It's time to explore the ecosystem of yield farming on Polygon and how its latest upgrade can benefit you.
Polygon’s final mainnet zkEVM zk-rollup solution launched this week.
That’s a bit of a mouthful; let’s try to break this down.
If Polygon before was like a high-speed, multi-lane expressway built alongside Ethereum’s congested main road, Polygon + zkEVM is like a maglev skytrain soaring above traffic.
Just picture Polygon’s zkEVM rollup like this: imagine you want to send 6 different letters to people who all live in the same building — it would only make sense to send them all in one envelope and use just a single postage stamp. That’s the “rollup” part of all this. Transactions on Polygon are rolled up into batches and sent off as one to Ethereum the same way you would “roll up” your letters and send them in one envelope.
Some people are considering it to be a pretty big deal for Polygon, to put it lightly.
You might be asking: what exactly is a zkEVM? And it really just refers to the cryptographic techniques being used which leverage “zero-knowledge” proofs to enable efficient and secure layer 2 transactions compatible with the Ethereum Virtual Machine. Most people who interact with crypto and Polygon specifically, now and in the future, will not need to know or care what a zkEVM is though; the idea is that this will all just be background infrastructure built and maintained by nerds, a lot like the internet is now.
But just to be thorough, the term “zkEVM” can be broken down into two parts:
zk (Zero-Knowledge): Zero-knowledge proofs are cryptographic techniques that allow one party to prove the validity of a statement without revealing any additional information beyond the truth of the statement itself. In the context of a zkEVM, zero-knowledge proofs enable transaction validation without disclosing the underlying transaction data, thereby enhancing privacy and security.
EVM (Ethereum Virtual Machine): The Ethereum Virtual Machine is a Turing-complete virtual machine that powers Ethereum’s smart contracts, enabling the execution of complex, decentralized applications (dApps) on the Ethereum blockchain. EVM compatibility is crucial because it allows developers to easily port their existing smart contracts and dApps from the Ethereum mainnet to layer 2 solutions like zkEVMs, without requiring significant code changes.
In layman’s terms: Polygon’s zkEVM zk-rollup solution, which I’ll remind you again is now live as of March 2023, makes Ethereum faster and better, plus it allows developers to easily bring their products into the new ecosystem.
Now, back to you and your yield farming. Let’s talk about exactly how you can take advantage of this new technology to optimize your farming strategies and maximize your yield.
In other words, speed.
In traditional blockchain networks like Ethereum, transactions require multiple block confirmations before they are considered final, which can take some time. With zkEVMs, the use of zero-knowledge proofs allows for the aggregation of multiple transactions into a single proof, which is then submitted to the main chain. This process leads to much faster (or near instant) transaction confirmations and finality, making the user experience more seamless and efficient.
Here are 3 examples:
Rapid Arbitrage: Instant transaction finality allows yield farmers to quickly capitalize on arbitrage opportunities that arise from price discrepancies across different DeFi platforms. By executing trades at a faster pace, they can lock in profits before the market adjusts and the opportunity vanishes.
Faster Rebalancing: You’ll often need to rebalance your portfolios to maintain a desired risk exposure and optimize returns. Instant transaction finality ensures that you can swiftly move funds between different DeFi protocols or assets, reducing the time their funds are idle and increasing their overall yield.
Enhanced Liquidity Provision: Yield farmers providing liquidity to DeFi platforms benefit from instant transaction finality by being able to adjust their liquidity positions in response to market changes more rapidly. This allows them to minimize impermanent loss and optimize their returns from liquidity provision.
So basically cost to profit. It’s been estimated that Polygon’s zkEVM rollout will lower their already low transaction fees by another 90%. Lower transaction fees greatly benefit yield farmers by enabling them to optimize their strategies and maximize profits without incurring substantial costs.
Here are 3 examples:
Increased Profits: Lower transaction fees directly translate to higher profits for yield farmers. As they engage in yield farming strategies like liquidity provision, staking, or yield optimization across multiple platforms, reduced fees can substantially boost their net returns, making yield farming more lucrative and sustainable in the long run.
Frequent Strategy Adjustments: Yield farming often involves continuous monitoring and adjustments to maximize returns. Lower transaction fees allow yield farmers to make more frequent strategy adjustments without incurring significant costs. This enables them to better respond to market changes, rebalance their portfolios, and take advantage of emerging opportunities, ultimately improving their overall returns.
Micro Yield Farming: High transaction fees can be a barrier to entry for smaller investors looking to participate in DeFi yield farming. With lower fees on zkEVMs, these smaller players can now engage in yield farming strategies without being priced out of the market. This democratization of access creates a more inclusive DeFi ecosystem and allows for the growth and diversification of the yield farming community.
