I propose we get an AggLayer connection please!
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Hi folks,
amplice here from Gearbox.
Just wanted to throw our hat in the ring as a potential place for Polygon to deposit bridge assets.
I believe our passive lending pools are a great fit for the community’s desire for yield generation on bridged assets while maintaining high security standards and user accessibility/withdrawability.
Yield Generation on Bridged Assets
Gearbox Protocol offers a secure and efficient way to generate yield on assets held in the Polygon PoS bridge on L1. Our current yields are pretty competitive considering where the yield comes from.
- ETH: 4.03% APY
- USDC: 8.59% APY
- USDT: 7.00% APY
- DAI: 6.91% APY
- WBTC: 2.04% APY
These rates demonstrate our ability to provide good returns on idle assets, potentially generating millions in additional revenue for the Polygon ecosystem.
Keep in mind that this yield is generated from simple overcollateralized lending (similar in structure to Aave) - nothing complicated about where the yield comes from, no RWAs, complicated strategies, LP risks, depeg risks or anything like that.
Security and Risk Management
Security is paramount at Gearbox. Our track record speaks for itself:
- Zero bad debt on the passive lending side
- Comprehensive audit history, including recent full V3 coverage by ChainSecurity and ABDK
- Ongoing audits and security checks by reputable firms
- Robust bug bounty program with rewards up to $200K for critical vulnerabilities
- Onboarding external risk curators like Chaos Labs to further enhance risk management
See our audit history and bug bounty info here:
https://docs.gearbox.finance/risk-and-security/audits-bug-bounty
Simple Yield Model, Instant Withdrawability
Because the passive lending side of Gearbox is a straightforward lending market, funds are basically always instantly withdrawable - similar to Aave, interest rates start spiking extremely high when utilization gets past 85% or so, encouraging leverage users to wind down positions and/or new lenders to lend at high rates. As such, there is basically always liquidity.
Defi degens sometimes say “if you don’t know here the yield comes from, you ARE the yield”. When lending in Gearbox, you always know where the yields come from.
Proposal
We suggest depositing a portion of Polygon PoS bridge assets into Gearbox passive lending This should be implemented in phases, starting with a small allocation and potentially scaling up based on performance, security and community feedback.
Benefits for Polygon
- Generate additional yield on currently idle assets
*This yield could be somehow redistributed to Polygon users, stakers, etc. - Enhance the overall value proposition of the Polygon ecosystem
TLDR: Gooners, pls consider Gearbox as a venue for parking PoS bridge idle assets on L1, the yields are good, the yield model is very straightforward (simple lending), and we take security very seriously.
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Users across DeFi are looking for strong, durable sources of yield. One approach that PoS chains have taken to achieving this is by holding some portion of bridge assets in a yield bearing token. This has seen success on both Gnosis Chain and Blast, where the native stablecoins are yield bearing, or can be staked for higher-than-mainnet yields. It is important that this yield comes from safe, well proven systems built by responsible, trusted teams.
We propose for the Polani upgrade that the bridge hold some portion of assets in stataUSDC. stataUSDC is a wrapped version of the Aave aToken for USDC. This is a token which increases in value over time instead of increasing in balance like aUSDC would. It has offered an average 5.81% APY over the past year on the Ethereum mainnet. Aave USDC is the only yield earning USDC token with deep enough liquidity and attractive yields which would make this integration feasible. Furthermore, with the Umbrella program, aUSDC will be the safest place for anyone to earn on chain yield with USDC. This makes it a perfect choice for Polygon’s bridge deposits with important positive implications for the Polygon ecosystem.
We propose holding 50% of the PoS USDC tokens in stataUSDC. This will allow users to receive higher yields on the PoS chain, attracting more TVL. By integrating stataUSDC into the Polygon PoS bridge Polygon’s users get a better user experience and Aave continues to be a leading supporter of Polygon’s growth.
We look forward to refining this proposal as the process evolves.
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Develop a unified wallet integration framework that simplifies the process of connecting various wallets to the Polygon network. This could include a standardized API and user-friendly guides to streamline the setup process.
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I agree that it’s an ideal time to consider a large-scale upgrade to Polygon PoS and extend its functionality to the Unified LxLy bridge, which would be a key step in connecting to the AggLayer. This kind of Mobcup upgrade would significantly improve scalability and network performance by enabling more efficient data transmission and bridging capabilities.
