Polygon community members have rejected a preliminary proposal (or pre-PIP) that suggested deploying over $1 billion in stablecoin reserves to generate yield.

The proposal, presented by Web3 risk provider Allez Labs in collaboration with DeFi protocols Morpho and Yearn, aimed to utilize about $1.3 billion in DAI, USDC, and USDT reserves from the PoS Chain bridge.

Community members raised concerns regarding security issues and the absence of an opt-in mechanism for affected users, casting doubt on the proposal’s viability. “Given the community’s reservations about the pre-PIP, it appears unlikely that this proposal will advance, although this does not preclude exploring innovative or even bold ideas in the future,” remarked Polygon.

In response to the initial yield-generation proposal, Aave Chan, a contributor group from the lending protocol Aave, proposed ceasing its operations on the Polygon PoS chain.

Marc Zeller, the founder of Aave Chan, drafted a proposal to phase out Aave’s lending protocols on Polygon to address potential future security risks.

Yesterday, Polygon developers acknowledged the community’s concerns and decided not to advance the proposal. They highlighted the value of the governance process, which facilitates the exploration of new ideas within the community.

Polygon also responded to Aave Chan’s proposal, characterizing the reaction from Aave’s leadership as “disappointing.” They asserted that Aave Chan resorted to making threats as Morpho, their main competitor, began to gain traction.

Polygon referenced an earlier suggestion by Aave Chan in August, proposing to the Polygon community that the bridge funds should be allocated to Aave’s yield-bearing token. It suggested converting some of the bridge stablecoins into stataUSDC — a wrapped version of Aave’s aToken for USDC (aUSDC).

“Despite their initial excitement and zealous pitch for a similar proposition, they [Aave leadership] resorted to threats to dismantle Aave’s deployment on the Polygon PoS once their main competitor gained more traction as the leading protocol,” it said.

Meanwhile, Zeller from Aave Chan had previously argued that their approach to using bridge assets would have been safer than Morpho’s strategy of directing assets into curated liquidity pools. He claimed that their deployment strategy, underpinned by Aave’s Umbrella program and safety module, would not have exposed the bridge assets to the risk of accruing bad debt.

As a result, Zeller proposed phasing out Aave’s v2 and v3 protocols on Polygon as a precaution to protect them from potential future security risks stemming from Polygon stablecoins that had been involved in yield strategies.

Aave founder Stani Kulechov also weighed in on the controversy surrounding the investment proposal for Polygon’s bridge funds. He criticized the proposal for lacking sufficient risk protection, highlighting Aave’s role in the Polygon network, noting that 40% of Polygon’s total value locked is deposited into Aave and that Aave’s primary governance functions operate on Polygon.

He clarified that Aave’s infrastructure could have supported a custom market for Polygon if more control over the investment strategy was desired, claiming the protocol’s Safety Module was risk averse. He further defended Aave Chan’s actions and criticized Polygon’s accusations against Aave leadership.

“The Polygon team abandoned the mission, quickly spun a narrative about not supporting the proposal, and blamed Aave’s leadership for the failure of the proposal,” Kulechov wrote.

Following Polygon’s decision to reject the yield-generation proposal, it remains uncertain whether the Aave community will decide to withdraw from the Polygon PoS chain.

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