Original source: Nansen
Original source: Nansen
Polygon is a sidechain ecosystem that introduces a number of scaling solutions aimed at making DeFi and NFTs accessible to a wider range of users. Polygon bills itself as Ethereum's Internet of Blockchains and claims to offer scalability without sacrificing security. It is considered an "L2" scaling solution built on top of Ethereum, enabling higher throughput and lower transaction costs.
At its core, Polygon is a series of blockchains that help scale Ethereum. Polygon can be split into two central components; the PoS Polygon sidechain running in parallel to the Ethereum chain and ZK Rollups securing Polygon on top of the Ethereum chain, in addition to many other chains in development.
Nansen Polygon data page
Polygon has been a huge success so far, with a data page provided by Nansen showing that the Polygon network handles roughly three times as many transactions as Ethereum on average, approaching 3 million transactions per day.
Why is network scalability important?
Bitcoin is designed as a decentralized alternative to the current monetary system, a currency that serves three core purposes: as a store of value, as a unit of account, and as a medium of exchange. Underlying these uses is the hidden assumption that money works efficiently, a natural assumption given the observable ease of use of fiat money in the modern world. While many digital assets launched since Bitcoin have retained this core ideological belief, for all their shortcomings, centralized systems tend to be fast and efficient, while decentralized alternatives still struggle to match.
Therefore, scalability has become a core issue in the field of encryption. Throughout this article, "scalability" will be loosely defined as the ability to efficiently utilize a given system, regardless of total users and total transaction volume at any point in time. Ethereum represents the origin of decentralized finance, the first Turing-complete blockchain with the ability to execute smart connections. However, the network remains slow and cumbersome, governed by an auction-based blockspace model. Ethereum processes an average of 13 transactions per second, and given the sheer number of people transacting on the network, it often becomes congested, which causes the cost of interaction (gas fees) to rise. Hence, the lack of scalability of the Ethereum network is one of the biggest problems that the digital asset must overcome before it can be adopted on a global scale.
Sidechains Sidechains VS Rollups
The core difference between sidechains and Rollups is security. Sidechains operate independently and are responsible for confirming and processing transactions; thus requiring their own consensus mechanism, and subsequently, sidechains are responsible for security. Sidechains run parallel to Ethereum, so a bridge between the two networks is required. In contrast, Rollups rollups run on top of the Ethereum network and are thus protected by the underlying Ethereum layer.
Sidechains allow for the deployment of smart contracts and ecosystems that run in parallel, while rollups focus on increasing throughput by moving computation off the Ethereum mainchain. Aggregate batches of transactions and return a summary of the data to the Ethereum chain.
Polygon provides two scaling solutions, but is increasingly moving in the direction of Rollups aggregation.
How do Polygons work?
Layer 1 blockchains such as Ethereum act as the base blockchain. They are the infrastructure on which decentralized applications are built. They include consensus mechanisms and native tokens. Layer 2 solutions are built on top of the Layer 1 network, forming a second layer on top of the base layer. These second-layer scaling solutions often rely on the base layer for security and consensus. The second-layer network takes batches of transactions from the main chain or parent chain, processes them, and returns aggregated data to the main chain.
Polygon's PoS (Proof of Stake) sidechain is an EVM (Ethereum Virtual Machine) compatible blockchain. It uses the same coding or language as Ethereum, so developers can port their DApps easily, and hundreds of developers have already done so. PoS sidechains run alongside the Ethereum parent chain, with participants bridging their assets between chains and using the same DApps, but with much lower transaction costs. The sidechain can process 10,000 transactions per second, and the average gas fee is a fraction of a cent, making it more accessible to the average user. As more and more transactions happen on the PoS sidechain, it will naturally reduce congestion on the main Ethereum network.
Polygon's other scaling solutions are primarily ZK Rollups (Zero Knowledge Rollups). These techniques essentially bundle or “rollup” batches of transactions into a single transaction, execute it, and return transaction data to the parent chain.
Why is Polygon popular?
