DeFiForAll: The State of Lending on Polygon

Matching lenders with borrowers and directing savings to the most effective uses is one of the four core functions of traditional finance, the others being providing a payment system, enabling people to handle their finances across lifetimes and generations, and helping individuals and businesses manage risk. Lending is also the area where decentralized finance (DeFi) is making the most headway.

Polygon is home to some of the biggest DeFi protocols, including a number of lending applications. Here are some of the most noteworthy projects.

AAVE: Most Popular Protocol

AAVE is a decentralized money-market protocol which offers liquidity through interest-bearing deposits and borrowings. It is a non-custodial platform, meaning users retain control of their assets. Originally built on Ethereum, it is now also available on Avalanche and Polygon. AAVE v2 has a current market size of $6.61 billion on Ethereum (as of June 14), compared to $489 million on Polygon and $252 million on Avalanche.

As lenders, AAVE v2 users on Polygon get higher annual percentage yields (APYs), with the only exception being USDC stablecoin deposits on the Ethereum network. As borrowers, the variable rate loans on AAVE v2 Polygon may be more expensive than on other chains, but borrowing with a stable rate could be cheaper than with AAVE v2 Ethereum.

There are also moves underway to onboard staked assets as collateral, including sAVAX (BENQI), MaticX (Stader), and stMATIC (Lido). Users have also called for stablecoins to be added to the AAVE v3 market, including FRAX, UST (on Aave v3 Polygon), EURS, agEUR, gEUR, and more.

0VIX: New veLending Market

0VIX is an open-source lending and borrowing protocol enhanced with a streamlined version of Curve’s voted-escrow tokenomics (veTokenomics), which enables the community to directly decide on the distribution of market rewards as well as voting on governance proposals.  

The team is deploying a smoothed interest rate curve capable of absorbing undesired volatility in the rates borrowers are required to pay. After the protocol’s initial roll-out, and significant testing, the team plans to submit for DAO voting an upgrade which will make the key interest rate parameters dynamic. 

Real-time market conditions can be very messy. If competing protocols offer higher APY on supplying assets than a lending protocol does for borrowing, this results in liquidity bleeding out, subsequently jeopardizing the protocols’ health due to high utilization rates. 0VIX’s dynamic interest rate models aim to avoid such issues by guaranteeing that the interest rate curve can respond to extreme protocol utilization. 

0VIX offers cross-market lending, allowing users to supply one asset and borrow another, improving the utility and liquidity of the money market. But listing new assets can be a double-edged sword since it exposes the protocol to new attack vectors. 0VIX conducts deep due diligence before whitelisting new assets and runs extensive price simulations to stress-test the parameters, finding optimal utilization while mitigating protocol risk in a data-driven way.

0VIX serves as the foundation layer on which other protocols and enterprises can build complex financial products using Polygon Edge, a customizable blockchain stack. This positions the project as Polygon’s core lending protocol and a stepping stone to mainstream DeFi adoption.

Timeswap: Oracle-Free AMM-Based Market

Timeswap is an AMM-based decentralized money market protocol that does not use oracles or liquidators. Unlike Uniswap, where assets can be swapped in real time, borrowing on Timeswap involves swapping tokens until repayment is completed. Lenders provide Asset A for borrowing, while ‘protecting’ a certain amount of Asset B that borrowers use as collateral. Users can tailor their risk profiles to have higher interest rates at lower collateral ratios and vice versa.

This design allows for the protocol to support both blue-chips and a long tail of assets. Also, the collateral ratios and interest rates are entirely determined by supply and demand making it a more accurate reflection of the market than Aave or Compound, which have collateral ratios set through governance votes. Each liquidity pool on Timeswap is an independent market, but only one pool currently accepts MATIC as collateral for USDC loans. 

One of the most promising experiments on Timeswap is the Initial Debt Financing Offering. IDFO is the DeFi version of a company selling bonds to raise capital. Through Timeswap, DAOs and DeFi projects can raise funds by supplying their native tokens as collateral in order to borrow assets like USDC, WETH, and MATIC. So long as the community and supporters believe in the project's ability to repay, they can earn interest and help the project grow without having to sell tokens and dilute supply.

Market.xyz: Isolated Lending Markets

Market aims to simplify the lending space for communities by segregating the risk of each collateral type. With Market’s isolated markets users can supply multiple types of assets into liquidity pools and avoid potential macro-protocol issues because these assets are limited for borrowing and lending within the specific market. This means any one market can’t  jeopardize the entire protocol.

Isolated lending market safety allows for a longtail of assets available for lending and borrowing within the protocol. This improves the liquidity and utility of the assets within markets, as users can now borrow against them as collateral. DAOs and protocols can leverage Market to set up isolated markets for their assets and, more importantly, their governance tokens. Community members of these protocols can supply their assets to a market, meaning users no longer need to sell their governance tokens or assets to realize liquidity. 

There is almost $11.5 million of TVL currently deposited across nine Polygon-based markets. The types of markets range from typical two-asset paired-liquidity pools such as USDC-MATIC to forex pools made up of 11 coins of different currencies.

Teller: Backbone of Undercollateralized Lending

Teller Finance is an undercollateralized lending ecosystem that currently has three protocols on Polygon: USDC.homes, SG.loans, and CreditFi. Teller computes borrowers' credit scores using off-chain personal and financial data and proprietary credit risk algorithms. Teller securely relays the credit assessment on-chain once it has been computed. 

USDC.homes allows borrowers to secure mortgages of up to $5 million in Texas by using their crypto assets as collateral without having to liquidate their holdings. Users only need to provide a 20% downpayment to finance the remaining 80% of the home's cost. SG.loans, in collaboration with Signum Capital, offers Singapore residents personal unsecured loans up to $6,000 in USDC. CreditFi provides lender-backed travel insurance. Lenders on USDC can earn up to 15% APY.

With more than 19,000 dApps running on Polygon there is a lot more to explore, so be sure to check out our ecosystem page. Tune into our blog for the latest on Polygon. And let’s bring the world to Ethereum! 

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