Three-Minute Introduction to the Polygon DeFi Ecosystem: Which Protocols Are Worth Trying?

This article is from Defi Dao, original title: "New DeFi Play | What are the most worthwhile protocols to play on Polygon? Get started in 20 minutes!", Author: Ryan Sean Adams (Bankless) Co-founder, Translator: Pingfeng.

With the significant rise in MATIC prices, Polygon has become a hot topic of discussion in the crypto space.

In recent weeks, Polygon's growth has been explosive, with over $8.9 billion in value locked and new and old protocols being deployed daily. Polygon has indeed lived up to the hype, with lightning-fast transaction speeds and low costs. As more of the Ethereum L1 applications we know and love are deployed on it, users are starting to reap the rewards of composability.

Polygon has gained a lot of attention, and if you are curious about what high-yield operations you can perform in this emerging DeFi ecosystem, you are in the right place. Following the guidance below, you can get started with your first application in just 20 minutes. In addition to learning about various operations that can only be done on Polygon, you can also see how much gas fees Polygon can save you.

Safety Precautions Before Using Polygon

Before using Polygon or any other network, it is important to understand its architecture and the security assumptions that need to be made. After all, this is a new technology, so use it at your own risk!

Polygon provides a universal framework that allows developers to create custom chains for specific applications and offers an interoperable network that combines various scaling solutions, such as Zk-rollups, optimistic-rollups, and sidechains. The Polygon PoS chain is Polygon's first product and has gained significant traction. This chain sits between a sidechain and a pure Layer 2 scaling solution (like Rollup), inheriting the security of the main chain.

Polygon ensures security through a POS mechanism, where validators stake MATIC tokens into smart contracts that are hosted on the Ethereum main chain. Currently, over $2.6 billion worth of MATIC is staked in these contracts.

To transfer funds from Ethereum to Polygon, you must use what is known as a "bridge." In short, bridging works by using a locking and minting mechanism. When you deposit funds into the bridge, they are actually 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: the Plasma bridge and the PoS bridge.

The Plasma bridge inherits the security of the Ethereum main chain; however, it takes seven days to complete the withdrawal process. The PoS bridge secures the chain itself with the same group of validators and staked MATIC, with a withdrawal time of about three hours.

Connecting all of this, the contracts holding staked MATIC are responsible for the security of the chain and the funds locked in the PoS bridge. This is important to remember because both the staking and bridging contracts can be altered using a proxy controlled by a multi-signature wallet.

This wallet was initially a 2/3 multi-signature but has now been upgraded to a 5/8 scheme. Recently, the team confirmed that four of these signers are co-founders of Polygon, while four are notable members from other Polygon DeFi projects.

This is a centralized entity and certainly a risk factor to consider when deciding to use Polygon. If this wallet were compromised, the security of the network and the ability to transfer funds back to Ethereum would be severely threatened.

In addition to the multi-signature, about 31% of the staked MATIC is delegated to a node operated by Binance. This centralization of staking is another factor to consider when deciding whether to move to Polygon.

How to Use Polygon

Before using Polygon, you need to take a few 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
• Use Matic PoS Bridge to Migrate Funds
• Use Zapper to Migrate Funds

Where to Go First on Polygon

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 gained immense popularity in recent days. The name "Quick" is indeed fitting: with an average block time of 2.1 seconds on Polygon, transactions on QuickSwap are confirmed in the blink of an eye.

In recent weeks, the protocol has attracted over $650 million in liquidity while processing $150-250 million in trading volume daily. As a result, QuickSwap earns hundreds of thousands of dollars in fees for its liquidity providers each day.

For LPs looking to earn income beyond trading fees, there are currently over 100 incentive pools where LPs can earn QUICK rewards, the native governance token of QuickSwap, as well as 0.25% of trading fees.

Additionally, similar to SushiBar on SushiSwap, QUICK holders can stake their QUICK tokens to earn 0.04% of trading fees generated by the protocol in the form of dQUICK tokens.

Gas Fee Savings

While DEXs are among the cheapest DeFi protocols to use, they are still not suitable for small transactions. At current gas prices, a transaction on Uniswap costs about $30-80, while providing liquidity often exceeds $100.

These costs are significantly reduced on QuickSwap. The cost of trading and providing liquidity is just $0.0002, meaning trading on Polygon is 435,000 times cheaper than on Ethereum Layer 1, and starting an LP position is 785,000 times cheaper!

This means that regardless of the user's balance, they can trade or provide liquidity without worrying that gas fees will take a big chunk out of their profits!

Lend and Borrow on Aave

Aave was one of the first major DeFi projects to announce deployment on Polygon. Following the announcement, Aave attracted over $5.1 billion in liquidity on Polygon.

Just like Aave on Ethereum L1, users can deposit assets into the protocol and use them as collateral for borrowing.

Aave's Polygon market currently supports deposits of seven assets: USDT, USDC, DAI, wBTC, wETH, MATIC, and AAVE, with all loans except the latter. Although the selection is limited compared to the Ethereum market and staking or collateral swapping is not currently supported, users can still borrow some of the most liquid assets in DeFi to earn farming yields or leverage long or short positions.

