Polygon Co-Founder Calls Aave Leadership ‘Monopolistic’

The Proposal: Freezing Bridged Assets on Polygon

On December 13, 2024, Aave Chain founder Marc Zeller introduced a proposal to revise risk parameters for Aave v2 and v3 deployments on Polygon. The goal is to reduce the risks associated with bridged assets, particularly in light of recent vulnerabilities in cross-chain bridges, such as the Harmony and Multichain bridge exploits.

• Loan-to-Value (LTV) Ratios Set to 0%: Zeller’s proposal suggests adjusting LTV ratios to 0% for certain bridged assets, which would prevent users from borrowing against these assets. This adjustment aims to minimize the risk of these assets being exploited in the event of bridge vulnerabilities.
• Freezing Certain Reserves: The proposal includes freezing assets like USD Coin Bridged (USDC.e), Wrapped Ether (wETH), and Wrapped Bitcoin (WBTC), reducing exposure to these bridged tokens.
• Increasing Reserve Factors: Zeller also advocates for increasing reserve factors to further protect the protocol from potential risks.

Currently, Aave’s Polygon deployment holds $461 million in total value locked (TVL), with a cumulative fee generation of $122 million, according to DefiLlama. Despite the significant financial stakes, the proposal has sparked controversy within the Polygon community.

Polygon’s Governance Responds: Anti-Competitive Concerns

Polygon’s governance has expressed strong opposition to Aave’s proposal, raising concerns about its impact on competition within the DeFi ecosystem. Polygon Labs, the organization behind the Polygon network, issued a statement acknowledging the proposal but emphasized the importance of collaboration and open dialogue.

According to a Polygon Labs spokesperson:

“The Polygon community values open dialogue and collaboration. We encourage discussions to evaluate these proposals fully.”

However, the Polygon community strongly rejected Aave’s proposal, citing the potential risks to stablecoin holders and the lack of an opt-in mechanism in the pre-proposal draft. This has led to further tensions between both projects, especially as the governance process unfolds.

Sandeep Nailwal’s Response: Criticism of Aave’s Proposal

Sandeep Nailwal, co-founder of Polygon, expressed concerns over the lack of an opt-in mechanism for stablecoin holders, which could pose significant issues. He confirmed that the proposal was unlikely to pass due to widespread opposition within the Polygon community. Despite this, Nailwal praised the governance process for fostering an active debate and collaboration among stakeholders.

• Pre-PIP Concerns: Nailwal criticized the lack of flexibility for users, emphasizing that it could cause unnecessary disruption for stablecoin holders.
• Governance Process Praised: Despite disagreements, Nailwal commended the decentralized governance process for allowing productive discussions and feedback.

Aave’s Response: Monopolistic Accusations and Anti-Competitive Behavior

The Aave community has also responded to the backlash, with some perceiving Zeller’s “Operation Polygon(e)” proposal as a retaliatory move against Morpho’s competing initiative. This has led to accusations of monopolistic behavior, with Polygon’s leadership accusing Aave of stifling competition in the DeFi space.

Sandeep Nailwal described Aave’s actions as anti-competitive, stating:

“The Polygon community will not be intimidated and remains committed to fostering a decentralized, competitive DeFi ecosystem.”

The ongoing debate highlights the complexities of governance in decentralized networks and the balancing act between securing assets and encouraging innovation. Both sides continue to advocate for collaborative solutions, but the future of Aave’s operations on Polygon remains uncertain as the discussions evolve.

The Future of Aave and Polygon’s Relationship

As the debate continues, the crypto and DeFi communities are closely monitoring the situation between Aave and Polygon. The key questions remain whether Aave will cease its operations on Polygon, whether Polygon can find a solution to address the risks posed by bridged assets, and how these two major players will collaborate moving forward.

• Potential Cease of Operations: Aave may reconsider its operations on Polygon if the community cannot agree on changes to the risk profile of bridged assets.
• Ongoing Debate: Both Aave and Polygon continue to engage in discussions, with the future of their partnership hanging in the balance.
• Impact on DeFi Ecosystem: The outcome of this debate will have broader implications for DeFi protocols operating on Polygon and other blockchain networks.

As both sides seek a resolution, the future of DeFi on Polygon could take a new direction. Stakeholders are keen to see whether a compromise can be reached that ensures both security and innovation continue to thrive in this rapidly evolving ecosystem.