Pre-PIP: Polygon PoS Bridge Liquidity Program

Authors: Allez Labs, Morpho Association, Yearn

Abstract

After reviewing community feedback from the Pilani Feature Request Thread the authors propose this Pre-PIP to initiate discussion on gradually deploying the DAI, USDC & USDT reserves of the Polygon PoS Portal Bridge into curated liquidity pools to kickstart a new Ecosystem Incentives program to grow the DeFi ecosystems of Polygon PoS and the AggLayer at large.

The Pre-PIP Authors propose combining their industry leading technology and expertise to assist the Polygon Community in establishing this program: Morpho Vaults and Markets serving as the underlying liquidity protocol, Allez Labs serving as the curator/risk manager of the system, USTB from Superstate, sUSDS from Maker, and stUSD from Angle serving as high quality RWA and DeFi yield bearing collaterals, and Yearn as the reward program manager.

Motivation

The PoS Bridge currently holds ~$1.3B of stablecoins, which makes it one of the largest, but also idle, holders of stablecoins onchain. At the current benchmark lending rate for the 3 major stables this is an opportunity cost of around ~$70M annually. During the most recent request for features, one of the top recurring requests was putting the bridge reserves into canonical or conservative yield strategies that would unlock a lot of growth for Polygon PoS. The authors believe that DeFi as a whole has matured whereby assets held in the Polygon PoS bridge can be used productively and securely to incentivize additional activity on Polygon PoS and within the AggLayer.

Details

This Pre-PIP proposes a very gradual deployment of bridge liquidity for USDC, USDT and DAI into a corresponding ERC-4626 vault. Each asset in the program will be activated by its own independent PIP expanding on these details.

For each asset, the authors propose a high level description of the vault’s strategy as follows:

DAI:

All vault reserves will be held in Maker’s sUSDS, the canonical yield bearing wrapper for the Maker ecosystem.

USDC & USDT:

Morpho Vaults will be used as the canonical source of yield for USDC and USDT given the absence of native yield-bearing wrappers. They’ll act as core yield sources for the bridge collateral curated by Allez Labs. All decisions that increase risk (increasing market caps & adding new markets) will be behind a 72-hour time lock. Polygon Protocol Council will retain a veto (via the guardian role). The initial proposed Morpho Markets will include (but will not be limited to) Superstate’s USTB, Maker’s sUSDS, and Angle’s stUSD. Allez will conduct risk analysis on these assets and publish their recommendations both on the forum and present to PPGC as part of the final PIP submission. The final PIP will also approve a process by which Allez will manage the markets and engage with the Polygon Community.

The proposed Ecosystem Incentive Program will be managed by Yearn. Yearn will create a Polygon Ecosystem Vault for each approved asset. These vaults will be incentivized using the rewards earned from the bridge assets deployed in the liquidity protocol. The deposits in the vaults will be deployed across Polygon PoS and AggLayer DeFi, growing the ecosystem. The details of this program will be further detailed in its own independent PIP.

All yield generated by the above will be directed to a new Polygon Ecosystem Incentives program managed by Yearn. Yearn will create 3 Polygon Ecosystem Vaults (for USDC, USDT and DAI) whose deposits will be deployed across Polygon PoS and AggLayer DeFi. The yield earned from the Morpho Markets and sUSDS strategy will be used to reward depositors of these new Polygon Ecosystem Yearn Vaults.

The above changes will be debated by the community via the forum and PPGC consensus making process. Formal PIPs will follow with details of a proposed specification, along with each respective asset type to be used.

Backwards Compatibility

The goal is for there to be no major backwards compatibility concerns as all Bridge APIs are unchanged. The amount of gas used by certain bridging calls may increase as part of executing the new logic. In the exceptional case where liquidity is not readily available, a withdrawal will be filled with the ERC-4626 vault token which can be redeemed directly for the underlying assets as liquidity is made available.

References

  1. ERC-4626 https://eips.ethereum.org/EIPS/eip-4626
  2. sUSDS (https://developers.sky.money/modules/susds-savings-usds)
  3. Morpho Vaults (https://docs.morpho.org/morpho-vaults/overview)
  4. Morpho Markets (https://docs.morpho.org/morpho/overview)
  5. Superstate (https://superstate.co/about)
  6. Superstate USTB (https://superstate.co/ustb)
  7. Angle stUSD (https://docs.angle.money/savings/savings)
  8. Yearn yVaults (https://docs.yearn.fi/getting-started/products/yvaults/overview)
  9. Allez Labs (https://allez.xyz/about)

Copyright

All copyrights and related rights in this work are waived under CC0 1.0 Universal.

