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How to Use Polygon (MATIC) in DeFi

How to Use Polygon (MATIC) in DeFi

6 min read

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Welcome to the perfect guide to get to understand how Polygon works and how to make the most of it in DeFi. Also, we will walk you through the importance that Polygon has to Ethereum, as it is referred to as “Ethereum’s Internet of Things”. Here is the table of contents that will be covered, at the end of the article, for sure you will be a Polygon (MATIC) expert.

  1. What is Polygon?
  2. Why is Polygon growing?
  3. Polygon to Ethereum: Ethereum’s Internet of blockchains
  4. How to use Polygon in Defi?

What is Polygon?

You may not have heard of Polygon, but you may have heard of MATIC network, a layer 2  designed to solve the scalability problems of layer 1 blockchains. You may be wondering, if you're not a blockchain expert, what is all this talk about layers and why networks are needed to solve scalability problems. To understand the importance of a network like Polygon, and its importance in the DeFi world, we have to understand what is known as the blockchain trilemma.

The blockchain trilemma states that when designing a blockchain, its base layer could only achieve 2 of the following 3 objectives: security, scalability and decentralization. For example, Ethereum's network is secure and decentralised, but not scalable. Ethereum was only capable of processing 18 TPS, therefore not being fast or scalable at all, yet it has a reputation for being secure and decentralized. How does Ethereum manage network congestion and gets to improve its scalability? By resorting to layer 2 networks. According to Vitalik Buterin, the way Ethereum 2.0 will get around the trilemma is by sharding — meaning creating new sidechains that run in parallel with the main blockchain, splitting the load. This lets it process more transactions — vastly more — without reducing the number of nodes or rushing the validation security process.

Well, since we know the importance of MATIC's scalable layer 2-solution, what does it have to do with Polygon? Simple, in February 2021, the team behind MATIC announced that MATIC would become Polygon, Ethereum's Internet of Blockchains. While MATIC was just a scaling solution, Polygon is a multi-chain system for collaborative blockchains that retain their independence.

Why is Polygon growing?

Before we get to analyse how to use Polygon in DeFi, we first need to know why everyone is talking about this protocol and what makes it so special. If we take a look to Polygon website, we can see how the protocol defines itself as a “decentralised Ethereum scaling platform that enables developers to build scalable user-friendly decentralized applications with low transaction fees without ever sacrificing on security”. Ethereum can only process a limited number of transactions per second (TPS), and the high load on the network requires of scalability solutions so as to not have delays in the decentralised network and high network fees. Polygon can process up to 7.2k transactions per second, which is a huge number of transactions! Ethereum can just process, as mentioned, 18 TPS. By acting as a Layer 2 protocol, Polygon doesn’t aim to duplicate Ethereum’s functionality. Instead, it helps improve transaction speeds and lower costs for developers.Think of it as an express train that runs parallel to a local train, moving faster with fewer station stops. Today Polygon is a unique protocol in the blockchain market providing a variety of different scaling mechanisms.

Developers have never found it so easy to build ETH compatible blockchains and connect them to the Ethereum network as with this framework.

Polygon provides to it users multiple benefits like:

-Ethereum-compatible blockchain

-Scalability

-Security

-Sovereignty

-Interoperability

-Better user/developer experience

Summing up this part, Polygon network has set a precedent in the crypto world, as it has helped to establish blockchains compatibility and interoperability so that protocols do not operate as closed communities but as part of an interconnected ecosystem. Popular decentralised finance platforms like Quickswap, Balancer, QiDAO, Aave and Superfluid are built on top of Polygon, which proofs how reliable, cheap and fast this blockchain is.

Polygon to Ethereum: Ethereum's Internet of Blockchains

Polygon is designed to facilitate a future where different blockchains no longer operate as stand-alone chains and proprietary communities, but instead as networks that fit into a broader interconnected landscape. Basically, Polygon is an interoperable blockchain.

Its long-term goal is to enable an open, borderless world in which users can seamlessly interact with decentralised products and services without first having to navigate through intermediaries or walled gardens. It aims to create a hub that different blockchains can easily plug into, while simultaneously overcoming some of their individual limitations—such as high fees, poor scalability, and limited security.

Polygon uses a variety of technologies to achieve this expanded vision, these include:

  • POS Chain: Polygon's main chain is an Ethereum sidechain known as the Matic POS Chain, which adds a proof-of-stake (POS) security layer to blockchains launched on Polygon.
  • Plasma Chains: Polygon makes use of a scaling technology known as Plasma to move assets between the root chain and child chains via Plasma bridge.
  • ZK-rollups: An alternative scaling solution used to bundle a large number of transfers off-chain into a single transaction, using zero-knowledge proofs for the final public record on the Ethereum main chain.
  • Optimistic rollups: A solution that runs on top of Ethereum to facilitate near-instant transactions through the use of "fraud proofs".

As you might have noticed, Polygon intends to incorporate more than one scaling solution, in keeping with its goal of minimising barriers to entry by attempting to reduce transaction fees to a bare minimum. By taking a multi-pronged approach to the issue of scaling, Polygon is hedging its bets, should any other scaling solution fail to accomplish its purpose.

Source: Bit2Me Academy

How to use Polygon in DeFi?

As have just been mentioned lots of protocols have migrated to the Polygon network. Polygon is a Proof of Stake Consensus Mechanism blockchain which native token is called MATIC, an ERC-20 token created on Ethereum blockchain. How can you use it to maximize your profit? Let’s briefly mention the basic strategies you can perform in DeFi. In DeFi you can…

-Provide liquidity to Decentralised Exchanges (DEX) liquidity pools and receive LP tokens in exchange: by providing a pair of tokens into a liquidity pool, the liquidity provider, also known as market maker, helps the protocol with decentralisation of trading. In exchange, liquidity providers are rewarded with fees generated by trades on the platform, which can be thought of as a form of passive income.

-Borrow tokens in a money market: Users can put their crypto assets to work as a collateral to get a loan in return for regular interest payments.

-Leverage farming: Users can borrow external liquidity to farm larger amounts of crypto, which means users have the option to increase their returns by a sizable amount.

-Stake native tokens: staking is a practice that only takes place in PoS protocols, and therefore, it is not present in Proof-of-Work blockchains like Bitcoin. Staking involves locking blockchain's native tokens for a certain period of time to get, in return, crypto rewards for contributing to the blockchain's speed and security. In this case, MATIC is the native token of a PoS chain, so you can also stake it and contribute to improve Polygon’s speed and security while generating Annual Percentage Yield as passive income. Let’s mention that an upgrade of staking is called liquid staking, that allows users to stake their favorite proof-of-stake coin while still having access to the funds, not being those “fully” locked as occurs in the case of staking per se. So, basically, in liquid staking protocols you lock up funds to earn staking rewards (same thing as Staking) but, at the same time, you can take part in attractive yield farming opportunities (here is where liquid staking makes the difference).

Since in the crypto industry LSD (Liquid Staking Derivates, like Stader, the home of Liquid Staking) are becoming more popular, then you can have the best of both worlds: staking and DeFi, so you can do things like leveraged yield farming in CIAN protocol or use the LSD in an options vault like Polysynth to increase your returns and maximize your strategy. The sky’s the limit but why not starting with staking MATIC tokens into MATICX so you can secure the network and get a ~6% APY? From there, add as many DeFi strategies and layers of rewards as you want! Unsure of how to proceed or overwhelmed by the options? Click here to see the utility provided by Stader to MATICX token.

Hope that train of thoughts helped you! Are you ready to stake MATIC to get MATICX and have the best of both worlds (staking and DeFi)? What are you waiting for?

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