Locking in funds aiming for $10 billion! Explosive growth of Polygon (MATIC), which protocols are worth trying?
Ethereum's scalability has lived up to expectations, on Polygon, you can transfer funds quickly and almost at zero cost between applications.
(This article is authorized to be reprinted from ChainNews, the original title is "Three-minute introduction to Polygon DeFi ecosystem: Which protocols are worth trying?", the original article can be found here, the article is translated by: Ryan Sean Adams, Co-founder of Bankless; translated by: Pingfeng)
With the significant rise in the price of MATIC, Polygon has become a hot topic in the cryptocurrency circle.
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In recent weeks, Polygon's growth has been explosive, with over $8.9 billion in value locked, and new and old protocols being deployed on it every day. Polygon has indeed lived up to the hype, with lightning-fast transaction speeds and low fees. As more of the Ethereum L1 applications we know and love get deployed on it, users are starting to see composability benefits.
Polygon's reputation is booming. If you are jumping on the bandwagon and want to know what high-yield operations you can do in this emerging DeFi ecosystem, this article is for you. Following the instructions below, you can get started with your first application in 20 minutes. In addition to understanding various operations that can only be done on Polygon, you can also see how much gas fees Polygon can save you.
Table of Contents
Security Considerations Before Using Polygon
Understanding the architecture and security assumptions required before using Polygon or any other network is crucial. It is a new technology, so please be aware of the risks involved!
Polygon provides a generic framework that allows developers to create custom chains for specific applications and offers an interoperable network that combines various scalability solutions, such as Zk-rollups, optimistic-rollups, and sidechains. Polygon's PoS chain, its first product, has gained significant traction. The chain sits between a sidechain and pure layer-two scaling solutions (like Rollup) while inheriting the security of the main chain.
Polygon ensures security through a PoS mechanism, where validators stake MATIC tokens into smart contracts hosted on the Ethereum main chain. Currently, over $2.6 billion worth of MATIC is staked in these contracts.
To move funds from Ethereum to Polygon, you must use a "bridge." In essence, bridging works by using lock and mint mechanisms. When you deposit funds into the bridge, they are essentially held (locked) in a contract on Ethereum and then recreated (minted) on Polygon. To withdraw funds, you must go back through the bridge. When doing so, the tokens sent through the bridge will be burned on Polygon, and the funds in the Ethereum contract will be unlocked.
On Polygon, you can choose between two bridges: Plasma Bridge and PoS Bridge.
The Plasma Bridge inherits the security of the Ethereum main chain; however, it takes seven days to complete a withdrawal. The PoS Bridge ensures the security of the chain itself through the same set of validators and staked MATIC, with a withdrawal time of approximately three hours.
Connecting all this, contracts holding staked MATIC are responsible for the security of the chain and the funds locked in the PoS Bridge. This is important to note because both the staking and bridging contracts can be altered using a proxy controlled by a multisig wallet.
The wallet was initially a 2/3 multisig but has now been upgraded to a 5/8 scheme. Recently, the team confirmed that among these signers, four are Polygon's co-founders, and four are prominent members from other Polygon DeFi projects.
This is a centralized point of failure and certainly a risk factor to consider when using Polygon. If this wallet is compromised, the network's security and the ability to transfer funds back to Ethereum would be severely compromised.
Aside from the multisig, approximately 31% of staked MATIC is delegated to a node operated by Binance. This centralization of staking is another factor to consider when deciding to move to Polygon.
How to Use Polygon
Before using Polygon, you need to take several steps. First, configure the network in your wallet, and then, as mentioned above, you must use one of the two bridges to transfer funds from Ethereum L1. Here are some guides:
- Add Matic Mainnet to Metamask
- Transfer funds using Matic PoS Bridge
- Transfer funds using Zapper
First Steps on Polygon: Where to Begin
Trade and Provide Liquidity on QuickSwap
Decentralized exchanges (DEXs) are at the core of any blockchain-based financial system, and QuickSwap on Polygon is no exception. As a fork of Uniswap V2, QuickSwap has seen a surge in popularity in recent days. The "Quick" in the protocol's name is indeed apt: with Polygon's average block time of 2.1 seconds, transactions on QuickSwap are confirmed in the blink of an eye.
Over the past few weeks, the protocol has attracted over $650 million in liquidity, handling a daily trading volume of $150-250 million. Consequently, QuickSwap generates hundreds of thousands of dollars in fees daily for its liquidity providers.
For LPs looking to earn more than just trading fees, there are currently over 100 incentivized pools where LPs can earn QUICK rewards, the native governance token of QuickSwap, along with a 0.25% trading fee.
Furthermore, akin to SushiSwap's SushiBar, QUICK holders can stake their QUICK tokens to receive a portion of the protocol's generated 0.04% trading fee in the form of dQUICK tokens.
Saving on Gas Fees
While DEXs are among the most cost-effective DeFi protocols to use, they're still not ideal for small transactions. Current gas prices translate to transaction costs of approximately $30-80 on Uniswap, with providing liquidity costing over $100 typically.
These costs are significantly reduced on QuickSwap. Both trading and providing liquidity cost 0.0002, meaning trading on Polygon is 435,000 times cheaper than on Ethereum L1, and starting an LP position is 785,000 times cheaper!
Borrowing on Aave
Aave was one of the first major DeFi projects to announce deployment on Polygon. Since the announcement, Aave has attracted over $5.1 billion in liquidity on Polygon.
