Polygon (MATIC) is the first really successful sidechain. It is at the start almost everywhere where Ethereum is scaled. We take a look inside the gearbox.
Sometime last year, as a double hype surrounding DeFi and NFTs was brewing, fees on Ethereum exploded. Demand for smart contracts had far exceeded Ethereum's capacity.
Polygon (Matic) was there at exactly the right time. One application after another integrated the sidechain: the leading NFT platform OpenSea, the decentralized exchanges Uniswap and SushiSwap, the lending platform Aave. Even Adidas, Prada , Instagram and RAF Camora build their NFT projects on Polygon, while PayPal competitor Stripe can receive stablecoin dollars via the sidechain. And so forth.
Polygon has come a long way. Farther than any other sidechain, whether on Ethereum where it is unrivaled, or on Bitcoin where Liquid and Rootstock remain a haunted house. More than 19,000 dapps are now using the sidechain, according to the Polygon website.
Polygon is the first truly successful, massively commercialized sidechain. It could be the “layer 2 scaling” event the ecosystem has been waiting for: proof that blockchains can scale in layers.
Time to take a closer look at Polygon .
Like Ethereum, but cheaper and faster
Polygon is fully compatible with Ethereum, both for smart contracts and wallets. Anyone who knows Ethereum can also do Polyon, whether as a developer or as a user.
For example, if you use Metamask as a wallet, it doesn't take half a minute to align it with Polygon: you just have to switch networks. The online guide does not need three paragraphs.
Full compatibility and low fees - these were the two factors that made Polygon so successful. By March 2021, the blockchain was seeing around 100,000 transactions a day. Other chains, such as Cardano , pride themselves on such a number, but for Polygon it was just the beginning. It can hardly be seen in the chart today.
From April or May, the number of transactions exploded to more than a million a day. In the summer of 2021, the DeFi and NFT summer, it peaked at almost nine million. That's a good 100 per second.
The number has now settled between 2 and 3 million and Polygon has firmly established itself as a pillar of the ecosystem: most major tokens, NFTs and dapps on Ethereum are Polygon-enabled.
If you use the sidechain instead of the mainchain, you save massively on fees. Currently, an ERC transfer costs about $1.1 on Ethereum and 2.6 cents on Polygon. You save even more with more complex operations, such as a change on a DEX or the minting of an NFT.
These low fees despite the heavy load show that Polygon does what it says on the tin - it scales. But what price does the sidechain pay for this? To answer this question, we need to delve into Polygon's technology .
THE Polygon blockchain does not exist
The first fun fact about Polygon is that there is no such thing as THE Polygon blockchain. Hence the often added term "Matic".
Rather, Polygon is a broad framework under the title “ Polygon Edge ”. It aims to help scale Ethereum by enabling the creation of “optimized instances of Ethereum that are as flexible and scalable as standalone blockchains, but as secure and interoperable as Ethereum.”
Edge breaks the technology down into modules: the consensus algorithm, networking, smart contract language, interoperability, bridges, and more. You can put together your own desired blockchain and, the website promises, start it with a click.
Matic, the flagship product from Polygon
The flagship of Polygon is clearly the Matic Sidechain. This is also called Polygon PoS because it creates the consensus on the proof-of-stake process.
This one is an own creation. According to the white paper, it works on two levels: the stakers and the block producers. The stakers freeze their Matic tokens on the Ethereum blockchain and choose the block producers. These form the blocks on the Matic sidechain. At certain intervals, stakers place a checkpoint on the Ethereum blockchain, making past Matic transactions just as final as on Ethereum.
According to the white paper, this two-layer consensus algorithm allows new blocks to be created and verified incredibly quickly, while maintaining a high level of decentralization and security.
There was a hack at the end of 2021. But the loot was manageable (just over two million dollars) and core functions were not touched. There hasn't been an incident since then; the ecosystem seems to think Polygon is safe enough.
A bridge connects the two blockchains for the users. The PoS bridge or the plasma bridge take care of that.
