Growspace Research: Polygon (MATIC)

Updated: Oct 11


Introduction


Ethereum’s exceptional adoption has been both a boon and a curse for the network. Large amounts of traffic on Ethereum has rendered it clogged leading to high fees and slow transaction speed. The transaction throughput of Ethereum is roughly 15 transactions per second. Here comes Polygon to the rescue. Polygon acts as an infrastructure, just like Ethereum, where you can deploy decentralized apps and conduct transactions. Such solutions are called Layer 2s as they operate as add-on layers to the underlying blockchain, in this case the Ethereum blockchain. Polygon provides a set of Ethereum scaling solutions from PoS chain (which provides a throughput of upto 7000 transactions per second) to zkEVM to solutions for creating custom public and private blockchains and is intending to create Ethereum’s internet of blockchains, as stated in their lightpaper.


How does Polygon work?


Based on their lightpaper, Polygon supports 2 kinds of Ethereum-compatible blockchains- stand alone chains and secured chains.


Stand alone chains are very similar to sidechains, as in they are fully independent and provide projects built on them with a very high amount of flexibility. But, the disadvantage here is that they need to figure out their security by themselves, which is not a very easy task because of the difficulty in finding the required number of validators to ensure sufficient security. Such blockchains are useful for enterprise networks and established projects with strong communities.


Secured chains are less independent than stand alone chains but they do not need to worry too much about security as they use ‘security as a service’, provided either by Ethereum directly (via fraud proofs or validity proofs) or by validators in the Polygon ecosystem, instead of establishing their own validators. Such blockchains are useful for startups and security-focused projects.


All the Polygon offered solutions (Polygon PoS, Polygon zkEVM, Polygon Avail, Polygon Edge, Polygon Hermez, Polygon Nightfall, Polygon Maiden, Polygon Zero) lie in this spectrum of stand alone and secured chains. Developers can choose any of Polygon's scaling solutions based on their objectives. They could be building a custom independent chain using the Polygon Edge, or could just directly deploy their smart contracts on the Polygon PoS chain.


Now let’s have a look at Polygon’s architecture, which consists of 4 abstract composable layers:



Source: Polygon Lightpaper


Ethereum layer- Through this layer Polygon chains can use Ethereum (arguably the most secure blockchain in the world) to host and execute any mission-critical component of their logic.


Security layer- It is a specialized, optional layer that provides “validators as a service" through a set of validators that can periodically check validity of any Polygon chain for a fee.


Polygon Networks Layer- An ecosystem of sovereign blockchain networks built on Polygon. Each of these networks serves its respective community. As mentioned in the above infographic, this layer handles functions like: Transaction Collation, Local Consensus, and Block Production.


Execution layer- This layer serves the core function of transaction execution. Basically, it interprets and executes transactions that are agreed upon and included in Polygon networks’ blockchains.


Value Proposition


Polygon aims to solves scalability issues for Ethereum and is building the following suite of scaling solutions:



Source: https://polygon.technology/


Competitive Analysis


There are various techniques being used by different scaling solutions like rollups, sidechains, and plasma chains. Key competitors of Polygon that have gained significant traction are Arbitrum and Optimism. Both of them operate using a kind of rollup called optimistic rollup.


Rollups execute transactions outside of layer 1 (Ethereum here) and then post the data back to layer 1 where the consensus is reached. As the transaction data is being included in the layer 1’s blocks, this enables rollups to be secured by the layer 1 blockchain’s security. Rollups are of 2 kinds:


Optimistic Rollups- They assume the transactions to be valid by default and run computation via fraud proof in case of a challenge to validity of submitted transactions. More on optimistic rollups.


Zero-knowledge Rollups- They run off-chain computations and submit validity proofs on the layer 1 blockchain. More on zkRollups.


Polygon PoS chain is a commit chain that essentially lives on Ethereum, giving it the security of Ethereum. It’s also where most of the projects on Polygon are deployed. A project can take their existing smart contracts deployed on the main chain and deploy them directly on the PoS chain.


Following key metrics indicate Polygon to be a major and dominant contender in the Ethereum scaling space.


1. Total Revenue



Source: Token Terminal


Above chart shows the fees generated by each network and for the most part there hasn’t been a clear trend of any one network generating the most fees for a prolonged period of time. However, for the past few months, almost since the start of July 2022, Polygon has stayed at the top.


2. Daily active users



Source: Token Terminal


Polygon is clearly the dominant one in terms of usage, which indicates adoption- one of the key factors dictating success of any blockchain network.


Tokenomics


The MATIC token is used mainly for 2 purposes:


1. Pay transaction fees on the Polygon network: This fee, paid in MATIC, acts as an incentive for miners/validators to process and verify what you're trying to do.


2. Secure the network via staking: Polygon operates on Proof of Stake consensus mechanism which requires staking of MATIC tokens to reach consensus on the network. By staking MATIC, users can secure the Polygon network and earn inflationary MATIC rewards.


According to the Polygon’s website, MATIC will in future become a governance token as well and MATIC holders will be able to participate in governance voting on Polygon Improvement Proposals (PIPs).


The initial allocation of MATIC in April 2019 was as follows:



Source: https://messari.io/asset/polygon/profile/launch-and-initial-token-distribution


At the time of writing, MATIC circulating supply is close to 8.73 billion MATIC tokens (https://coinmarketcap.com/currencies/polygon/ ). Total supply of MATIC is capped at 10 billion tokens. The remaining tokens will be unlocked periodically over the next few years, mainly to be paid out through staking rewards.


Release schedule of MATIC is as follows:



Source: https://messari.io/asset/polygon/profile/supply-schedule


Polygon also brought an upgrade (EIP-1559) in January 2022 to burn a certain amount of transaction fees. Basically, the transaction fee paid by a user comprises 2 components, base fee and priority fee. When a user pays for a transaction, the base fee component gets locked on the burn contract on Polygon and the priority fee is paid to validators. This means, as the adoption of the Polygon network rises, more and more MATIC will be burned which would lead to MATIC becoming deflationary at some point in future.



Source: Token Terminal


Above graph shows the share of transaction fees burned, as of 13th August 2022.


Key Metrics


1. Network growth



Source: Polygonscan


Polygon network has clearly shown a consistent growth in acquiring new users on its platform.


2. Daily Transactions



Source: Polygonscan


Although the number of daily transactions peaked somewhere in mid 2021, the figure has stayed more or less within the 2-4 M transactions/day range in 2022.


3. TVL



Source: Defillama


Polygon network is one of the largest in terms of the amount of assets locked, and ranks 5th among all the blockchains based on TVL (as of 15th September 2022, Defillama)


4. Revenue generated


Source: Token Terminal


Above chart shows the fees generated, which peaked in January 2022, and has stayed in the $1-$2 million range for the year 2022 with the exception of May.


5. All time NFT sales volume



Source: Cryptoslam.io


Polygon ranks 5th highest among all blockchain in terms of the NFT sales volume (all-time).


Growspace Thesis


Polygon has clearly made its name in the Ethereum scaling solution space. The blockchain platform has: (data as of 14th September 2022)






  • Established partnerships with the likes of Starbucks, DraftKings, Adobe, and Stripe.


As crypto adoption rises, the need for reliable scaling solutions is going to rise as well and Polygon has displayed the ability to both level up technologically, as well as build important partnerships and develop the dapp ecosystem needed for a blockchain to become economically successful.


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