The introduction of a new role that can post data to the AggLayer for bridge updates is a smart move. Initially, relying on pessimistic proofs combined with the existing PoS finality guarantees would ensure a secure, low-risk approach, especially during the early stages of implementation. This strategy mirrors some of the modular, efficient approaches seen on platforms like Mobcup, where content distribution is optimized by smart backend processes, ensuring that everything functions smoothly even with new integrations.
This upgrade would allow Polygon to further integrate into a multi-layer ecosystem, allowing for smoother interactions with the AggLayer and offering enhanced capabilities for future blockchain developments.
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Executive Summary
karpatkey proposes to advise Polygon in developing a yield strategy for PoS bridge assets on Ethereum Mainnet, helping to prioritise optimal bridge liquidity and efficiency. We would provide strategic guidance on managing the USD-pegged assets, which currently represent ~$1.4bn. Other chains, like Gnosis Chain (where karpatkey directly contributed to both design and implementation) and Blast, have successfully implemented this approach, showcasing its viability.
Our advisory framework would help ensure smooth bridge operations by recommending optimal liquidity management approaches while suggesting yield generation strategies as a secondary benefit. We would also provide guidance on potential yield-sharing mechanisms with users. Drawing from our DeFi Treasury Management experience, we can advise on balancing bridge functionality with yield opportunities within defined risk parameters.
Proposed Framework
We propose to help design a collaborative yield strategy using established DeFi platforms from the Polygon community. We would advise on risk management parameters while providing recommendations for protocol deployment:
- Integration with battle-tested protocols such as Aave
- Collaboration with teams who have expressed interest, such as Yearn, Centrifuge, and Gearbox, for additional risk-adjusted yield opportunities
- Analysis and due diligence of specialised DeFi protocols to enhance risk management and diversification
We would also explore whether diversifying the stablecoin away from the USDC and USDT tokens, which currently represent 90%+ of the USD-pegged assets in the bridge, is a viable part of the strategy.
Core Risk Management Principles
A fundamental criterion for any capital deployment is the absence of lock-up periods or withdrawal restrictions. This would help ensure capital remains instantly accessible, maintaining seamless bridge operations.
We would help design monitoring frameworks for bridge activity and recommend optimal liquidity levels. This includes advising on appropriate idle stablecoin buffer levels and suggesting periodic reassessment triggers.
This approach would help ensure uninterrupted bridge functionality while optimising capital efficiency.
We would recommend introducing concentration limits per protocol and asset, helping establish proper risk distribution across the yield portfolio. Our advisory framework would include guidelines for diversification strategy and ongoing assessment of risk parameters.
Protocol Assessment Framework
We would provide a comprehensive assessment framework and ongoing recommendations based on our evaluation of protocols according to these key criteria:
- TVL and user base metrics
- LTV ratios and liquidation mechanisms
- Protocol-level leverage or any other inherent leverage considerations
- Collateral type and quality (established tokens, complex derivatives, etc.)
- Yield source composition between native protocol yields and incentives
- Security track record and past incident response performance
Ongoing Management
We could provide regular analysis and recommendations for monitoring opportunities, suggesting allocation adjustments based on risk changes, market conditions, and liquidity needs
Yield Distribution Framework
We would explore four paths for the utilisation of the generated yield, including:
- Direct User Benefits: Passing yield directly to bridge users.
- Staking Rewards: Enhancing staking incentives.
- Ecosystem Development: Supporting network growth initiatives.
- Buy-back & Burn: Systematic token buy-back programs.
About karpatkey
Since 2020, karpatkey has managed the Gnosis DAO treasury, combining traditional finance expertise with blockchain knowledge. Our partner network assets exceed $1.8 billion.
Our collaboration with Gnosis on the sDAI project is a testament to our capabilities in designing and implementing native yield-bearing assets:
- Development of the sDAI yield generation strategy for Gnosis Chain and its successful integration into the ecosystem
- Implementation of comprehensive risk assessment frameworks across all DeFi operations for a DAO with large AUM and complex needs
This experience uniquely positions us to advise Polygon on optimising bridge asset yield.
Conclusion
karpatkey is ready to provide strategic advisory services to help Polygon develop and implement a yield optimisation strategy for its PoS bridge assets, focusing on returns, security, and ecosystem alignment. We look forward to discussing how our advisory services can best support Polygon’s objectives.
Side note: our team will be on stage discussing stablecoin yield on L2 during the StableSummit on Sunday, November 10th.
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