DeFi’s honeymoon phase is over—2025 is shaping up to be the year of turf wars.

Aave’s decision to deprecate its Polygon deployment signals something deeper: a brewing conflict over liquidity, rehypothecation, and collateral priority. As stablecoins, LSDs, and wrapped assets dominate DeFi lending markets, the stakes are clear—when the music stops, whoever liquidates first wins.

Let’s break this down in the context of the Polygon/Morpho/Aave situation:

🏦Over $1B in stablecoins are locked in Polygon’s bridge. These aren’t “native” stables but wrapped deposit receipts—debt obligations that must eventually be repaid.
🧑‍⚖️Polygon’s new program introduces rehypothecation at the bridge, deploying idle assets to earn interest via Morpho on Ethereum L1.
😀Here’s the catch: a third of these assets are pledged as collateral on Aave. And Morpho? It’s a direct competitor to Aave, creating a dangerous entanglement.

Aave’s decision to shut down its Polygon deployment is a preventative move against catastrophic risk. If a bug or exploit hits Morpho, causing a mass liquidation, Aave’s collateral could go to zero, leaving their users holding the bag.

The real kicker? Morpho, in this scenario, acts as a senior creditor. It gets first preference to liquidate and recover assets, while Aave would be left scrambling, dependent on DAO handouts. This creates a fundamental breach in the implied financial and social contract at the bridge level.

This is just the beginning.

As DeFi grows more interconnected and complex, the battle for control over liquidity and collateral priority will intensify. The lines are drawn, and these turf wars will shape the next era of decentralized finance.

Buckle up. .@AndreCronjeTech says it better than me. Are we just building new highly complex systems of rehypothecation for a few extra bps of yield, or do we value the safety of user assets.

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