[ARFC] Adjust Risk Parameters for Aave V2 and V3 on Polygon

We recommends adding the following risk parameter changes to this proposal.

  1. Decrease supply cap limits for POL, WPOL, MaticX, and stMATIC.
  2. Decrease supply cap for $AAVE
2 Likes

Gm, I would like to propose the following for the voting as some things have changed.

  • PIP got canceled by the community showcasing they don’t want to follow this ruthless attempt to gain extra yield without any kind of security.
  • Aave user on Polygon shouldn’t be the affected ones by this vote and should have time to act accordingly.
  • Leadership of Polygon is attacking Aave DAO and it’s “so called leader”.

So my proposal would be, instead of moving away from Polygon immediately by changing parameter drastically, I would suggest the DAO simply stops business there over time. This means we don’t raise caps anymore, we don’t add new assets, we raise the RF over time and encourage user to move to other chains, as there were already a few comments from those chains where they would incentivize this. That way user have enough time to adjust their loans without getting rekt on day one. We keep the market functional as long as needed but don’t invest more time and money into it.

8 Likes

Roc Zacharias here, QuickSwap Co-Founder, Polygon CTB (Community Treasury Board) board member, and long time Aave user, holder, and fan. Good to see your comment Emilio, long time no see my friend :)

I really appreciate your thoughtful and calm headed take on all of this. I am in the same boat as you in that I have such a strong love for Aave, it’s leadership, and our amazing community. Our communities have been instrumental in the growth of Ethereum and it’s scaling ecosystem.

I understand people’s concerns with the bridge pre-PIP, and I am not a fan of the Pre-PIP either. I don’t think it’s the craziest idea, and if implemented a different way, for example only using Eth to validate Ethereum, or having insurance fund, or insurance by Polygon treasury or other creative ways, it could have been more interesting. With that being said, the idea has been squashed, and I highly doubt it will be brought up again. The community on both sides voiced loudly that it just isn’t something we want which is a sign of good governance on both sides.

Keep in mind, a Pre-PIP in Polygon is more similar to a Temp Check on Aave. This wasn’t an actual PIP, never got to that stage, and never will. To me, this should be basically a finished issue. Aave Polygon has significant revenue, history, and huge user-base. Polygon Aave deployment is one of the largest by users as Emilio mentioned above. It just doesn’t make sense for the communities to “break up” over a simple discussion. If anyone disagrees, could you please explain why we would “break up” and hurt all of the users who have actively voted with their wallets to use Aave on Polygon? Many of these users are exclusively Aave on Polygon, or started their journey on Polygon, and have since expanded to more chains after first trying Aave on Polygon.

If you look at this data from Dune, Polygon Aave users are continuing to grow at a strong pace. https://dune.com/queries/4573060/7624783

Here is another interesting data point. Polygon is 2nd in cumulative fees behind only Ethereum, having 100x more than Base and BSC, 4x more than Arbitrum. I love Base and Arbitrum, no competition here, just giving stats for everyone to see. https://defillama.com/protocol/aave#fees-revenue*

I have a lot of respect for everything Aave has accomplished, and many of the incredible milestones happened with our communities working together! We literally made history TOGETHER!

Polygon is fighting hard to unite all Ethereum L2s, and will continue to be a major contributor to the future of scaling Ethereum through rollups, and I know damn well Aave will continue to innovate and provide finance to the underbanked of the world. We have bigger battles with external enemies like banks, governments, the incumbent financial industry, and overly zealous regulators who would like to see our whole industry burn a fiery death. I know strong words were had on both sides. Words among a handful of individuals don’t change our history or our mission. I hope we can come back together and keep fighting the good-fight with our communities united!

With so much love,
Roc

7 Likes

The current proposal has been escalated to ARFC Snapshot.

Vote will start tomorrow, we encourage everyone to participate.

