DeFi Projects Continue Flocking to Layer 2 Solution Polygon

Gas fees on the Ethereum blockchain may have dropped, but that has not stopped an increasing number of decentralized finance (DeFi) users and developers from flocking to layer 2 solution Polygon.

Cheap transaction costs and fast block times have largely driven the growing adoption of Polygon by SushiSwap, Aave and other DeFi projects, according to analysts and people behind some DeFi projects.

Polygon, one of the early projects providing an Ethereum layer 2 scaling solution, has grown significantly in the past few months. For example, as of June 13, popular automated market maker SushiSwap has more than 15,000 unique active wallets on Polygon, while on Ethereum that number was around 4,194, according to data provided by crypto data site DappRadar – meaning there are more SushiSwap users on Polygon than there are on Ethereum.

A June 10 report by DappRadar also highlighted that in May alone DeFi money market Aave logged a daily average of $6.75 billion in transaction volume on Polygon compared to $2.48 billion and $2.28 billion for Aave and Aave version 2, respectively, on Ethereum.

Aave has been working with Polygon since March, as CoinDesk reported, in order to “escape” the high transaction fees on Ethereum.

“Using layer 2 solutions especially Polygon makes more sense because when we talk about DeFi, if the transaction cost is very high, it doesn’t make sense for small players or for the normal traders to use the application,” Sameep Singhania, co-founder of Polygon-based decentralized exchange QuickSwap, said in a phone interview with CoinDesk. “That’s why I think it’s a good move that DeFi is moving to Polygon.”

Prices for Polygon’s MATIC token also have rallied significantly this year so far, according to Messari. Now ranked 15th by market capitalization, MATIC token’s price is up nearly 9,000% on a year-to-date basis.

“Layer 2 solutions are a catalyst for growth and new users” for DeFi, Mira Christanto, an analyst at Messari, wrote in an email response to CoinDesk. “Ethereum gas fees have been prohibitive for many users. Polygon and other layer 2 solutions are a precursor of demand on Ethereum when the gas fee hurdle is removed.”

Most recently, Polygon’s rise also occurred as Ethereum’s gas fee, the cost for the amount of computational effort required to execute trades on Ethereum, has dropped significantly. But analysts said that it may indicate a promising future for Ethereum 2.0, a system-wide upgrade for Ethereum blockchain that aims to improve the blockchain’s usability and scalability.

“Until ETH 2.0 is fully rolled out, layer 2 solutions are needed to create scalability on the Ethereum blockchain,” Nick Mancini, research analyst at crypto sentiment analytics platform Trade the Chain, said in an email response. “If a product creates an easy-to-use solution, the market will stick to it like glue.”

Notably, the trading volume of SushiSwap on Ethereum is still much higher than it is on Polygon, per data on DappRadar. On June 14 alone, SushiSwap notched around $200 million in transaction volume on Ethereum but only about $47 million in transaction volume on Polygon over the same time period.

This may indicate that Polygon's growth is mainly due to increased DeFi usage by retail traders and investors, who are mostly conducting small value transactions.

“It shows that whales still want to pay gas fees and use Ethereum DEXs [decentralized exchanges],” Ian Kane, senior content specialist at DappRadar, said. “But the new wave of lower value investors are not so diehard for Ethereum and are just looking for good user experiences and low fees.”