You can also earn MATIC by using the protocol, as 1% of the total supply of MATIC will be allocated to Aave users, with annual interest rates generally ranging from 5-15%.

Gas Fee Savings

The gas savings when using Aave on Polygon are even more pronounced than on QuickSwap. At current gas prices, depositing funds into Aave on Ethereum L1 costs about $95, while borrowing gas fees exceed $125, meaning the total cost for deposit and loan operations exceeds $200.

On Polygon, these combined costs are reduced by 235,000 times, as the cost for deposits and loans is only $0.001.

Trade and Provide Liquidity on Curve

Curve is another major DeFi project that has recently deployed on Polygon. While it does not offer the extensive and exciting liquidity pools we see on Ethereum L1, Curve currently provides a single Polygon pool named "Aave," where users can deposit aTokens received from the Polygon version of Aave.

With just one click, users can deposit and collateralize aDAI, aUSDC, or aUSDT (or directly deposit the non-aToken versions of these assets) to earn 0.02% fees per transaction, as well as MATIC rewards. This pool has attracted over $464 million in liquidity and facilitates daily trading volumes of $50 million. Additionally, the comprehensive APY that LPs can earn has consistently ranged from 35-45%.

This integration is the best embodiment of DeFi composability, allowing users to adopt a strategy to earn yields:

• Deposit assets into Aave to earn interest and MATIC rewards
• Use more MATIC rewards to lend stablecoins
• Deposit these stablecoins into Curve pools to earn trading fees and more MATIC rewards.

Gas Fee Savings

Surprise! The gas savings are enormous. At current prices, transaction fees on Curve are about $70, while LP deposits and collateralization cost an additional $110. On Polygon, these costs are reduced to a negligible $0.0002. Costs have been reduced by 355,000 times and 570,000 times, respectively!

Trade, Provide Liquidity, and Borrow on SushiSwap

SushiSwap is another popular protocol deployed on Polygon. Within two weeks of its launch, the project has already garnered $620 million in liquidity, with daily processing volumes reaching tens of millions.

Just like on Ethereum, users can use 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, as well as the regular 0.25% trading fees. Although yields have decreased in recent days, stakers can currently earn annual interest rates ranging from 30-110%, depending on the trading pair.

In addition to trading, users can utilize a new project on the Sushi menu. Kashi is the first application built on the BentoBox vault, allowing anyone to create their own lending pairs.

To create a pair, all you need to do is:

1. Choose an asset to lend
2. Select an asset as collateral
3. Click "Create" to launch it!

While there are more services on Ethereum, Kashi on Polygon currently supports creating pairs using any combination of ETH, DAI, AAVE, MATIC, USDC, USDT, and wBTC.

Gas Fee Savings

When it comes to gas fee savings, I am at a loss for words. But I will say it again. At current gas prices, the cost of making a trade is about $57, providing liquidity costs $95, and creating a Kashi pair costs $98. On Polygon, these costs drop to $0.0002, $0.00004, and $0.0004, respectively. This translates to savings of 285,000 times, 237,500 times, and 245,000 times!

Participate in Lotteries on PoolTogether

Missed the recent Bankless badge lottery?

Don't be discouraged; now you can play again with PoolTogether on Polygon! This no-loss lottery protocol currently offers a USDT pool that pays out prizes daily. The prize pool currently holds over $8.2 million in deposits, with daily jackpots typically ranging from $1,000 to $2,000. Like Curve, this protocol also leverages the power of DeFi composability by sourcing prize pool earnings from Aave's Polygon market.

In addition to the chance to take home the grand prize, lottery participants can also earn yields, as depositors in the prize pool will receive MATIC rewards, with annual interest rates around 20-25%.

Gas Fee Savings

The cost of participating in the PoolTogether lottery on Ethereum L1 is $183, while on Polygon it is only $0.0006, a reduction of 305,000 times!

Collect NFTs on OpenSea

The top NFT marketplace now has a test deployment on Polygon! While it does not offer as wide a range of tokens as L1, collectors can still purchase various NFTs. Interestingly, game tokens seem to be the most popular collectibles on the market, with NFTs related to ZED (a digital horse racing and ownership game) and Neon District (a cyberpunk-themed RPG) accounting for over 60% of the listed collectibles.

Gas Fee Savings

The cost of collecting NFTs on Polygon is virtually zero. This is because OpenSea L2 fully subsidizes the gas costs of purchasing NFTs. What would cost $72 on Ethereum L1 is now free. This is the power of Polygon.

Conclusion

Ethereum's scaling is already underway and living up to expectations. On Polygon, you can transfer funds between applications at lightning speed and almost zero cost. While it does not inherit all the security guarantees of Ethereum, it is a step towards realizing the vision of a monetary internet we have promised.

There are many things you can do on Polygon, and more applications are being deployed every day. As mentioned earlier, while there are some security trade-offs, early adopters have already reaped high yields and cost subsidies, not to mention the gas savings!

The daunting nightmare of expensive gas fees is finally coming to an end. The Ethereum economy is now accessible to anyone. Come be a Polygod and experience the future of finance!