The ability to do more for less work and scale your farming activities. zkEVMs facilitate seamless integration with various DeFi protocols built on Ethereum, enabling you to easily combine different strategies and maximize returns through efficient capital allocation.
Here are 3 examples:
Cross-protocol strategies: Enhanced composability allows yield farmers to create sophisticated strategies that span multiple DeFi protocols, such as borrowing from one platform at a low-interest rate and lending on another with a higher return. zkEVMs make it easier to connect and interact with different DeFi platforms, enabling seamless execution of complex strategies.
Leveraging yield optimization tools: Composability with zkEVMs enables yield farmers to utilize various yield optimization tools and aggregators more efficiently. These tools automatically rebalance and reallocate assets to maximize returns, taking advantage of the best opportunities available across multiple DeFi platforms. (Note: this is exactly what we’re building, powered by AI, at One Click Crypto!)
Customized risk management: With the improved composability that zkEVMs offer, yield farmers can better manage risk by combining different financial primitives such as options, futures, and insurance products. This enables them to hedge against market volatility and protect their investments while still seeking high returns in the DeFi space.
Given the above, it’s obvious that lower transaction fees and higher throughput will allow more people from across the world to interact with crypto. Bringing blockchain and DeFi to a wider audience actually helps DeFi yield farmers in 5 interesting ways:
Lower barriers to entry: Improved accessibility reduces the barriers to entry for new users, enabling a more inclusive DeFi ecosystem. With more participants, yield farmers can benefit from increased liquidity, better price discovery, and a more robust market for various DeFi products and services.
Broader adoption: Enhanced accessibility attracts more users to the DeFi ecosystem, leading to an increase in total value locked (TVL) across various platforms. As a result, yield farmers can benefit from a larger and more diverse pool of opportunities for earning returns.
Simplified user experience: Greater accessibility often translates to a more intuitive and user-friendly experience. This allows yield farmers to navigate and manage their strategies more efficiently, saving time and effort that can be allocated to finding and optimizing the best yield farming opportunities.
Network effects: As accessibility improves, it fosters network effects, which can drive the growth and development of the DeFi ecosystem. This growth creates more opportunities for yield farmers to explore new platforms, protocols, and strategies, further increasing their potential returns.
Innovation and competition: Greater accessibility encourages innovation and competition among DeFi platforms and services. This leads to the development of novel financial products, improved interest rates, and better risk management tools that can help yield farmers maximize their returns while minimizing risk.
This one really just isn’t that complicated. The improved security offered by Polygon with zkEVM deployed plays a crucial role in helping DeFi yield farmers maximize their returns. As zkEVM leverages zero-knowledge proofs to ensure transaction privacy and security, it minimizes the risks associated with hacks, exploits, and other malicious activities that can lead to loss of funds. A more secure environment builds trust and confidence in the DeFi ecosystem, encouraging more participants to enter the space and contribute to liquidity pools, which in turn leads to better yield opportunities for farmers. Furthermore, the enhanced security reduces the likelihood of unexpected losses due to vulnerabilities, ensuring that yield farmers’ investments are better protected and their returns are more predictable and stable over time.
This boils down to the simple fact that it’s hard to make a return if all your money gets stolen. Duh.
Polygon’s new release combines the benefits of zero-knowledge technology and Ethereum Virtual Machine (EVM) compatibility, enabling a highly scalable and secure layer 2 solution for Ethereum. By leveraging zero-knowledge proofs, Polygon’s zkEVM offers increased privacy, security, and instant transaction finality, while maintaining compatibility with existing Ethereum smart contracts and developer tools. This combination of features allows developers to seamlessly migrate their dApps to Polygon’s zkEVM and users to enjoy lower transaction costs and higher throughput, all without sacrificing the security and decentralization of the underlying Ethereum network.
It will be faster, smoother, and all your favorite Ethereum protocols are probably already there, plus a bunch more you’ve never heard of. Right now, Polygon is the place to be in my opinion for DeFi yield farmers who are looking to really maximize their returns.
Be wise. Do your own research. And always dig deeper.
Disclaimer: This article is not intended to serve as financial advice. The sole objective is to provide an educational perspective on the current state of Polygon’s zkEVM launch and how it can benefit farmer, as well as to identify trends that are gaining momentum. Investing in products, tokens, or company shares associated with these trends will not necessarily result in financial gain. Always conduct your own research and seek the advice of a financial professional.
Secret hashtag: #PolygonFarming
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