10 Likes

OPINIONS/VIEWS EXPRESSED IN THIS POST ARE EXCLUSIVELY THOSE OF MY OWN AND NOT POLYGON LABS OR ANY OTHER ENTITY OR GROUP

Separating the explanation into two distinct buckets—how the yield is earned and how it is distributed—imo, provides a helpful overview of the Stake the Bridge (STB) proposal. Here’s the breakdown:

1. How the Yield is Earned

  • Idle Stablecoins on the Polygon PoS Bridge: The $1.3 billion in stablecoins (DAI, USDC, and USDT) currently sit idle on the Polygon PoS Bridge.
  • Deployment to Yield-Generating Vaults:
    • Stablecoins are deposited into ERC-4626 vaults on Ethereum, creating wrapped yield-bearing tokens like yeUSDC.
    • Morpho Vaults & Markets act as the core yield source, curating risk-managed strategies for these assets.
  • Collateralized Yield Strategies:
    • Allez, a Morpho curator, deploys these stablecoins into markets backed by high-quality collateral:
      • USTB by Superstate
      • sUSDS by MakerDAO/Sky
      • stUSD by Angle Protocol
  • Conservative Yield Approach:
    • These markets are carefully selected by Allez Labs, the risk manager, ensuring conservative and sustainable yield generation.
    • Example: USDC and USDT use Morpho Vaults; DAI is wrapped into sUSDS for yield within MakerDAO/Sky’s ecosystem.
  • Yield Growth Potential: With an estimated yield of ~7%, this deployment could unlock ~$91 million annually for Polygon.

2. How the Yield is Distributed

  • Yearn’s Role:
    • The yield generated in Morpho Vaults is sent to Yearn through designated contracts.
    • yeUSDC and other yield-bearing tokens have built-in functionality to redirect profits to a Yearn Reward Contract.
  • Bridging Yield Back to Polygon PoS:
    • The accrued yield is bridged back to Polygon PoS from Ethereum.
    • Once bridged, the funds are redeployed into DeFi projects on Polygon PoS and the AggLayer.
  • Polygon Ecosystem Incentive Vaults:
    • Yearn creates Polygon Ecosystem Vaults for each asset type (USDC.e, USDT, DAI).
    • Depositors in these vaults are rewarded with yield earned from the bridge assets.
  • DeFi Ecosystem Growth:
    • Yield is strategically deployed across Polygon PoS and the AggLayer to incentivize liquidity and stimulate project growth.
    • Example: Yearn may direct yield into yvDAI, investing directly in DeFi projects that improve cross-chain composability and user experience.
  • Program Management:
    • The incentive program, funded by yield, is managed by Yearn.
    • Rewards are distributed to both users and projects, ensuring a balanced approach to ecosystem development.

TL;DR Simple Summary of Buckets:

  1. Earning Yield:
  • Stablecoins → ERC-4626 vaults (e.g., yeUSDC) → Morpho Vaults or sUSDS → Generate yield (~7% annually).
  1. Distributing Yield:
  • Yield → Yearn → Bridged to Polygon PoS → Deposited into Polygon Ecosystem Vaults → Rewards to users/projects → Growth of DeFi on Polygon PoS and AggLayer.

IMO, this structure ensures a productive and efficient use of stablecoin reserves while directly benefiting the Polygon ecosystem through reinvestment and incentive programs.

5 Likes

OPINIONS EXPRESSED IN THIS POST ARE EXCLUSIVELY THOSE OF MYSELF AND NOT POLYGON LABS OR ANY OTHER ENTITY OR GROUP

I am strongly in support of the direction this Pre-PIP proposes, and the conversation that I hope will come out of it in the coming PPGCs. PoS is in desperate need of a program such as this, firstly to rejuvenate the community of stakeholders, but also to become serious about the direction of the chain overall. Over the past several quarters we have seen more and more chains focus less on value extraction and revenue generation at the transaction fee level and more on the higher level application level, and this proposal is a key step in shifting our view as a community in that direction.

