What Is Polygon?
A Step-by-Step Guide to One of DeFi Most Popular Blockchains
By: Rahul Nambiampurath •Beginners
Running a decentralized blockchain network, where each transaction has to be verified across thousands of nodes, demands massive computing resources.
This becomes especially problematic when the network has to deal with high traffic. On Ethereum, these traffic spikes have resulted in exorbitant ETH gas fees.
To make Ethereum affordable, the Polygon project gained traction. Polygon is what’s known as a Layer 2 blockchain, meaning it seeks to improve on Ethereum’s structure and performance.
Polygon and its native token, MATIC, have become so popular that its total value locked (TVL) is keeping pace with other blockchains such as Solana.
Let’s dive deeper into how Polygon works.
Polygon’s Funding and Development
Polygon was launched in 2017. There are four key figures involved with its creation.
Jaynti Kanani is the project’s CEO and senior software engineer, working alongside Sandeep Nailwal as the cofounder. Anurag Arjun is Polygon’s Chief Product Officer (CPO), and Mihailo Bjelic is a co-founder and another experienced software engineer.
As blockchain startups go, Polygon is well-funded, with venture capital firms investing $451.5 million in the project. They include Galaxy Digital, Sequoia Capital India, SoftBank Vision Fund 2, and Galaxy Interactive.
Why Is Polygon Needed?
Centralized computer networks tend to be more efficient in processing transactions. After all, they handle dataflow with a single cluster of servers. Whether it’s Google or Visa, this structure delivers near-instantaneous customer service.
Yet highly centralized networks may be prone to a single point of failure. Both Bitcoin and Ethereum were created to foster decentralized finance (DeFi), where one doesn’t need permission or intermediaries to access networks or apps, and can users run network nodes of their own.
While Bitcoin focused on wealth conservation, Ethereum focused on developing a smart contract framework. This way, developers can replicate traditional financial offerings, such as loans, in the form of decentralized applications.
Ethereum is the primary dApp host and covers many activities: play-to-earn games, NFT marketplaces, predictive markets, insurance, borrowing, lending, and exchanges.
During 2020 and 2021, dApp popularity exploded. At one point, in December 2021, Ethereum’s TVL reached nearly $135B billion before coming back down to earth.
Ethereum TVL: Source: Defi Llama
That spike in popularity aligns with Ethereum’s enormous fees. It was common to see triple-digit dollar sums for simple token transfers from one wallet to another in December 2021.
Ethereum Average Tx Fee: Source: TheDAOMaker
Over time, this forced developers to import their dApps into the Polygon sidechain, as a side road that relieves traffic from Ethereum’s main highway.
Not only are Polygon’s transactions faster compared to Ethereum’s 15 tps, at +7,000 tps, but they are also negligible.
Polygon Gas Price: Source: CoinTool
In short, Polygon is starting to play a critical role in Ethereum’s mass adoption. As of August 2022, Polygon has a $2.04 billion TVL, which is on the same level as Solana blockchain, at $2.1 billion TVL.
This is quite significant, as Solana was supposed to be Ethereum’s main alternative. By the way, the trend is moving, it seems that Layer 2 scalability solutions like Polygon will be more successful.
How Does Polygon Work?
Like all other Ethereum alternatives, Polygon is a Proof-of-Stake (PoS) blockchain, which replaces Proof-of-Work’s (PoW) energy expenditure with economic staking. Needless to say, this makes PoS blockchains more scalable for mass adoption, which is why Ethereum itself is transitioning from PoW to PoS, dubbed The Merge.
By the time Ethereum’s The Merge happens, the network should lower its energy footprint by 99.95%. Polygon already performs at that level. Just like with other PoS blockchains, people running Polygon nodes are called validators. They verify transactions and receive the network’s native token — MATIC — in return.
Polygon’s incentives are further tweaked by having two types of network engagement:
- Validator: They run full nodes, containing entire blockchain copies. These copies are synced and updated with every new block (transaction) added to the chain. If validators are misbehaving, such as verifying false transactions, or having an unreliable internet connection, their MATIC stake could be slashed.
- Delegator: Instead of running full nodes, delegators select which validators should serve as public validator nodes. This way, delegators share with validators both risks and rewards. The more MATIC tokens they have, the greater their voting power to select validators.
