BEXL CAPITAL

Polygon (MATIC)

Lucia Uwalaka    |    Nov 21, 2021

Polygon (MATIC)

Polygon (MATIC) logo

Polygon, originally known as Matic Network, is a protocol and a framework for building and connecting Ethereum-compatible blockchain networks. It was designed to solve pain points associated with blockchains, like high gas fees and slow speeds, without sacrificing security.

For context, Ethereum, the most widely used smart contract platform, has limitations of low throughput (number of transactions that can be processed simultaneously), poor user experience (in terms of high gas fees, and delayed Proof of Work finality), and no sovereignty. Other smart contract platforms which boast of a higher transaction throughput compromise on decentralization to improve speeds, while most of the forthcoming solutions propose developing their own blockchains, neglecting the massive developer community and ecosystem currently on platforms like Ethereum, and the billions of dollars of market cap that dApps and other projects have already created on such platforms.

A number of projects are exploring Ethereum-compatible blockchains as a way to mitigate high gas fees and slow speeds while still leveraging Ethereum’s thriving ecosystem. However, there is no specialized framework to build such blockchains nor a protocol to connect them, leading to significant development challenges and ecosystem fragmentation. This is the problem Polygon aims to address.

As an ​off/side chain scaling solution for existing platforms, Polygon provides scalability and superior user experience to dApps/user functionalities, thus tackling scalability and usability issues while leveraging the existing developer community and ecosystem and not compromising on decentralization. It aims to create "Ethereum's internet of blockchains,” the multi-chain ecosystem of Ethereum-compatible blockchains, by providing a simple-to-use framework that allows developers to launch their own custom Ethereum-compatible blockchain in a single click. Developers will also be able to create standalone blockchains using the Polygon Software Development Kit (SDK), and all these blockchains will be interoperable.

Background

Matic Network was founded in 2017 by Jaynti Kanani, Sandeep Nailwal, and Anurag Arjun, three seasoned software developers. Jaynti Kanani is one of the architects of More Viable Plasma (MoreVP), an improved version of the Plasma scaling solution for Ethereum originally proposed by Ethereum’s founder, Vitalik Buterin, in 2017.

The Matic Network launched in May 2020, not long after India lifted its first cryptocurrency ban. It was later rebranded to Polygon in February 2021 as the scope of the project expanded. While Matic was a simple layer-2 scaling solution for Ethereum, Polygon is the infrastructure for a network of massively scaling, collaborative blockchains that retain their self-sovereignty.

How It Works

Polygon uses an adapted version of the Plasma Framework, thus providing fast and extremely low-cost transactions with finality on a mainchain. This is how Polygon functions:

  • A user deposits a cryptographic asset in the Matic contract on the mainchain (currently implemented with Ethereum blockchain only).
  • Once deposited, tokens get confirmed on the main chain; tokens will appear on the Matic Chain using Polygon.
  • The user can now transfer tokens to anyone they want almost instantly (Matic Chain has faster blocks - approximately 1 second or less, in contrast to Ethereum’s 14-20 seconds) for almost negligible fees.
  • Whenever users wish to, they can withdraw tokens to the main Ethereum chain by establishing proof of remaining tokens on the Root contract (deployed on the Ethereum chain).

This same method will work for any ERC-20 token or other fungible crypto assets on the Ethereum blockchain. While built on Ethereum, the original Matic Network was meant to eventually be a scaling solution for any blockchain project looking to improve its throughput. However, with the rebrand to Polygon, MATIC became focused on becoming Ethereum’s Internet of Blockchains rather than becoming a widespread solution for multiple chains. The Matic Network is still operational, just as the first of many blockchains that will make up the Polygon ecosystem.

With Polygon, any project can easily create a dedicated blockchain network that combines the best features of stand-alone blockchains (sovereignty, scalability, and flexibility) and Ethereums’ (security, interoperability, and developer experience). These blockchains will also be compatible with all the existing Ethereum tools (Metamask, MyCrypto, Remix, etc.) and can exchange messages among themselves and with Ethereum.