I am incredibly excited to see this idea originally discussed on the Pilani Features Thread by a number of community stakeholders brought to life by this incredible list of authors, who bring deep expertise in risk management, DeFi and stablecoins to the table.

  • Morpho with its immutable and simple modular structure is the perfect technology backend for this use case.
  • I have had the pleasure of working with the Allez Team on a number of prior projects and can testify to their professionalism and expertise in curating the proposed vaults.
  • Yearn is the first DeFi protocol you think of when you hear yield manager and it is a no brainer to have them working on the ecosystem rewards program.
  • Superstate is the leader in tokenized assets and features like protocol mint & redeem show they are serious about DeFi integration.
  • Angle have been constant pioneers in the stablecoin space and having the involved shows a desire to stay up to date with the latest in safe design.
  • Maker/Sky is the backbone of so many projects and is uniquely positioned to handle the sheer scale a project of this nature demands.

I look forward to joining the community in discussing the tradeoffs with this pre-PIP and as we iterate together and debate the concept further I commit to working with the authors on developing proper PIPs of the implementation.

6 Likes

Yearn has been committed to seeing this come to life since the Pilani thread back in June. This program will unlock a sustainable economic force of incentives to inspire builders to come to AggLayer and grow the ecosystem and the best part is there are no additional resources required. This simply is a creative use of things that already exist to amplify growth.

Yearn vaults have evolved in the past couple of years with the launch of V3 tokenized vaults. These 4626 compliant vaults today give users access to a spectrum of risk based on their choosing. For instance, yvWETH-1 deposits to Aave, Compound, stETH and yvWETH-2 has a slightly different risk profile depositing into Across, Sturdy, Gearbox, Euler, and even yvWETH-1 if those yields happen to be higher.

Yearn V3 is automated too. Every 60 minutes we take a look at onchain data and use an offchain algorithm to determine the best allocation. We take into consideration all factors like dilution, slippage, gas costs, max debt ratios, and how quickly debt ratios can be reduced. If all parameters are met within our onchain guardrails, the execution of the new allocation is automatic.

For this implementation we’ll use our most proven strategies from Aave, Quickswap, Curve, and any other Polygon or AggLayer project most aligned with growing the ecosystem together.

2 Likes

$1.3B is an amount that blackhats will find worthwhile exploiting.
What are the measures taken by the 3 teams to make sure that funds are securely managed? Multisigs? Audits? Insurance?
If some of the yields come from v3 liquidity provision, is there any capital protection?

6 Likes

Given the thoughtful nature of this Pre-PIP, I appreciate the emphasis on a gradual and risk-managed approach to deploying stablecoin reserves into carefully vetted DeFi strategies. The proposal’s modularity—treating each stablecoin individually, establishing time-locks on risk parameters, and preserving Polygon Protocol Council veto rights—balances innovation and security. Moreover, leveraging ERC-4626 vaults and leading platforms such as Morpho, Maker, Yearn, and Angle to anchor the yield-bearing component should instill confidence in the community.

That said, I’d encourage more detailed parameters around governance oversight and ongoing risk assessment. For example, a public, regularly updated dashboard or quarterly community calls with Allez Labs’ risk management team could provide invaluable transparency into protocol health, collateral composition, and returns. Additionally, considering thresholds or “guardrails” for quickly de-risking positions under adverse market conditions would help reassure the community that capital preservation is a primary concern. Finally, soliciting input from other experienced ecosystem participants specializing in yield optimization or stablecoin asset management could help refine strategy selection and ensure that the incentive program remains competitive and sustainable over time.

1 Like

Hi all, Fig from Superstate here. I lead Protocol Relations and am looking forward to working with the community.

Thank you to Allez, Yearn, and Morpho for a thoughtful proposal. Superstate, led by Robert Leshner, is excited to support Polygon’s ecosystem growth and collaborate with top-tier teams to deliver sustainable, liquid, real-world yield.

Superstate’s USTB (https://superstate.co/ustb) was selected through rigorous RFP processes to deliver innovative tokenized asset management to support protocol treasuries and manage reserves for stablecoins. Today, USTB powers a variety of projects, including:

USTB is also under evaluation in the Spark Tokenization Grand Prix to support Sky’s USDS (link here). USTB is a great compliment to USDS and stUSD as collateral as it is 1) bankruptcy-remote as a Delaware Statutory Trust 2) the Investment Mandate is Sub-Advised by Federated Hermes, a $800B+ fixed income asset manager and 2) holds short-duration US treasury bills, with NAV struck by the second.

