Polygon also introduced a new unified blockchain ecosystem, AggLayer. According to the official explanation, AggLayer represents a unified chain (L1, L2, L∞), but its positioning appears somewhat difficult to grasp, prompting the release of a dedicated explanatory article in November.

Additionally, within the ecosystem, the ZK proof toolkit Polygon Plonky3 has become the fastest zero-knowledge proof system. Even Vitalik Buterin interacted on Twitter, stating, “You’ve won this race.”

Beyond technology, many established blockchain projects have resorted to rebranding as a means to revitalize their image. Polygon underwent such a transformation earlier by rebranding from Matic to Polygon. However, in today’s market environment, non-disruptive technological innovations seem to struggle to establish a compelling narrative. For projects like Polygon that remain committed to technological breakthroughs or hope to revamp their brand through integration, this reality is undeniably harsh.

What truly attracts users and sustains attention are often rewards and incentive programs, such as the recent buzz around Hyperliquid. Polygon’s attempts at reform in this area are constrained by limited resources. For instance, the daily on-chain fee revenue for Polygon amounts to only tens of thousands of dollars, a figure too small to spark user interest. This led to the “Borrowing Chickens to Lay Eggs” proposal mentioned earlier.

However, it is evident that the “chicken’s owner” does not agree with the business deal, potentially causing Polygon to lose even more in the process. Ultimately, the root cause of Polygon’s ecosystem stagnation is its lack of sufficient user incentives and a compelling new narrative. As market competition intensifies, Polygon needs to go beyond technical innovation and seek more appealing market strategies. This dilemma is one faced by many established blockchain networks today.

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