Polygon supports two major types of Ethereum-compatible blockchain networks:

  • Stand-alone networks: These are fully sovereign Ethereum-compatible blockchain networks that are fully in charge of their own security, i.e., they have their own pool of validators. They offer the highest level of independence and flexibility, with the tradeoff of sometimes challenging validator pool establishment.
  • Secured Chains: These networks use “security as a service” instead of establishing their own validator pool, a service provided either by Ethereum directly (via fraud proofs or validity proofs) or by a pool of professional validators (similar to Polkadot’s “shared security”). Secured chains offer a high level of security, with the tradeoff of sacrificing a portion of independence and flexibility.

Polygon’s architecture is divided into four layers:

  • Ethereum layer: All Layer 2 blockchains on Polygon will rely on this for security and consensus.
  • Security layer: This is in charge of validator management and Polygon chain validation. It lets any Polygon blockchain tap into Polygon’s core validators for security and consensus for a fee if they don’t want to leverage the Ethereum blockchain. Security as a service is also optional, meaning Polygon’s first two layers are not mandatory.
  • Polygon networks layer: It handles interoperability between all blockchains created using the Polygon SDK.
  • Execution layer: Hosts on-chain and cross-chain smart contracts.

Polygon is similar to Polkadot, Cosmos, Avalanche, etc. But stands out in the sense that:

  • It can fully benefit from Ethereum’s network effects.
  • It is inherently more secure.
  • It is more open and powerful.

A comparison between Polygon and some notable alternatives is shown below:

Comparison between polygon and notable alternatives

Table Source

The MATIC token

The MATIC token is the token that powers the entire Polygon ecosystem, largely used for paying gas fees and participating in governance. Staking is done using the MATIC token, and staking rewards range between 4% and 420% per year depending on how much of MATIC’s token supply is being staked.

MATIC tokens are released monthly. MATIC currently has a circulating supply of about 4.9 billion MATIC tokens and a maximum supply of 10 billion MATIC tokens.

At its initial private sale in 2017, 3.8% of MATIC’s max supply was issued. In the April 2019 launchpad sale, another 19% of the total supply was sold at $0.00263 per token to generate $5 million. The remaining MATIC tokens are distributed as follows:

  • Team tokens: 16% of the total supply.
  • Advisors tokens: 4% of the total supply.
  • Network Operations tokens: 12% of the total supply.
  • Foundation tokens: 21.86% of the total supply.
  • Ecosystem tokens: 23.33% of the total supply.

According to the release schedule, all the tokens will be released by December 2022.

Validators on Polygon stake their MATIC tokens as collateral to become part of the network’s Proof of Stake consensus mechanism and receive MATIC tokens in return. Members of the network who do not wish to become validators can delegate their MATIC tokens to another validator but will still participate in their staking process and earn staking rewards.

Coinbase listed the MATIC token in early March, which had a massive effect on MATIC’s price action. MATIC has seen a 10x increase since the start of the year due to some notable partnerships and also because the dApps built on Polygon are seeing some serious adoption. In February alone, Polygon logged over 200,000 unique users on the Matic Network.

Positives

  • It has faster transaction speeds that are also at a lower cost than on Ethereum, making it attractive for decentralized finance applications. Currently, the top transaction speed of Polygon (MATIC) is 65,000 transactions per second. Theoretically, this number will be scalable to millions of transactions per second.
  • Block confirmations are every 2 seconds or less, making transactions extremely quick on Polygon.
  • It is the only scalability solution that supports the Ethereum Virtual Machine (EVM). It enables connected chains to retain self-sovereign security while also ensuring interoperability between them and the Ethereum mainchain.
  • It has a lot of potential use-cases, and it is built to scale as user volume increases, which means that, in theory, it can be used for mass adoption.
  • It uses Plasma framework and rollups and can lean on the Ethereum blockchain for security and consensus. This makes it possible to reclaim user funds if anything goes wrong (referencing the last snapshot or rolled-up transaction left on Ethereum. If something goes wrong on a para chain on Polkadot, users might be unlucky if something happens to their tokens.
  • Polygon is still in its infancy, and there don’t seem to be any other solutions available. This is why Polygon has been enlisting Ethereum developers as advisors since rebranding.
  • It has no whale wallets, all large holders are smart contracts, staking pools, and exchange accounts, and there is seemingly no holder of more than 0.2% of the entire token supply.
  • Polygon is not a competitor to Ethereum like the other smart contract cryptos.
  • It currently shows an upward trend in the long term, given that it has a fixed supply, a low market cap, and it underpins a network that is increasing in utility.
  • If anything goes wrong with Optimism (Ethereum’s native scaling solution), Polygon will be the first Layer 2 Ethereum dApps will go to.