So if this proposal passes, Polygon will be removed from AAVE at the end date of ARFC Snapshot (Feb 7th) ?
How will I be affected if I’m supplying $POL to borrow USDT on AAVE V3 ?

All active loans won’t be affected.
What you cannot do will be to take out another loan with those assets.

1 Like

the proposal was edited following community & service providers feedback.

Aave stays on Polygon, users are mostly unaffected, Aave DAO only reduce risk exposure to this network.

3 Likes

Will I still be able to add $POL and USDC as collaterals to prevent the health on my existing from dropping ?

that is correct. please refer to the proposal first post that has been updated or go to discord if you have more question.

1 Like

As Michigan Blockchain, we agree that cross-chain bridge vulnerabilities have been a significant security concern in the DeFi space. According to Chainalysis, approximately $2 billion in crypto was stolen across 13 cross-chain bridge hacks as of August 2022. This accounted for 69% of funds stolen that year. It is important that Aave proactively reduces risk and ensures user safety as Polygon governance is evaluating changes to its bridged asset framework. Setting the LTVs to 0% and increasing Reserve Factors will discourage new borrowing and minimize exposure to potentially unsafe assets. This will also strengthen Aave’s long term stability. We also support the user migration initiative, which will help Aave users move their positions to safer networks with incentives and support.

As Michigan Blockchain, we support adjusting the risk parameters for Aave V2 and V3 on Polygon, specifically by setting the LTV for key stablecoins—USDT, USDC, USDC.e, and DAI—to 0%. This change would prevent these assets from being used as collateral for borrowing. This is a precaution we believe is necessary given the unique risks associated with bridged assets and the deployment of large capital amounts into yield-bearing DeFi protocols.

Many stablecoins on Polygon are bridged from other chains such as Ethereum, meaning their 1:1 backing depends on assets held externally. In December 2024, a proposal was put forth on the Polygon forum suggesting that approximately $1.3 billion in stablecoins (DAI, USDC, and USDT) currently idle on the Polygon PoS Bridge be deployed into yield-bearing liquidity pools via ERC‑4626 vaults. While deploying this idle capital can unlock significant yield and bolster ecosystem growth, it also introduces additional risks. Idle funds in the bridge are typically held in straightforward contracts, limiting exposure to the complex vulnerabilities inherent in active DeFi protocols. Once deployed, however, these assets interact with more intricate smart contracts, liquidity pools, and yield strategies, thereby increasing their exposure to risks such as smart contract bugs, liquidity crunches, and potential exploits.

A critical concern is that a hack or exploit at the bridge could result in the loss or manipulation of the assets backing these stablecoins. If such an event were to occur, the stablecoins could lose their 1:1 peg—a depeg scenario that would have devastating consequences for the Aave markets on Polygon. Given that a substantial portion of the stablecoins on Aave V3 is used as collateral (with figures like $63 million USDT supplied, $55 million USDC supplied, $10 million USDC.e, and $9 million DAI supplied), any significant devaluation could trigger massive liquidations and widespread financial losses for users.

It is important to note that while idle capital on the bridge might seem “safe” due to its minimal exposure to complex DeFi interactions, it also comes with the drawback of opportunity cost—it is not being productively deployed to generate yield or support liquidity. However, deploying the $1.3 billion into yield-bearing strategies increases its exposure to market dynamics and interconnected protocol risks. In such a scenario, if a vulnerability in any layer—be it the bridge or the underlying DeFi application—were exploited, the impact would be amplified by the large capital involved, further threatening the peg of the stablecoins and the stability of the Aave markets.

In conclusion, by adjusting the risk parameters and setting the LTV of these bridged stablecoins to 0%, Aave should mitigate the compounded risks arising from both potential bridge exploits and the increased exposure due to active deployment of large capital in yield-generating protocols. This proactive measure is essential to protect users from cascading liquidation events and to maintain the overall health and stability of the Aave V2 and V3 markets on Polygon.

-Kerem Dillice and nsks