Episode 16 – Layer 2: The sequel we asked for
“You know what they say, you gotta spend money to make money. But how much money do we need to get rolling in DeFi? Are there alternatives out there to soften that financial hit? Well… yes, there are networks where you don’t have to spend quite as much, and they could spare you a pretty penny.
Enter Layer Two!
Layer 2 protocols are those that are built on top of or beside of mainnets. These are built to offload some of the transaction volume from the mainnet onto more efficient chains in an effort to increase scalability.
So Ethereum is Layer 1 and networks like Polygon are Layer 2’s.
In this episode, we’re gonna migrate from Ethereum mainnet to the most popular Layer 2 today, Polygon, which pushes transactions onto a sidechain that’s faster, cheaper and totally DeFi ready. Are we finally gonna come under budget?… F*&^ YEAH.
This is School of Block.
As we covered in episode 13, DeFi, the shorthand for decentralized finance can offer some sizable advantages over traditional finance or as the cool kids call it “TradFi” – if we really need to shorthand everything. Running on smart contracts that provide trustless, guaranteed, efficient financial transactions, DeFi can offer better returns and rates than any banker, pawn shop owner or even back-alley bookie can, all of which we covered in more depth in episode 14. Oh yeah, and maybe the coolest thing, it’s composable, meaning developers can build on top of each other’s applications, again and again, making a money lego tower of good old dapps that would put your 5-year-old nephew to shame
But moving from lego to lego can be expensive.
Not but a month or so ago, the Ethereum network was bumping up against its scaling capacity – blame the degens – creating long wait times for transactions and also pushing the transaction fees into a couple hundred dollar range. And this has happened before. CryptoKitties became so popular after it launched in 2017 that the Ethereum network became bogged down just the same.
And so developers have been working on Layer 2 protocols to help solve the problem so that users, just regular ole everyday users, can utilize these networks without going broke. And actually it’s working…
So let’s begin at the foundations, gas, which is calculated in Ether. You’re gonna need some. Always. Every action you take on Ethereum will require some amount of gas fee. Think of it like carrying water in the desert. And because the vast majority of today’s DeFi is built on top of Ethereum and you can’t use Ethereum without it ETH is a must have. You can purchase ETH from an exchange or other centralized provider or you can also purchase ETH directly through MetaMask using Wyre. But what exactly is this foxy number?
Well that is MetaMask, a browser or mobile application that allows you to store and manage your crypto keys and connect you with the weird and wonderful world of decentralized applications. If you think of it as both a passport and a wallet then that’s probably getting you close. With it we can view all the tokens we own, sign transactions, buy and sell items, connect to decentralized applications and interact with other networks like – wait for it – Polygon.
But let’s start by buying $250 worth of ETH.
Just a week ago, $250 would have allowed us to make maybe one transaction with some ETH left over just to HODL, but recently gas fees – gas being the equivalent of handing your valet a fiver for executing a smart contract transaction – have dropped. So $200 should be enough to really get us going.
And we really want to go and play where the gas fees are in our favour which means heading to Layer 2, or L2 for short. Now, there’s no need to be scared here, all we’re doing is shifting value from one chain to another. It’s like travelling in Europe with a British passport. Oh dammit. It’s like travelling in Europe with a european passport. Free passage but you still have to cross borders.
So here’s how we do that, we’re going to be swapping ETH for MATIC, Polygon’s native token. So we start at https://wallet.matic.network/, where you’ll connect your MetaMask wallet and then get dropped into the landing page, which shows your balances and what you can do next.
To get ETH onto the network, you’ll click the button aptly named MOVE FUNDS TO MATIC MAINNET and then you choose how much ETH you want to swap – at $250, we’ll be swapping around 0.1 ETH. Hit TRANSFER and CONTINUE on the pop-up, which tells you how long the transfer will take, right now 7-8 minutes. This deposit transaction does incur an Ethereum mainnet transaction fee, but HEY, FEES ARE LOW right now, so that’s only gonna be $3.19.
This swap is happening via Polygon’s blockchain bridge, which allows you to swap between mainnet and sidechain tokens with relative ease, although getting tokens onto a sidechain typically takes less time than getting them back onto mainnet. Before you swap tokens, you’ll get another pop-up that tells you how much time it’ll take to bring tokens back to Ethereum mainnet, and right now, that’s about three hours.
Hit CONTINUE again and then you’ll CONFIRM the transaction in MetaMask.
Haha, we’ve done it, we’re traveled to another blockchain country! So now that we’re on the Polygon network, what can we do now? Well there’s a bunch of things actually.
CHOICE OF SERVICES
If you go to defiprime.com/polygon, you can see the whole list of supported dapps on the Polygon network.
For new DeFi degens, perhaps one of the least scary dapps you could play with is POOLTOGETHER. PoolTogether is a no-loss lottery, but it’s less like gambling and more like an exciting savings account.
To jump into a pool on PoolTogether, first we’ll need to swap the tokens we have on the Matic Mainnet for a token that’s supported on PoolTogether. Users deposit money into a pool, that money is then deposited into a yield generating source, and the yield earned makes up the prize pool. Every week, one lucky winner earns the entire pot. And if you don’t win, no worries, you’ll come out of the pool with the same amount as you put into the pool. Cool!
There are other ways to earn passive income on your crypto – you know conservative, steady streams of income – and we’ve covered a bunch of those in this video – PASSIVE INCOME EPISODE
But if you think you’re ready to go full degen and yield farm yourself, you can try out some of the decentralized lending protocols supported by Polygon. We’ll use AAVE. Aave let’s you provide your assets as liquidity to the network for others to borrow on. And this process earns you rewards of all kinds – interest, liquidity provider rewards, governance tokens and other speculative crypto assets.
So you’ll have to move some crypto onto Aave. To do this, you’ll swap tokens using a decentralized exchange like SushiSwap or QuickSwap.
Once we’ve got crypto on the protocol, we can move over to the STAKING tab, where you can stake, or lock up, your tokens. Each pool and platform will offer different interest rates on staked tokens. And this is the game that serious degens play – constantly swapping tokens and staking them on different protocols depending on the fluctuating rewards doled out.
Obviously, all of this work comes with risks attached. The crypto markets can be highly volatile ripping the heart out of previously secure positions so it’s advisable to start your journey working with stablecoins where you can opt for a simple interest earning position and then work your way deeper into more complex positions as you gain confidence. We’ve covered DefiSaver previously but their simulator really is a fantastic way to play around with DeFi primitives without putting anything at risk.
Once we’ve staked, though, now we just sit back and watch our crypto bags bulge.
IF YOU CAN SEE THE YIELD COMING IN, THAT WOULD BE A GOOD TO DISPLAY
And once you get a good handle on staking to one protocol, there’s also so much more you can do within the DeFi ecosystem. We’ve covered a ton of protocols and projects on The Defiant’s YouTube channel, so make sure to check those out as you level up.
So put on your boots, get your digital shovel and spade and start yield farming! But make sure you’re on a Layer 2 plot so you can save money while you earn money.
You’ve been watching School of Block, presented by Ledger and the Defiant, demystifying decentralisation, one block at a time. Don’t forget to subscribe, drop us a like as it helps the youtube algo (Robin notices fuel stop) Oh no! I’ve run out of gas, quick, ping that notification bell to get the heads up early on the next episode… and as always – here’s to your financial freedom. Now i need to buy some gas, noooooooo”