Polygon could lose over $300 million in TVL as Aave votes to halt lending on PoS chain

Polygon is on the verge of losing over $300 million in total value locked as the community running Aave, a popular liquidity protocol, appears to have overwhelmingly voted to essentially halt lending on the PoS chain.

Aave's community approving a proposal to forgo lending services on Polygon's PoS chain has been primarily driven by a negative reaction to a Polygon proposal in December to utilize more than $1 billion in bridged stablecoins for yield generation. 

In response to Polygon weighing the option, Aave founder Marc Zeller authored a proposal suggesting the protocol impose stringent risk parameters for Aave v2 and v3 deployed on Polygon PoS to discourage further deposits and prevent users from borrowing against their collateral. 

Zeller contended that Polygon’s approach to yield generation was substantially riskier than methods employed by other chains, such as depositing ETH in liquid staking protocols or DAI in MakerDAO’s savings rate module, as these yields are not exposed to bad debt.

"The Aave ecosystem has experienced both indirect and direct impacts from bridge vulnerabilities, notably the Multichain and Harmony bridge hacks," the initial governance post reads. "Additionally, depositing user funds into unsafe protocols has historically resulted in significant losses."

Aave is the largest decentralized app on Polygon by total value locked (TVL), with deposits exceeding $300 million on the PoS chain, according to DefiLlama data .

Ideal resolution, for Polygon

Last month, Polygon Labs CEO Marc Boiron told The Block that the "ideal resolution" would be if Aave came to the conclusion that there is no reason to be concerned and dropped any plans of ending its relationship with Polygon. Boiron noted that Polygon's community voted against the plan to deploy assets on platforms like Morpho and Yearn (Aave competitors), and that it had never advanced beyond the pre-PIP or "preliminary proposal" stage.

"That’s the ideal outcome," Boiron said at the time. "What do I think is going happen? It’s very difficult to know. It depends on how loud the community is, on the Aave side, in terms of informing leadership 'We want to continue to make several million dollars a year on Polygon PoS and don’t see why we lose that.'"

Polygon did not immediately respond to a request for comment on Tuesday. 

Aave's latest version

Aave's proposal is set be finalized on Tuesday after the Aave DAO voted to pass the measure on Monday. "The adjustments are in response to an upcoming proposal that will significantly impact the risk profiles of bridged assets within the Polygon network," the proposal reads.

The measure proposes changing the loan-to-value (LTV) of stablecoins like USDT and USDC on Polygon's PoS to 0%, essentially preventing users from borrowing against those assets. As of 12:03 p.m. ET, over 692,000 votes were in favor of leaving Polygon, with roughly 117,000 against. 

"This proposal demonstrates Aave's dedication to upholding the highest security measures and actively mitigating risk to safeguard user funds," said Aave Labs founder Stani Kulechov. "As the DeFi landscape continues to evolve, the Aave community will continue to evaluate risk and take action as necessary to enhance safety and reduce risk."

On Monday, Aave posted to X that its latest upgrade was live and introduced "changes in managing bad debt and liquidations, setting the stage for Umbrella."