Pre-PIP: Polygon PoS Bridge Liquidity Program

Polygon Improvement Proposals Proposal Ideas
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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.

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