Polygon Guide

Polygon: Harnessing Layer 2 Solutions to Create Ethereum's Internet of Blockchains

Polygon is a company that grants developers access to Layer 2 solutions for Ethereum. It offers a growing suite of products - most notably its main chain, Polygon PoS.

Polygon used to be called MATIC, and its native token has retained this original name.

- Launch date: 2020
- Amount secured on Polygon PoS (July 2023): US$5bn
- MATIC’s market cap (July 2023): US$6.8bn

Polygon At a Glance

Highly Scalable

Polygon powers a Layer 2 scaling solution that enables it to process up to 65,000 transactions per second - a major improvement compared to Ethereum’s current capacity.

Accessible & Stable Transaction Fees

Polygon’s transaction fees are lower than other blockchain networks’. In addition, the fees are predictable, which reduces volatility risks.

Interoperable

Polygon can work seamlessly with different blockchains, enabling decentralised applications (dApps) that interact with multiple networks.

Developer-friendly

Polygon supports many programming languages, and provides strong community support for developers, including funding.

Key Figures

A Layer 2 for Ethereum

Polygon is an ETH Layer 2, meaning it’s built on top of the main network (Ethereum) to provide additional services.

Polygon’s founders were frustrated by what they considered to be ETH layer 1’s main drawbacks: delays and high gas fees, resulting in a poor user experience and limited capabilities.

Polygon therefore tries to solve these issues by moving transactions off the main Ethereum network, in order to improve scalability, improve throughput, and reduce costs. 

This is how a transaction flows through a dApp that uses Polygon PoS:

1. Users interact with the app at the execution layer - for example, launching a transaction. 

2. This transaction is put into blocks on the Polygon PoS Chain. 

3. Nodes validate transactions on the security layer, which runs parallel to Ethereum. 

4. Randomly selected nodes send confirmation messages to Ethereum through checkpoints. 

Learn more about Ethereum and Layer 2s in our Ethereum Guide.

Polygon is therefore tightly linked to Ethereum, providing products that fit a variety of user needs - making different security and flexibility trade-offs in the process:

• Sovereign independent chains (Polygon Supernets): they rely on their own security layer, and connect to Ethereum via bridges.

• Chain with its own validator set, but deriving part of its security from Ethereum (Polygon PoS).

• Customisable enterprise-specific blockchains (Nightfall)

• Rollup scaling solutions that derive full security from Ethereum. Unlike its competitors Arbitrum and Optimism, Polygon does not rely on optimistic rollups (trust-based model with validators and witnesses) but favours ZK-rollups which use zero-knowledge proofs for secure, private transaction verification at the cost of slightly lower scalability.

Polygon relies on a Proof of Stake (PoS) consensus mechanism. In a PoS protocol, validators must lock (stake) tokens. They are then randomly selected to validate transactions and create new blocks. In return for maintaining the security of the network, they are rewarded with a portion of the block’s value. 

Polygon’s staking rewards currently stand at ~4.7% APY.

History

Polygon was founded in 2017 under the name Matic, by a group of crypto entrepreneurs and developers looking to improve Ethereum's scalability. The team has since grown to build a full technology stack for Web3.

Key milestones:

• 2020: Mainnet Polygon PoS, Polygon’s first blockchain, is launched, powering 7 million transactions across 200k addresses.

• 2021: Matic rebrands to Polygon. 

• 2022: Polygon hits 200 million addresses.

• 2023: Polygon zkEVM Mainnet Beta is launched.

   

What's next?

Polygon zkEVM is a zero knowledge scaling solution that is equivalent to the Ethereum Virtual Machine: the vast majority of existing smart contracts, developer tools and wallets work seamlessly within the two environments.

Use cases across many industries

Polygon’s solutions can be deployed in many industries, most notably:

• Decentralised Finance (DeFi). Polygon can speed up transaction and settlement time for a low cost. 

• NFTs. Polygon supports NFTs: any asset can easily be bridged from ETH to MATIC, with reduced transaction fees. 

• Retail. Polygon has partnered with Starbucks to integrate NFTs with its loyalty program. 

• Web3. More generally, Polygon’s flexibility and ease of use make it an excellent candidate for creating decentralised apps (dApps), powering the next version of the internet. 

CoinShares’ Analysis

Polygon sits in a middle position between layer 1s (Solana, Avalanche) and layer 2s (Arbitrum, Optimism). It falls short of its layer 1 competitors when it comes to security, decentralisation and adoption, but it’s ahead of its layer 2 competitors in these same categories. Most metrics position it as a market leader, and it could become a major Web3 player in the years to come.

But there are risks to take into account. Polygon is strongly dependent on Ethereum, making it very susceptible to any evolution ETH undergoes. Its Zero-Knowledge technology is innovative and promising - but it’s also in its very early stages and unproven.

Strengths 

• Market leader across most metrics. Polygon is ahead of its main competitors Optimism and Arbitrum in terms of daily active addresses and number of transactions. 

• Robust ecosystem. Polygon has over 37,000 applications and over a million users integrated into the Polygon network via the Coinbase wallet.

Weaknesses

• Heavy reliance on Ethereum. The demise of Ethereum or the rise of other blockchains could negatively impact Layer 2 traction and adoption. 

• Low  decentralisation. Polygon PoS’s  distributed validator set is pretty low, featuring 100 active validators. This could have security consequences.

Opportunities

• Network effects. If it fulfils its promises, Polygon’s zkEVM should allow all apps on Ethereum to transfer seamlessly over to Polygon. 

• Many use cases, one token. Each chain under the Polygon umbrella has its own total addressable market for different use cases, all using the MATIC token to accrue value.

Threats

• Users favouring speed over decentralisation. They would then flock to competing blockchains such as Solana, which are faster but less decentralised. 

• Experimental technology. Unlike optimistic rollups, which are production ready, Zero Knowledge Proofs are still being tested.  In addition, Ethereum's transaction capacity may vastly improve after the Surge, one of its next development stages.