Aave Set to Leave Polygon Blockchain After Leaders Trade Barbs Over $1B Investment Proposal

Aave, the largest lending protocol in decentralised finance, is set to leave the Polygon blockchain after leaders at both organisations traded barbs

Aave, the largest lending protocol in decentralized finance, is set to leave the Polygon blockchain after leaders at both organizations traded barbs over a proposal to invest $1 billion in idle crypto on the Polygon-Ethereum bridge.

Two major delegates at Aave DAO, the digital cooperative that manages the Aave protocol, told DL News they will vote to leave Polygon when the question goes before Aave DAO members.

One of those delegates, longtime Aave contributor Marc Zeller, first proposed the split. A preliminary vote is expected to go online next month, he said.

The other, who goes by the pseudonym EzR3aL, said they too would support the measure.

Together, they have enough votes to decide the outcome of any proposal that comes before Aave DAO, if recent voting patterns continue into the new year.

Representatives from other major Aave delegates did not return DL News’ request for comment or declined to comment.

Aave accounts for some 40% of the crypto locked in Polygon’s myriad DeFi protocols, and its departure would be a dramatic blow to the popular blockchain.

The spectre of Aave’s departure has led to accusations its leaders have used monopolistic tactics to undermine a rival.

The investment proposal was in a preliminary stage and many months from becoming a reality, Polygon Labs CEO Marc Boiron told DL News. Moreover, despite Aave’s outsize share in the Polygon ecosystem, Polygon accounts for a mere 1.5% of Aave revenue.

“‘We have the power to hurt them’ — that’s what that statement says. ‘We have all the power here, as the big dog,’” Boiron said.

“That to me is pure anti-competitive behavior, when you combine those two things.”

Aave’s leadership, in turn, said it is simply taking a hard line against an unpopular, high-risk proposal and its architects.

Moving crypto from one blockchain to another typically requires software known as a bridge, which holds crypto from the origin chain and mints new tokens on the destination chain.

The new tokens are always redeemable for those sitting on the bridge and, as such, trade at par on the destination chain.

Almost $4 billion in crypto sits in the Polygon’s built-in bridge, according to L2BEAT.

Two weeks ago, risk management firm Allez Labs, along with DeFi projects Morpho and Yearn, proposed transferring about $1.3 billion of that crypto — all dollar-pegged stablecoins — to Morpho, where it could be borrowed at interest.

Rather than sit idle in Polygon’s bridge, the stablecoins would generate a revenue stream estimated at $70 million per year, according to Allez Labs and its partners. Polygon could, in turn, use the money to lure new developers to its ecosystem.

It was controversial from the start.

But the proposal went viral after Zeller’s Aave Chan Initiative, a service provider that contributes to the development and management of Aave, suggested the lending protocol withdraw from Polygon “to mitigate risk.”

Zeller shared his counter-proposal on X with a brief comment: “Operation Polygon(e).”

Allez’ proposal, and Zeller’s reaction, sparked a furore on social media. Some saw in Zeller’s response an attempt to discredit Morpho, a fast-growing competitor he has relentlessly criticized over the past year.

But others saw a reasonable response to a risky proposal.

Bridges are already among the most vulnerable pieces of software in crypto. Layering risk on top of that — with profit going to Polygon, rather than depositors — was unacceptable, critics said.

Executives at stablecoin issuers Tether and Circle expressed their opposition to the proposal.

Andre Cronje, DeFi developer behind many protocols, likened it to fractional reserve banking. He called it “the antithesis of why the original DeFi ecosystem was created.”

Last week, Polygon leadership said the proposal was all but dead, and celebrated the episode as a victory for the blockchain’s fledgling governance system, which gives investors a say in its development.

“It was a SHITSHOW and I ABSOLUTELY LOVED every second of it!” Polygon co-founder Mihailo Bjelic wrote on X.

“The community considered this proposal unacceptable and loudly voiced that opinion, drawing a lot of attention across the ecosystem and beyond. That’s by design.”

But the counter-proposal from Aave Chan Initiative prompted an outcry from Polygon Labs executives, who accused Aave’s leadership of abusing its power to kneecap a competitor, Morpho.

“This is a prominent example of a DAO leadership engaging in anti-competitive tactics and bullying other ecosystems to play to their tune,” Polygon co-founder Sandeep Nailwal wrote.

Aave’s leadership have rejected the accusation.

“Framing Aave DAO’s proposal as anti-competitive behavior is inaccurate and diverts attention from the real issue: user security,” Stani Kule