We’re eager to contribute our DeFi expertise and crypto-native product features (Continuous Pricing and Protocol Mint / Redeem) to provide Polygon with great onchain products to help generate yield for the idle stablecoins in the bridge.

We’ll be closely monitoring the Forum and are here to address any questions as it relates to Superstate and/or USTB and look forward to the Polygon community’s input and the continued development of this PIP.

6 Likes

this looks… so so tempting! I feel like this will set a precedent for all other L2s as well.

one thing I would improve here would be to split the 1B across several risk managers so that they would compete… a little bit…. to see who can generate the most yield, within the bounds of the rules…

0xloth from Morpho here

  • Blast has shown that productive bridges are a successful GTM but can’t go past an airdrop
  • This exciting proposal to plug idle PoS bridge liquidity into existing active borrow demand decrease drastically the opportunity cost of Bridges while funding ecosystems/chains in a highly sustainable way If this adds complexity to previously locked idle liquidity, it adds a ton of exciting advantages for the Polygon Ecosystem:
  • Sustainable incentives, i.e, yield experienced on any Defi Apps, will skyrocket, creating strong incentives for both builders and new bridges. These incentives won’t be paid but earned, effectively decreasing sell pressure for POL
    The more users bridge, the higher the incentives become on Polygon PoS via the Yearn, which is very reflexive.

Morpho design is particularly well suited to such a bridge use case, enabling Polygon Foundation to own:

  • Risk (collateral selection with Allez)
  • Code (Immutable code base, with no upgrade patterns and therefore post-integration costs)
  • Fees (100% of Vault Generated fees will go to Polygon’s Yearn Vault

We’re very excited to work with Allez Labs, Superstate, Sky, Angle, Yearn and Polygon Foundation/Delegates to make this happen in 2025.

4 Likes

I don’t like to take additional risk as a user having money on the plattform. I would be fine taking this risk if users with stake in the game (money on polymarket) also get a piece of the pie (the yield generated).
The vaults chosen should also be the most conservative and safe once from suppliers with proven track record.

3 Likes

Sorry, this isn’t a good approach for a couple of reasons:

  1. Risk Aversion of Stablecoin Holders: People who currently hold stablecoins on the Polygon PoS bridge have chosen to keep their assets there because they perceive it as a low-risk environment. By placing these stablecoins into a vault, you would be compelling these holders to take on additional risk without any corresponding reward. This could lead to dissatisfaction or loss of trust among users who value the stability and safety of their current holdings.

  2. Upcoming Changes to the Bridge: The Polygon PoS bridge is scheduled to be upgraded to the AggLayer unified bridge in just a few months. Any benefits from placing stablecoins in a vault would only last for this short interim period, making the effort and potential complications not worth it. The transition to the new bridge could also introduce unknowns or additional risks that might not be fully understood or appreciated yet.

Given these points, the temporary gain from vault interest doesn’t justify the disruption and potential risks to the stablecoin holders on the bridge.

4 Likes

Don’t wanna be the one that ruins the party here but as a user I will not feel really comfortable on adding layers of risks on assets that by nature are perceived as the less risky. I totally get that the opportunity seems tempting but it will be even more tempting for bad actors too and the more are the parties involved the more the risk grow.
Just my 2 cents.

7 Likes

Let’s get this straight: You want stablecoin holders who trust Polygon with their assets to bear many layers of risk, and then transfer the reward for that risk to… a different set of stakeholders?

Stablecoin holders seek to MINIMIZE risk. You’d create a LARGE honeypot of these risk-averse holders’ assets, and give them ZERO reward for it? And you still expect them to use the chain? This is a ridiculous proposal and i hope it is voted down for the sake of the Polygon ecosystem.

6 Likes

Hello,
I have a lot of questions about this pre proposal:

  • why cant holders opt-in?
  • how is security managed?
  • how are you going to prevent a mass exodus of stablecoin and other asset holders when their funds are used without approval?
  • why dont you reward all users?
  • why do you think this is benefiting Polygon? If a lot of users withdraw funds because of perceived high risk, Polygon will loose usage and adoption and market value.

