Polygon community evaluating proposal to use over $1 billion in stablecoin reserves – What to expect

The Polygon community is evaluating a proposal to deploy over $1 billion in stablecoin reserves from the Polygon PoS bridge. DeFi protocols Morpho, Yearn, and Web3 risk provider Allez Labs presented the proposal seeking views from the polygon community. 

Allez Labs, Morpho, and Yearn collaborated on a community-led Pre-PIP (pre-Polygon improvement Proposal) to use dormant stablecoins to gain yield. The PoS bridge reportedly holds reserves of USDT, DAI, and USDC. 

Polygon community considers the proposal to deploy stablecoins held in reserves 

According to the Pre-PIP authors, deploying the stablecoin reserves into curated liquidity pools would kickstart an ecosystem incentives program to grow Polygon PoS and AggLayer DeFi ecosystems. 

The authors recommended combining their expertise and industry technology to help the Polygon community establish the program. They also outlined the details of the deployment in the proposal. The industry players suggested gradually deploying bridge liquidity for the stablecoins into an ERC-4626 vault. Each asset in the program was proposed to be activated by an independent PIP.

They suggested Morpho Vaults and Markets would serve as the underlying liquidity protocol, while Allez Labs would serve as the system’s risk manager. According to the proposal, USDT and USDC would use Morpho Vaults as a yield source due to the absence of native yield-bearing wrappers. The authors added DAI reserves would be held in Maker’s sUSDS vault.

It was also proposed that USTB from Superstate, sUSDS from Maker, and stUSD from Angle would serve as DeFi yield-bearing collaterals and high-quality RWA. The authors also proposed Yearn would serve as the system’s reward manager.  

Proposal’s authors suggest deployment could unlock yields for the network 

The authors suggested the idle funds would gain a yield of over $70 million per year at the current lending rates. They expressed their belief in Polygon’s maturity and the assets reserved on the Polygon PoS bridge could now be securely utilized.

Paul Frambot, co-founder and CEO of Morpho Labs, commented that the stablecoins held represented a $50-90 million opportunity at current lending rates. He also reiterated the proposed measures could incentivize a new ecosystem that would establish Polygon as a sustainable DeFi innovation leader. 

Polygon has $1.3B in unproductive stablecoins in the PoS bridge.
That’s $50-90M in potential yield at current rates.

The proposal: deposit idle stablecoins into a Morpho Vault and redistribute the yield to Polygon’s DeFi ecosystem—kickstarting a flywheel.

Why Morpho:
– Full… https://t.co/qrhYClB6JT

— Paul Frambot | Morpho (@PaulFrambot) December 12, 2024

Crypto Texan, the DeFi Growth lead at Polygon, speculated that using the stablecoins through the proposed vaults would generate over $90 million in yields annually. 

The PIP authors highlighted that all decisions on increasing risk, such as adding new markets and increasing market caps, would be behind a 72-hour time lock. They noted the Polygon Protocol Council would retain a veto through their guardian role. 

The authors expressed the goal of ensuring there were no backward compatibility concerns since all Bridge APIs remained unchanged. However, they warned that the gas amount used in certain bridging calls may increase in the execution of the new proposal. 

Polygon announced its migration from its MATIC token to the new POL token in September 2024. The migration was reportedly initiated after a proposal from the Polygon community. The company said the migration aimed to enhance the token’s functionality.  

The migration was part of the company’s roadmap, “Polygon 2.0” announced last year. According to Polygon, the roadmap aims to improve the network’s capabilities. The company clarified the new token would not replace MATIC but would only become central to advanced functions to be launched in the near future. 

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