What’s the secret behind Polygon’s rise? Is it the “Guardian of Ethereum” or just a flash in the pan?

Wu said author | Kafka

Editor of this issue | Colin Wu

Polygon's Token Matic reached a peak price of $2.70 on May 18, and has soared more than 10 times in the past month. The total market value ranking has jumped into the top 15, and it is far ahead in the growth rate in the past 90 days. A week after the sharp drop, Matic quickly recovered from the lowest point of $0.75 to a high of $2.44. Matic's surge has attracted the attention of a large number of investors. After all, the price performance in the secondary market also reflects its value to a certain extent. What is the secret of it, commonly known as the "horseshoe"? Will it just be a flash in the pan?

Ethereum’s Dilemma

As we all know, the rapid development of the Ethereum ecosystem, especially the increasing number of users of Defi projects, is facing congestion and rising gas fees due to low TPS (processing speed per second). This has also triggered an arms race to seek scalable, decentralized, and secure solutions to reduce user costs. While Ethereum's expansion problem has not been solved, more efficient layer1 public chains such as Binance Smart Chain (BSC) have seized Ethereum's Defi market. It is worth noting that the locked position of PancakeSwap, a decentralized exchange on BSC, has surpassed Uniswap.

The impossible triangle problem of blockchain (decentralization, security, performance) has always existed, and it is often possible to sacrifice one of them to achieve the other two. Neither Ethereum nor the current BSC can solve it. BSC is only a temporary alternative in terms of speed and transaction costs, and it cannot achieve decentralization because it has only 21 nodes. The recently popular public chain Solana has achieved the extreme in terms of speed and transaction costs, and the number of verifiable nodes (594) is far less than Ethereum (11,000+), and it has not achieved complete decentralization.

The Guardian's Arrival

Although public chains such as BSC, Solana, and Fantom have seized part of the market, Ethereum, a smart contract platform with a prosperous ecosystem, still has a group of devout DeFi users and developers who hope to help it improve cost efficiency.

In 2017, three active participants from the Indian crypto community co-founded Matic to solve Ethereum's expansion problem. On February 10 of this year, the Matic Network team decided to expand the scope of their project and changed its name to Polygon.

The Ethereum expansion solution currently used by Polygon includes two expansion solutions, Plasma chain and PoS chain:

Matic PoS Chain, officially called the "commit chain". It is different from the side chain. Although Matic PoS Chain has its own consensus mechanism, it also relies on the security of Ethereum in terms of verification node staking and checkpoints. It runs in parallel with the Ethereum chain, and the chain is protected by a proof-of-stake consensus mechanism with its own verification nodes, which ensures its decentralized nature. In addition, Matic PoS Chain is compatible with the Ethereum Virtual Machine (EVM), and those Ethereum-based projects can easily migrate their smart contracts to the Matic PoS chain.

Matic Plasma Chain is Ethereum's second layer network, which is an EVM-based Plasma solution. Plasma allows users to transfer transactions from the main chain to the child chain, enabling fast and cheap transactions. One disadvantage of Plasma is that it takes a long time (7 days) for users to withdraw funds from the second layer network, while PoS Chain only takes about 3 hours. In addition, Plasma cannot be used to expand general smart contracts.

In general, Polygon uses a combination of Plasma and PoS, and hopes to improve efficiency and ensure security through expansion solutions while sharing security with Ethereum. Currently, the Polygon chain can process 65,000 TPS, far exceeding the 14 TPS of Ethereum. In terms of transaction fees, Polygon's transaction fees are about $0.00004-$0.00012, which is also far lower than the current prohibitive gas fees on Ethereum.

The Future of Polygon

The white paper of Polygon states: "Polygon is a protocol and framework for building and connecting blockchain networks compatible with Ethereum. Polygon's mission is to become an aggregator of Layer 2 solutions on Ethereum, to achieve the building performance that the Ethereum network itself cannot achieve, and to make up for the important missing links in the current Ethereum ecosystem. Polygon is positioned as a scalable solution to accelerate the adoption of the Ethereum ecosystem..."

