How did the Indian crypto unicorn Matic come to be?

While the cryptocurrency industry certainly has its share of charlatans, it has also attracted some of the most talented minds and produced some of the most groundbreaking ideas of our time.

In the past period of time, many mainstream Ethereum applications including Aave, Curve, Aavegotchi, and OpenSea have chosen Polygon (formerly MATIC) to expand performance. With the increase in Polygon's market value and the assets it carries, this Indian unicorn with a market value of US$12 billion has become a giant in the crypto world.

In early April this year, Aaryaman Vir, co-founder of Prophetic Ventures, shared the experiences behind the company’s founder and the value support behind its rapid growth. In the current industry context, it is of great reference value for readers to have a deeper understanding of the project. Therefore, Chain Catcher translated the article and made deletions and modifications without affecting the original meaning.

I’ve been through several cycles in the crypto market, and while I’ve taken time off to explore new areas, my interest in the industry has never been higher than it is now. Here, I want to educate you on some of the exciting new things that have happened in the past few years and share my learnings with you.

Matic was the perfect project because their local origin story made them a fascinating subject of study for our largely Indian readership. But beyond that, I would also say that the story of Matic is one of the most inspiring startup stories I have ever heard in my life.

01

Matic founder story

Matic initially had three co-founders: Jaynti Kanani, Sandeep Nailwal, and Anurag Arjun. Later, Serbian programmer and entrepreneur Mihailo Bjelic also joined the team as a co-founder. That being said, the main inventor of the Matic protocol is Jaynti, also known as JD.

JD was born and raised in Ahmedabad, India, where his father was a worker from one of the city's many diamond factories. Growing up, the family environment was not easy for JD, as his two older sisters did not attend high school due to financial difficulties.

Still, the family sent JD to an engineering college in the nearby town of Nadiad. It was a coincidence that JD ended up in the computer science program there—he didn’t get good enough grades to get into the college’s more popular electrical engineering program—but I guess a very happy coincidence.

JD joined Persistent Systems, an IT services company based in Pune, after graduating from college in 2011. Through his mentor, JD was first introduced to Hacker News, Y Combinator, and the global startup culture. After discovering this exciting new world, JD dove into learning about technology and entrepreneurship.

As a natural result of his immersion in entrepreneurship, JD soon had the urge to start his own business. However, his first business, a witter analytics tool, failed to take off, and soon thereafter JD applied to Housing.com.

JD first heard about crypto around 2015 when he was working as a front-end developer at Housing, where he became friends with the company’s head of data science. The story behind this is quite interesting. As a huge fan of Game of Thrones, JD wanted to build a spin-off project where people could bet on plot developments in the show.

“Which character will die on Game of Thrones? Bet correctly and win money!” — This was the premise of JD’s app, but he ran into problems building a payment feature that could serve a global user base. While trying to find a way to solve these problems, JD discovered cryptocurrency and quickly fell down the rabbit hole like many of us.

Since then, JD has been reading and absorbing information about the crypto world. After making some money in the 2017 bull run, JD finally left Housing.com in October of 2017 to start his own business again. In 2018, JD completed the first proof of concept of the system that would eventually become the Matic network. Along the way, he met Anurag and Sandeep. Together with the rest of the Matic team, the three of them went on to create one of the most valuable and important cryptocurrency projects out there.

JD's career shows that it doesn't matter who you are, where you come from or how much money you have, anyone can change the world only through curiosity, determination and a willingness to take risks.

JD has certainly taken many risks throughout his life, and you could even say that the act of going to college was a risk to his family. Still, all of those risks paid off in a most unlikely and dramatic way.

02

Background of Matic Development

Anyway, to start understanding Matic, we first need to understand Ethereum, which allows users to write custom code into a decentralized ledger in the form of "smart contracts". Once this code is deployed to the distributed ledger, everyone else can see it and interact with it. Applications can be built that have no central server, no single database, and are open source from the beginning.

The coolest thing about Ethereum is that anyone can come up with an idea and publish it to the world computer as a set of smart contracts. On the other hand, after deployment, anyone can read and interact with these contracts. All of these programs are transparent, open, and freely accessible.

This functionality has given rise to a massive industry called “decentralized finance,” or DeFi for short. Today, approximately 200,000 unique addresses trade on Ethereum-based DEXs each week, with 1,000-1,400 unique borrowers per day.

But the problem is that Ethereum has some limitations: transaction throughput, transaction speed, and transaction costs. Any transaction made on Ethereum must be replicated on all nodes running the Ethereum program, which is the only way that the various internal copies of the distributed ledger will stay in sync. But this opens up the possibility of abuse, someone could write a program that takes up a gigabyte of memory or creates an infinite loop that crashes the computer running the program.

To solve this problem, Ethereum introduced the concept of gas. Transactions require more storage and memory, and users must pay more gas fees for the transaction to be reflected on the distributed ledger. As a result, building and using complex distributed applications can become very expensive.

In addition to gas-related issues, Ethereum also suffers from a transaction bottleneck. The system is designed in such a way that it can only process 12-20 transactions per second. For a very popular system like Ethereum, this results in a large number of pending transactions. Furthermore, transactions take about 13 seconds to be processed and written to the ledger, with different users bidding higher and higher prices to ensure that their transactions are in the queue to be processed next.

As a result, millions of DeFi, NFT, and regular Ethereum users need to wait in line before their transactions are confirmed on the ledger. Users can skip the queue by paying a higher gas fee, which has led to the current average gas fee of $20 for Ethereum.

This is the problem Ethereum is currently facing. High costs, slow processing times and low transaction throughput make it completely untenable in many application scenarios.