If i could vote on-chain my vote would be very much against this under current conditions. I will withdraw all my staked funds from Polygon if this goes through unchanged.

Edit

I have submitted a pre-pip to counter future pip’s that involve huge risks for Polygon:"

https://forum.polygon.technology/t/pre-pip-polygon-improvement-proposal-pip-guidelines/20326

5 Likes

We’re grateful for the feedback and thoughtful questions received so far both on the forum and in private regarding the Pre-PIP. We’d like to address these comments and provide additional details to ensure clarity and transparency as we continue discussion around the Bridge Liquidity Program.

Transparency and Community Engagement

We believe that transparency and community engagement are key to the proposed Bridge Liquidity Program. We plan to communicate and provide insights and monitoring at all levels of the stack through multiple channels:

  • Community calls and communication channels: we plan on participating in the Polygon community calls as they occur and where relevant to provide updates to governance as well as answer any questions. Moreover Allez is available at all times for Polygon community members and stakeholders on telegram and other social channels (X, email, website)
  • Monthly forum posts: each month, we will publish a comprehensive report on the Polygon forum that details changes in collateral risk profiles, market metrics, returns, our risk assessments, and any changes to the strategies for managing the Bridge Liquidity Program. We encourage community discussions on any aspects of the plan or collateral assets through these forum posts.
  • Process around new market listings and changes to caps:
    • Forum post before cap submissions: Allez will publish a detailed risk analysis on the forum and wait for a 5-day discussion period, before submitting any cap to the vaults, this in conjunction with the proposed time-lock (next section) brings the duration for any risk-on action to 12 days at the minimum.
    • Onboarding new collaterals: We encourage members of the Polygon community and interested issuers to reach out and submit new collaterals to be listed in the vaults. The process around new collateral submissions will be fully fledged out as we get closer to formal PIPs but Allez is reachable through all its social channels and welcomes any forum post that argues for a new collateral to be listed. Submitting your collateral does not guarantee it being listed, it will still go through our standard risk analysis and the cycle of feedback from the Polygon community.
  • Open dashboards and risk monitoring: our dashboards will provide up to date information for any community participants wishing to get a better idea of the bridge activity, vaults’ composition, and individual morpho markets. Additionally these dashboards will provide constant risk scoring for all components of the stack.

A sneak peek into what is currently in development:

  • Bridge Liquidity Monitoring: the bridge liquidity dashboard and apis will be the hub for the Polygon community to check where bridge liquidity is standing, daily flows and transactions and other metrics including simulations on withdrawals from the bridge given the vaults’ idle reserves and capacity. These tools will allow the community to better understand the health of the bridge in conjunction with the vaults.

  • Allez’s Morpho risk dashboards: this will give users an interactive way to explore comprehensive data and risk metrics around the Polygon vaults and their exposure to the underlying Morpho markets. Community members will be able to understand the health and composition of the vaults’ exposures, the returns, alongside risk metrics and scoring from Allez on the markets, their user base, backing assets and oracles.

On top of dashboards, we are building monitoring and alerting tools internally to track data around underlying collaterals, secondary markets etc.

Check out https://allez.xyz to see public examples of what we build and our about page to learn more about our history in DeFi risk management.

Guardrails and community control

This proposal is a community endeavor, the design proposed keeps the users and stakeholders of Polygon through the Protocol Council in control at all levels of the stack. The community retains control of the choice of yield venue, reward program manager, curator and can change at any time thanks to the design of yeUSD{C,T}.

Specifically on the the MetaMorpho vaults: currently this is the proposed entities for each of the critical roles:

Role Owner Guardian Curator Curator Allocator Allocator Allocator
Entity Allez or Protocol Council * Protocol Council Protocol Council Allez Protocol Council Allez Morpho Public Allocator
  • pending community feedback

The table above is indicative of the end permissions of the vault and not the exact implementation on-chain, e.g. the Protocol Council being the owner of the vault will by default have all the permissions and thus does not need a specific call to setIsAllocator to be an allocator. Similarly there is only 1 curator, but the owner has by default all the permissions.