At the same time, Polygon co-founder Sandeep Nailwal also emphasized in a media interview that Polygon's mission is always to expand Ethereum and bring the power of blockchain and Crypto to more users, and expressed respect for Ethereum founder Vitalik. It can be felt that both the founder and the entire Polygon team exude loyalty and admiration for the Ethereum community.

Currently, the core team of Polygon has turned to creating all the tools and infrastructure needed for all second-layer solutions compatible with the EVM. Their first product, the SDK (Software Development Kit), was released on May 27th, and is designed to build an Ethereum multi-chain system for creating new fully interoperable DApps, with a choice of second layers: ZK Rollups, Optimistic Rollups, Polygon PoS, State Channels, or Validium. Operators will be able to choose whether to fully integrate into Ethereum's security layer or run their existing PoS chain solutions. Polygon will save development time and reduce costs in this step, while using the security provided by Ethereum.

In the future, Polygon will effectively transform Ethereum into a mature multi-chain system. Similar multi-chain systems include Polkadot, Cosmos, Avalanche, etc. However, in comparison, the combination of Polygon + Ethereum has many advantages: a strong user base and developer community; a lower technical development threshold; reliable security, etc.

Ethereum's expansion race is not a winner-takes-all game. Different projects will have different needs in the future, so various expansion solutions will coexist for a long time. Polygon's proposal to build a multi-chain system for Ethereum is a reliable guardian solution on the long road to Ethereum 2.0. In the future, Polygon's community-driven support and first-mover advantage will be enough to give Ethereum an advantage over new entrants.

Challenges Polygon will face

Currently, Polygon has formed a strong ecological community through the mature expansion solution of the implemented Matic PoS chain, the incentive of Tokens and its outstanding performance in the secondary market. Although Polygon has many DeFi and NFT project maps, from the perspective of locked positions, Aave, the leader of DeFi lending, accounts for 62.62%, which shows the support of a head project to a huge ecosystem, and the quality of other projects is generally low.

When it comes to Ethereum's expansion track, we have to mention the currently popular Optimism and Arbitrum. Like Polygon, Optimism and Arbitrum have also received support from the leading DeFi project (UniSwap). Arbitrum, which was launched on the mainnet on May 28, is also supported by infrastructure such as Metamask, Chainlink, and Truffle, and Optimism, which is about to be launched, has also reached a cooperation with Synthetic, a leader in decentralized synthetic assets.

Judging from Aave's influence in the Polygon map, the ecosystem supported by the top projects will also attract a large amount of locked positions. Compared with Optimism and Arbitrum, Polygon's progress in technology implementation does not seem optimistic. It claims to have built a variety of layer2 expansion solutions, but it has only launched an SDK (software development kit), and other Layer2 available modules are still under development. And its competitors are gearing up to launch a new round of battles for the ecological map this summer. By then, Optimism and Arbitrum are bound to absorb part of the locked positions. After all, capital always flows to profitable places.

In addition, a series of Layer 2 communities such as Optimism and Arbitrum have not yet issued governance tokens. Once the tokens are issued, they will definitely attract the attention of the secondary market and affect the market value of projects that provide relatively outdated expansion solutions.

Polygon will respond to competition by accelerating iterations. It is reported that the Polygon SDK will undergo two iterations, with the first version allowing developers to create independent chains with full interoperability with the Ethereum network. In the second Polygon SDK iteration, the development team will be able to create an actual second-layer protocol that is directly connected to the Ethereum mainnet.

Post-ETH 2.0 Era

Even ETH 2.0 cannot provide the infinite scalability required for high-throughput Dapps. The best case scenario is that Ethereum has 64 shards, each with 50 TPS, and the maximum that can be provided is 3200 TPS. Judging from the adoption rate of applications, demand is expected to continue to rise and congestion problems will still exist.

However, after ETH2.0, Polygon's solution will be more robust, because the lower the gas fee, the shorter the interval in which the Polygon chain can submit nodes to Ethereum. But it is difficult to determine whether there will be a hundred flowers blooming or a single dominant company providing expansion solutions for Ethereum in two or three years. As blockchain technology matures, there will be more and more technical teams that can provide mature solutions. Polygon will also face stronger competitors. Whether its ecosystem is sustainable remains to be seen.