If a user wants to bring a token from Ethereum to Polygon, all they have to do is place it in a smart contract. The contract freezes the token, after which it is duplicated on Polygon. This happens automatically as the polygon nodes synchronize the states of both blockchains and of course the bridge works both ways.
In order for tokens to be available on Polygon, developers (or users) must "map" them. Thanks to the easy-to-use tools , this should take no more than a few minutes. Advanced smart contracts are a bit more complicated, but also an easy exercise with good developer tools.
Matic is in the center of Polygon. But the framework goes further than that. It offers other consensus algorithms, such as Proof of Authority (PoA), a Ripple-style voting mechanism that debuted on an Ethereum testnet but is stable enough to power real blockchains as well.
A main focus of Polygon Edge is rollups. In addition to sidechains, these form the second pillar of the complex scaling of Ethereum. Basically, Polygon is competing with its own Matic blockchain with the rollups.
Rollups do not scale with another blockchain, but rather with a mostly central party gutting the transactions and storing their results in a smart contract on Ethereum. This saves an enormous amount of space; Cryptographic methods such as zero-knowledge proofs prevent the operators of the rollups from being able to cheat.
Polygon now includes an impressive collection of rollup variants: Hermez, Zero, Nightfall, zkEVM and Miden. These differ in details, such as security, speed or privacy. Two achievements are particularly noteworthy: Hermez is said to be decentralized, and zkEVM covers all Ethereum opcodes. Both would be technical breakthroughs.
Finally, it will be about the MATIC token. This is the native token of the Polygon sidechain, and its dark side, so to speak.
In 2019, Polygon sold almost two billion $MATIC in an IEO - an Initial Exchange Offering - via the Binance exchange. With the proceeds from this token sale, the Polygon Foundation financed the development of the software and the construction of the ecosystem.
In addition, the tokens serve several purposes for the ecosystem :
Users need them to pay network fees. They are like ether at Ethereum or any other native blockchain token. This is a hindrance for the users as they have to buy the tokens first to use Polygon. Economically, this also makes Matic more of an alternative blockchain rather than a sidechain.
Stakers need the tokens to vote on who is the block producer. You can also earn interest on the tokens.
Users can use the tokens to vote on which improvements will be implemented in Polygon or Matic. This is the approach to a Polyon DAO, but as far as I can see it doesn't deserve the name yet.
As an investment, however, the token is rather mediocre. It is ranked 13th by market capitalization at just under $7 billion. At the end of 2021, this was briefly more than 20 billion; the rate had reached almost three dollars; today it is 80 cents.
Polygon price history since early 2021 according to Coinmarketcap.com
In principle, this is respectable, but it does not quite do justice to the fact that Polygon is the most successful scaling of Ethereum. The Binance Smart Chain, for example, has a market capitalization two and a half times higher with only slightly higher transaction volume.
This shows that there is no direct relationship between usage and token value. The distribution of the tokens is likely to be much more important .
The economy
When $MATIC was born in 2019, there were 2.83 billion tokens. Of those, $1.9 billion went to investors, with the rest going to the Foundation and an ecosystem fund.
Over time, the total will gradually increase by creating new tokens for stakers, developers, ecosystem funds, foundation and other parties. In 2025, the crowd will plateau at 10 billion and only grow slowly through staking.
The distribution of the tokens is extremely centralized: The "team" received 17.7 percent of the eight billion tokens that exist today, the Foundation more than 20, and the ecosystem fund more than 25 percent. Only 7 percent was distributed decentrally to the stakers and 20 percent to the participants of the IEO.
The tokens of the team, foundation and fund are vested in the long term. Recently, 1.4 billion MATIC were released from such a bond. They flowed partly to the team, partly to the Foundation, which put them into the staking contract. While this caused a stir, it all went according to plan. However, it shows that there are risks in the centralized token distribution: redeemed tokens can flood the market or, if used for staking, centralize Polygon right down to the consensus mechanism.
Similar to Ripple , this makes Polygon significantly less attractive to investors. For users and developers, on the other hand, Polygon has conquered a place in the blockchain universe that it is unlikely to give up again any time soon.
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