Polygon's current PoS chain has over 172 million unique addresses, over 300,000 active addresses, and processes over 2 million transactions per day. Daily transaction volume peaked in June 2021 with more than 9 million transactions. According to DeFiLlama, Polygon’s PoS sidechain has 310 DeFi protocols and has a TVL (Total Value Locked) of $1.3 billion, making it the fifth largest ecosystem.
Advantages and disadvantages of Polygon
Polygon's strengths are its speed and scalability. It can process thousands of transactions for users at very low cost, making it ideal for beginners and those who want to explore the possibilities of DeFi. Polygon has a symbiotic relationship with Ethereum. Although Polygon is far more dependent on Ethereum than Ethereum is on Polygon, overall, Ethereum growth is a net gain for Polygon.
Polygon has relatively few disadvantages. It faces stiff competition from projects like Optimism and Arbitrum, and TVL has recently dropped as liquidity has shifted to other second-layer scaling solutions. Polygon is also not fully autonomous, so in the improbable scenario that the Ethereum network ceases to exist, Polygon would disappear as well.
The impact of Ethereum's merger Merge on Polygon
The Ethereum merger is a change in the consensus mechanism from PoW (Proof of Work) to PoS (Proof of Stake), with no change in the scalability of the network. Gas costs remain the same, as does the processing power of the network, so Polygon remains critical to providing scalability. The only effect merge has on polygons is the environment effect. The merger increased the energy efficiency of Ethereum, so Polygon is now more environmentally friendly.
What is Matic Token?
MATIC is the native token of the Polygon Network, powering the ecosystem. It has a total supply of 10 billion, with 8.73 billion in circulation. Users can stake MATIC to help improve the security of the PoS sidechain and receive MATIC in return. Currently, MATIC is an inflationary token due to staking rewards, but MATIC will eventually become deflationary thanks to Ethereum Improvement Proposal (EIP) 1559, which went live on Polygon in January of this year. This saw a portion of the underlying transactions burned, with a total of 3.1 million MATIC tokens burned to date. Matic Network, founded by three Indian developers Jaynti Kanani, Sandeep Nailwal and Anurag Arjun in 2017 and rebranded to Polygon in 2021, explains the difference between the project name and the token name.
Matic's token distribution is as follows:
3.8% of MATIC's total supply sold privately for the first time in 2017
19% of the supply was sold during the 2019 ICO (Initial Coin Offering)
16% of the supply is reserved for the team
4% of supply reserved for advisors
12% of supply is reserved for staking rewards/network operations
22% of the supply is reserved for the Polygon Foundation
23% of supply reserved for ecosystem tokens
Usage of Matic Token
MATIC has the same use cases as other digital assets and can be used for digital payments. It can be staked to generate a source of passive income. It is also used to pay transaction fees within DeFi when interacting with DApps on Polygon.
An important field of MATIC is the NFT field. Many creators are minting NFTs on the Polygon network due to lower costs, and NFT traders are taking advantage of Polygon's low transaction costs to buy and sell NFTs. Polygon has also recently partnered with Disney and Starbucks to launch their respective NFT product lines.
How does Polygon's cross-chain bridge work?
Blockchains remain siled due to the adoption of different rules and consensus mechanisms. This prevents the exchange of value and information between sovereign chains, and there are bridges that connect blockchains and allow the free flow of assets and data. Polygon Bridge works straight away. When tokens are bridged from Ethereum, these tokens are locked so that the circulating supply remains constant. The same number of tokens are minted 1:1 on the Polygon network. When tokens are bridged back to Ethereum, tokens on Polygon are burned and tokens on Ethereum are unlocked.
The Future of Polygons
An important consideration for the future of Polygon is the eventual implementation of sharding on the Ethereum network and the completion of ETH 2.0.
As more decentralized applications are being built, developed and deployed every day. Ethereum cannot meet demand, and this pain point will become more acute as user usage increases. Layer 2 scaling solutions will remain indispensable, an acknowledgment from Ethereum developers: “The Ethereum ecosystem firmly believes that layer 2 scaling is the solution to the scalability trilemma while maintaining decentralization and The only way to be safe."
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