Similar to Aave on Ethereum L1, users can deposit assets into the protocol and borrow against them.
Aave's Polygon market currently supports deposits for seven assets: USDT, USDC, DAI, wBTC, wETH, MATIC, and AAVE, and all but the latter for borrowing. While the selection is limited compared to the Ethereum market and does not support staking or collateral swaps currently, users can still borrow against some of DeFi's most liquid assets to earn yield farming returns, leverage long or short assets.
Users can also earn MATIC by using the protocol; 1% of MATIC's total supply is allocated to Aave users, with annual rates typically ranging between 5-15%.
Saving on Gas Fees
The gas savings from using Aave on Polygon are more significant than QuickSwap. At current gas prices, depositing funds into Aave on Ethereum L1 costs about $95, while borrowing gas fees are over $125, totaling over $200 for both actions.
On Polygon, these combined costs are reduced by 235,000 times, as the costs for deposits and borrowing are only $0.001.
Trading and Providing Liquidity on Curve
Curve, another major DeFi project, recently deployed on Polygon. While it does not offer the extensive, mind-boggling array of pools as on Ethereum L1, Curve currently provides a single Polygon pool named "Aave" where users can deposit aTokens received from Polygon's Aave.
With just one click, users can deposit and collateralize aDAI, aUSDC, or aUSDT (or directly deposit their non-aToken versions) to earn a 0.02% fee per transaction and MATIC rewards. This pool has attracted over $464 million in liquidity and facilitates $50 million in daily trades. Additionally, LPs can earn a combined APY typically ranging between 35-45%.
This integration represents the best of DeFi composability, where users can strategize to maximize their returns:
- Deposit assets into Aave for interest and MATIC rewards
- Subsidize lending stablecoins with additional MATIC rewards
- Deposit these stablecoins into the Curve pool to earn trading fees and more MATIC rewards.
Saving on Gas Fees
The gas savings on Curve are immense. At current prices, transaction costs on Curve are about $70, while LPs' deposits and collateralization cost another $110. On Polygon, these costs are reduced to a negligible $0.0002. The costs are decreased by 355,000 times and 570,000 times, respectively!
Trading, Providing Liquidity, and Borrowing on SushiSwap
SushiSwap is another popular protocol deployed on Polygon. Within two weeks of its launch, the project has garnered $620 million in liquidity and processes millions of dollars in daily volume.
Like on Ethereum, users can utilize SushiSwap to trade tokens and provide liquidity. The protocol also incentivizes nine popular trading pairs, where liquidity providers can stake their SLP tokens to earn SUSHI and MATIC rewards, in addition to the standard 0.25% trading fee. While recent yields have decreased, depending on the trading pair, LPs can currently earn between 30-110% APY.
Aside from trading, users can explore a new item on SushiSwap's menu. Kashi is the first application built on top of the BentoBox vault, allowing anyone to create their lending pairs.
To create a pair, you simply:
- Choose an asset to borrow
- Select an asset as collateral
- Click "Create" to initiate!
While the service is more limited on Ethereum, Kashi on Polygon currently supports creating pairs using any combination of ETH, DAI, AAVE, MATIC, USDC, USDT, and wBTC.
Saving on Gas Fees
Gas savings are significant across SushiSwap operations. At current gas prices, a single trade costs about $57, providing liquidity costs $95, and creating a Kashi pair costs $98. On Polygon, these costs are reduced to $0.0002, $0.00004, and $0.0004, respectively. This translates to savings of 285,000 times, 237,500 times, and 245,000 times!
Participating in Lotteries on PoolTogether
Missed out on the recent Bankless badge lottery? Don't fret; now you can play again on PoolTogether on Polygon! This no-loss lottery protocol currently offers a USDT pool that pays out daily prizes. The prize pool currently holds over $8.2 million in deposits, with daily grand prizes typically ranging between $1,000-2,000. Like Curve, the protocol leverages DeFi composability by directing the pool's earnings from Aave's Polygon market.
In addition to a chance at taking home the grand prize, lottery participants can earn yields as depositors in the pool receive MATIC rewards, typically yielding around 20-25% APY.
Saving on Gas Fees
The cost to participate in the PoolTogether lottery on Ethereum L1 is $183, while on Polygon, it's only $0.0006, a reduction of 305,000 times!
Collecting NFTs on OpenSea
The top NFT marketplace now has a test deployment on Polygon! While it doesn't offer the wide array of tokens as on L1, collectors can still purchase various NFTs. Interestingly, game tokens seem to be the most popular collectibles in the market. NFTs related to ZED (a digital horse racing and ownership game) and Neon District (a cyberpunk-themed RPG game) account for over 60% of the listed collectibles.
Saving on Gas Fees
The cost of collecting NFTs on Polygon is virtually zero. This is because OpenSea L2 fully subsidizes the gas costs for purchasing NFTs. What used to cost $72 on Ethereum L1 is now free. That's the power of Polygon.
Conclusion
Ethereum's scalability is well underway and living up to expectations. On Polygon, you can transfer funds between applications at lightning speed and almost zero cost. While it doesn't inherit all of Ethereum's security guarantees, it's a step towards realizing the vision we've set for the internet of money.
There are many things you can do on Polygon, with more applications deploying daily. As mentioned, while there are some security trade-offs, early adopters have reaped high returns and cost subsidies, not to mention gas fee savings!
The nightmare of expensive gas fees is finally coming to an end. The Ethereum economy is now accessible to everyone. Become a Polygod and experience the future of finance!