The central theses
- The number of daily users on Polygon is growing rapidly, with the Layer 1 scaling solution recently surpassing Ethereum in the number of daily transactions.
- Ethereum-native protocols like Aave, SushiSwap, and Curve paved the way for Ethereum users to migrate to the network.
- Polygon is a scaling solution from Ethereum and is in direct competition with Binance Smart Chain.
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Polygon offers a similar yield farming experience as the Ethereum mainnet at a fraction of the cost. Key metrics show that DeFi power users are beginning to migrate to the network.
Low-cost DeFi on Polygon
High gas fees price down regular DeFi investors on Ethereum. As ETH price has surged, so has gas fees, raising doubts about the possibility of a second DeFi summer.
Ethereum’s popularity has helped push gas prices to record highs, even as organizations like Flashbots work to reduce blockchain congestion. Some users have turned to Binance Smart Chain even though this network has suffered from a variety of issues such as hacks and flash credit attacks.
In search of low fees and fast transactions, many yield farmers have turned to Polygon, the Ethereum scaling solution sometimes referred to as “commit chain”. Polygon uses a proof-of-stake consensus algorithm, and transactions on the network cost fractions of a cent.
Source: Nansen
The growth in the number of daily active addresses was accompanied by an impressive price increase of Polygon’s native token, MATIC. In the last 30 days, the token price has increased by more than 300% according to CoinGecko. Transaction count on Polygon surpassed Ethereum for the first time on May 2, with leading exchange Quickswap accounting for the majority of the volume.
Let’s examine some @0xPolygon data on @nansen_ai (currently in alpha). Looks like the eth flipped based on the number of transactions on May 2nd. pic.twitter.com/pzJDdFCtfV
— Akshay (@aioeth) May 7, 2021
According to Nansen, only 0.09% of Ethereum addresses have interacted with Polygon, meaning there are ample yield farming opportunities for those who have started using the network. The chance of earning passive income has increased as more protocols have been introduced on Polygon.
While apps like Quickswap are native to Polygon, interest in the Layer 1 scaling solution grew as mainstream DeFi protocols built versions of their apps on top of Polygon. Aave, Curve, and SushiSwap have all joined the ecosystem this year, with positive results.
Even after the launch of Aave v2 and a popular liquidity mining program on Ethereum, Aave’s polygon market size has already reached $6 billion. To support the growth of the market, Polygon has distributed MATIC bonuses for lenders and borrowers. Demand for low-cost DeFi, easy access to capital, and MATIC rewards distributed to lenders and borrowers have all helped attract liquidity.
Source: Aave
Lenders can currently earn up to 18% by lending USDT on Aave. Interestingly, users can also borrow USDT at a rate of 8% per year but earn 12.5% in MATIC rewards, resulting in a net profit.
Yield farming on polygon
DeFi users currently have multiple ways to earn high returns on crypto assets on Polygon. The first option is to provide liquidity on Quickswap, the most popular exchange on Polygon. With low fees and gas prices, Quickswap’s volume is high and results in high commissions for Liquidity Providers (LPs). Additionally, LPs can earn FAST rewards for specific pools, which further boosts APYs. These rewards currently range from 30% on stablecoin pairs to 200% when the trading pair contains QUICK. SushiSwap and Curve also offer MATIC rewards in addition to fees for their LPs.
Users can also entrust their LP tokens (tokens they receive for providing liquidity to a trading pair) to yield aggregators like Yearn.Finance on Ethereum. These yield aggregators help reinvest profits into the same pools and increase their users’ returns. Some platforms like Adamant Finance have also launched their own governance token as a further incentive, pushing APYs even higher. As a result, providing LP tokens to Sushi’s USDT/USDC pool currently earns an APR of 99%, including ADDY tokens.
Source: Adamant Finance
Classic yield farms are also back, with the most popular so far being Polywhale. Users can stake their cryptocurrencies in Polywhale’s pools in exchange for the native token KRILL. When users deposit their crypto assets, a portion of their deposit is used to buy back KRILL from the market. Users can currently earn up to 80% APY by using MATIC, harvesting the KRILL rewards and depositing them into their own pool for up to 2,500% APY.
It is important to note that such farms are very experimental and the price of tokens like KRILL can be extremely volatile. For many users, the mix of risk and huge returns is reminiscent of summer 2020 on Ethereum. If the DeFi yield farming excitement returns this summer, it could very well be Polygon.
Disclaimer: The author held BTC, ETH and several other cryptocurrencies at the time of writing.
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