After community feedback we propose for the time lock to be 7 days, this means that any action meaningfully increasing risk to the vault is behind a 7 day waiting period, e.g. a new market listing or cap increase for a listed market. This, in conjunction with our above stated communication channels, will give ample time to the community to review and the Protocol Council to veto when/if necessary.

All risk-off actions, namely: withdrawing from existing markets and/or setting the supply queue to be empty can be done instantly to allow Allez and the Protocol Council to react to changing markets. If the Protocol Council is the owner of the vault it would additionally have the ability to change curator instantly with no time lock.

The thesis behind the proposed vaults and stack

The top priorities behind the design of the system are capital preservation and community control.

This starts with choosing the right stack, it is better to have the protection of overcollateralization and liquidations than directly investing into yield bearing collaterals when there is no canonic yield wrapper for the considered asset, which is why lending is considered only for USDC and USDT. When choosing the stack for lending you want the least dependencies, low-to-no governance risk, permissionless deposits/withdrawals and a predictable or immutable set of smart contracts that have lindy: Morpho.

Second the choice of collateral markets against which the assets are lent is crucial. When choosing which collateral markets to allocate to, the priorities are preservation and availability of capital. The first priority being preservation, exposure to collaterals on the lower end of the risk curve is preferred, for USDC and USDT that is being closest possible to the source of native yield for USD stablecoins: T-Bills. Second priority being the availability of capital to cover the PoS bridge’s liquidity needs, in Morpho that comes down to choosing markets that have a rate sensitive user base and good liquidity management. Here we propose only high quality, yield bearing, deeply liquid and established assets: sUSDS | sDAI, USTB and stUSD. These collaterals are a mix of pure T-Bills wrapper (Superstate) and a portfolio of collaterals heavily weighted towards RWA (Sky and Angle). All have an obvious use case (the carry-trade) and a sophisticated user base, this makes for underlying markets on Morpho that are more rate sensitive and thus more reactive.

Roll out mechanics and reserves

Pending the final design, i.e. whether all liquidity goes into the idle market and serves as reserve or whether the reserve is at the yeUSD{C,T} level. Stablecoin liquidity would flow through yeUSD{C,T} which would be fully controlled by the Protocol Council and allocated into the Morpho Vaults which will supply first to their respective idle markets allocations will be made accordingly. There will be safeguards at all levels of the stack, e.g. caps on listed markets corresponding to a specific phase’s ramp up.

To ensure a smooth transition, we plan to implement a phased rollout, deploying stablecoins gradually, and in a predictable manner. A detailed plan outlining the mechanics, specific phases and allocations will be shared as we get closer to the formal PIPs, we continue to gather feedback and input from stakeholders on the most sound path forward.

6 Likes

I dont like this nor agree with it, the security risks are too high. If this was to pass I would not trust nor use PoS anymore. Stablecoins should be backed 1 to 1 and thats it, leave it as it is, the less risk the better. Further more this proposal doesnt take into account global compliance and legal considerations.

8 Likes

I am strongly in support of the direction this Pre-PIP proposes, and the conversation that I hope will come out of it in the coming PPGCs. PoS is in desperate need of a program such as this, firstly to rejuvenate the community of stakeholders, but also to become serious about the direction of the chain overall. Over the past several quarters we have seen more and more chains focus less on value extraction and revenue generation at the transaction fee level and more on the higher level application level, and this proposal is a key step in shifting our view as a community in that direction.

3 Likes

It’s crazy this is even a real proposal. Why would you put all user’s funds at risk without it being opt-in? If you want to destroy Polygon’s image and trust, this is how you do it.

10 Likes

At the ACI and on Behalf of the Aave DAO, as the largest dapp of the polygon ecosystem, we acknowledge this proposal and the risk involved.

Considering bridge risk is historically the largest culprit for user funds losses and aware of our previous bad experiences with the Harmony and Multichain bridge hacks.

The ACI has started a discussion about the future of Aave in the Polygon ecosystem to protect Aave users from the consequences of this proposal.

https://governance.aave.com/t/arfc-adjust-risk-parameters-for-aave-v2-and-v3-on-polygon/20211

13 Likes

The lack of security and the unpermissioned use of others peoples money in the bridge means a solid

NO

and a fast no. AAVE will leave polygon if this passes, I do not blame them.

https://x.com/DefiIgnas/status/1868612366822461817

10 Likes