Negatives

  • A lot of tokens coming on the market every six months could seriously suppress the impressive short-term price action of Polygon due to the flood of supply.
  • Polygon’s upward trend also depends on what happens to its demand when Ethereum implements its native scaling solution, Optimism, which does not have a token, and was conceived with the express purpose of scaling Ethereum. Leading Ethereum dApps like Uniswap and Synthetics are already preparing to launch on Optimism, and exchangers like Coinbase are ready to support deposits and withdrawals directly from the Optimism layer. Optimism, like Polygon, alleviates issues related to low speeds and high gas fees on the Ethereum blockchain and seems to have the edge when it comes to network effects and adoption.
  • Optimism and Polygon are not interoperable. If someone wanted to use Optimism to complete a cheap Uniswap transaction, then deposit those tokens into Matic’s Aave smart contract; this would not be possible without interaction with the mainnet, which may be expensive and time-consuming.
  • Polygon is having a really hard time finding developers to build their new ecosystem due to the shortage of developers. This could slow down their progress as they would require developers to work on their redefined (and broadened) scope.
  • While Polygon has a lot of partnerships with multiple projects, little progress has been seen with many of these partnerships (probably due to the developer shortage that the cryptocurrency space is experiencing), and these projects are not much discussed on crypto media or Polygon’s or Matic’s blog posts on Medium but are mostly announced on Twitter.

Notable Partnerships

  • In mid-February 2021, The Graph added support for Polygon, making it possible for developers to index data from the dApps built on Polygon’s various blockchains. A week after, Polygon partnered with Chainlink to introduce verifiable randomness to the Polygon ecosystem, introducing new use cases related to gaming and gambling that rely on random number generation.
  • The Chainlink verifiable random function (VRF) may become invaluable in Polygon’s subsequent partnership with Atari because Atari also partnered with Decentraland to build a virtual cryptocurrency casino that will be powered by Polygon. Polygon will also be supporting Atari’s ATRI token and will be hosting Atari’s upcoming NFT platform.
  • Aavegotchi, an NFT platform, also announced in January 2021 that it would launch on the Polygon network because of Ethereum’s exorbitant gas fees and sold all 10,000 NFTs at its launch.
  • There are around 100 dApps built on the Matic network. However, most of them don’t seem to have much engagement; the largest dApp on Polygon by total value locked (TVL) is currently QuickSwap. This uni-swap clone holds over $ 100 million, the highest TVL of any Layer 2 decks by a wide margin.
  • The fastest-growing dApp on Polygon seems to be Decentral Games which hosts gambling games in Decentraland.

These dApps matter for Polygon because the MATIC token is used to pay for all the transaction fees on these dApps. Given the surge in demand for NFTs and virtual worlds, it is logical to assume that the demand for Polygon will continue to grow.

Exchanges Where You Can Buy MATIC Tokens

  • Binance Exchange
  • Kraken
  • KuCoin
  • Uniswap
  • Crypto.com Exchange
  • Coinbase Pro
  • Huobi Global
  • Bittrex
  • Huobi Global
  • FTX Click here to learn more.

Works Cited

https://www.youtube.com/watch?v=34wQaNSvi10&ab_channel=CoinBureau

https://github.com/maticnetwork/whitepaper

https://support.bityard.com/hc/en-us/articles/4402904183193-What-Is-Polygon-MATIC-

https://coinmarketcap.com/alexandria/article/what-is-polygon-matic

https://docs.chainstack.com/blockchains/polygon#consensus.

https://polygon.technology/technology/

Jones, Evan. “Polygon (MATIC): How to Buy, History, Pros & Cons.” CryptoVantage.com, https://www.cryptovantage.com/buying-crypto/polygon/. Accessed 17 November 2021.

“Optimistic Ethereum Versus Polygon: Which Will Scale Ethereum Better?” Bitpush News, 8 April 2021, https://bitpushnews.medium.com/optimistic-ethereum-versus-polygon-which-will-scale-ethereum-better-ba9f366ae448. Accessed 17 November 2021.

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