Based on this dual incentive structure, the Polygon network uses a web of supernets to route Ethereum’s load.
Developers can then use Polygon’s open-source software development kit (SDK) to launch their dApps. They are fully Ethereum-compatible, taking advantage of one of three scalability techniques:
- ZK-Rollups: zero-knowledge (ZK) scaling method that rolls up multiple transactions into a single batch, relieving network congestion. Furthermore, because this technique uses zero-knowledge cryptography, it uses validity proof which immediately verifies transaction validity.
- Optimistic Rollups: Just like ZK-Rollups, optimistic rollups batch up multiple transactions into a single one. However, this method doesn’t use validity proof. This means that the transaction is assumed to be valid until proven otherwise, which is why it is called “optimistic”.
- Plasma Chains: Another roll-up method, but into individual sub-blockchains. This creates a child-parent relationship to Ethereum’s main chain. As such, plasma chains deploy their own smart contracts, which is quite beneficial if other sidechains are hacked or go down. Furthermore, plasma chains deliver transactions off-chain at greater efficiency.
At this point of development, it is difficult to say which scalability method will win out. They each have their own advantages and disadvantages. Typically, there is a mix of optimistic and zk-rollups, represented by Polygon Zero, Polygon Nightfall, Polygon Miden, and Polygon Hermez.
Overall, when one references Polygon, they mean Polygon PoS as the supernet umbrella. Thus far, the Polygon network processed over 1.3 billion transactions at an average fee 10,000x lower than on Ethereum.
Ethereum Total Number of Nodes Source: Etherscan
What is important to keep in mind is that all of Polygon’s rollup techniques make the Ethereum experience faster, but without sacrificing decentralization or security.
That’s because rolled up transactions are returned to the main chain, Ethereum, as one of the most decentralized networks with 9,570 nodes.
Polygon’s Native Token: MATIC
Just like Ethereum has its ETH as the network’s currency, Polygon has MATIC. This is both a utility token to pay for dApp fees, and a governance staking token in use by the aforementioned validators and delegators. Unlike Ethereum, Polygon staking has no minimum requirement, as just 1 MATIC is enough.
As of August 2022, Polygon staking offers up to a 14.3% annual percentage rate (APR), which can be calculated using the reward calculator. Across 100 global validators and over 15,000 delegators, investors have staked over $2.4 billion worth of MATIC tokens, already having distributed $545.8 million in rewards.
Unlike Ethereum, which has an uncapped maximum supply of ETH, there are in total 10 billion MATIC coins, out of which 80% are in circulation. Due to steady integrations by businesses, such as Reddit, Yuga Labs, Disney, and others, the MATIC token has even outperformed Ethereum in the second half of 2022.
ETH vs. MATICPolygon’s Matic token has outpaced ETH. Source: TradingView
From May to August 2022, MATIC outperformed ETH by nearly +60%. Nonetheless, due to the bearish market caused by the Federal Reserve’s interest rate hikes, MATIC is still down -69% from its all-time high of $2.92 in December 2021.
Polygon is dominated by dApps offering lending services. Among the top ones is Aave, at 21.4% share, imported from Ethereum. Other most popular dApps are also for decentralized finance (DeFi).
Top 10 Polygon dApps. Source: DefiLlama
If one is looking at Polygon’s blockchain gaming dApps, this aggregator is a fine tool for all play-to-earning needs. Speaking of blockchain games and their NFTs, Polygon even got integrated into OpenSea, as the largest NFT marketplace, described as a gasless NFT minting experience.
How To Access Polygon?
If you are already using Ethereum, you are most likely using the non-custodial MetaMask wallet as your browser extension. This is the most streamlined way to connect to the Polygon network, by simply switching the network from Ethereum Mainnet to Polygon MainNet.
Once connected, one can then visit any Polygon dApp available. Lastly, to transfer cryptocurrency or NFTs from Ethereum to Polygon, and vice-versa, you have to visit Polygon Bridge, using the MetaMask wallet to bridge the funds. Sending cryptos to Polygon means depositing them, while sending assets to Ethereum means withdrawing them.
Given that Ethereum will always need sidechains, even after its ETH 2.0 transition, it is reasonably safe to assume that MATIC token is poised to appreciate and go above its previous ATH. As you have seen, it is very easy to access and use, making it an indispensable infrastructure for the growing DeFi ecosystem.
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.