03

So, what is Matic?

The idea for Matic came from the need to improve Ethereum’s cost and scalability issues. In 2018, the team at Matic began to modify and innovate some existing concepts in the cryptocurrency world to create a Layer2 solution on top of Ethereum.

Unlike Layer 1, the second-layer network provided by Matic helps improve transaction costs and throughput. To achieve this goal, the Matic system involves two main components:

1) A set of Matic smart contracts on Ethereum

2) Matic sidechain, which is a completely independent blockchain

The first part is easy to implement given our current understanding of smart contracts on Ethereum, and the second part, the Matic sidechain, is essentially a new chain built autonomously by the Matic team. Unlike Ethereum, this new chain is optimized for some parameters, such as transaction speed and transaction throughput.

Transactions on the Matic chain are confirmed after 1-2 seconds, while Ethereum is 15-20 seconds. In contrast, Matic can process more transactions in parallel, thereby reducing the fee pressure on Ethereum. However, there are still transaction fees on Matic, but these fees are about $0.00004-$0.00012 and are paid in MATIC tokens, which is the native cryptocurrency of the Matic chain.

Just like Ethereum and Bitcoin, Matic Chain achieves security and consistency between copies of a distributed ledger — computers that are incentivized to continuously process Matic transactions and maintain an internal, provably trusted copy of the ledger.

In Matic, these people are called validators, and their incentive to run these computers is to earn newly minted Matic tokens as long as they prove that they maintain the correct distributed ledger of all processed transactions. Node validators need to stake Matic tokens to participate.

If the system finds that a validator has committed a malicious act, the staked Matic tokens will be confiscated, thereby reducing the bad behavior of node validators and ensuring authenticity.

Currently, Matic has become the preferred scaling solution for many Ethereum-based projects, including Decentraland, OpenSea, PolyMarket, Aavegotchi, etc. The list of partners and use cases is constantly growing, and Matic will soon expand support to other popular layer 1 blockchains beyond Ethereum.

As of now, users have deposited about $400 million in tokens into the Matic Deposit Manager, and the price of the MATIC token has increased nearly 20 times. (Note: This is data from early April. Currently, more than $7 billion has been deposited, and the token has increased more than 100 times.)

04

How does Matic improve transaction throughput?

Matic offloads the computational burden of Ethereum transactions to the Matic sidechain. Here’s how it works:

1) First, let’s assume that a user wants to use ETH to perform a bunch of fast and low-cost transactions on Decentraland.

2) The user is unable to conduct these transactions on the Ethereum mainchain due to high fees and slow processing times;

3) The user takes the money they wish to spend, let’s say 100 ETH, and sends it to a special smart contract on the Ethereum mainchain called Matic Deposit Manager.

4) The deposit manager is basically like a vault. Once a user sends 100 ETH to the deposit manager, the user will no longer be able to access the ETH on the Ethereum main chain.

5) This transaction happens on the Ethereum mainchain and is subject to the same high fees and slow times as all other Ethereum transactions, but don’t worry, it gets better from here.

6) After the user transfers to the deposit manager, the Matic sidechain continuously scans the Ethereum ledger to track transactions involving the deposit manager contract, sees the transfer of 100 ETH and records the 100 ETH to a new account on the Matic sidechain.

7) Matic chain is built as a mirror of Ethereum, and users can use the same wallet on Matic as they use on Ethereum. Therefore, once a deposit transaction is made on the main chain, this mirror account on the Matic chain will be credited with 100 ETH.

8) Now that the user has 100 ETH in the Matic chain, they can make as many transactions as they wish. They can send funds to their Matic wallet on Decentraland and enjoy fast and cheap transactions.

9) Whenever a user wishes to move their funds back onto the Ethereum mainchain, they can send those tokens to a special "burn address" on Matic. This is essentially equivalent to publicly destroying those funds. In our example, let's say a user spent 20 ETH in Decentraland, and then they sent the remaining 80 ETH to the burn address.

10) After burning the tokens on the Matic chain, the user must send a mathematical proof of this burn back to the Deposit Manager contract on the main chain. The Deposit Manager is able to calculate whether the burn actually occurred on the sidechain, and after a successful calculation, the user can receive the remaining 80 ETH in their ETH wallet.

This is a super simplified version of events, omitting many details, but this is the essence of the system. Matic basically provides a parallel transaction processing layer with low fees and fast confirmation times. Assets can be moved back and forth between the parallel layer and the Ethereum mainchain using the bridge created by the deposit manager.

05

What is the value of the MATIC token?

As we have seen earlier, Matic actually runs its own proof-of-stake blockchain. Any blockchain needs to incentivize people to secure the network and ensure the collective ledger is maintained honestly and fairly.

On a public network like Matic or Bitcoin, everyone can be anonymous. No one is obliged to maintain a true copy of the distributed ledger, especially if doing so would take some time (like server time or computing hardware). This is why blockchains offer monetary rewards to miners (in proof-of-work systems) or validators (in proof-of-stake systems) who secure the network by verifying transactions and maintaining a mathematically provable internal record of all those transactions in order.

Since the correct state of the ledger can always be mathematically verified, no bad actor can get away with falsifying numbers. There will always be enough "honest" nodes with their own copies of the distributed ledger who will ignore the fraud and continue to build honest distributed ledger safes, assuming that all other reasonable and profit-seeking people will converge on a common, provably true version of the truth.

On Matic, validators will be rewarded with MATIC tokens created by the protocol to maintain control of the incentive structure. Over time, the supply of these new MATIC tokens will continue to decline until the protocol creates no new tokens.

However, in order to get these newly minted MATIC tokens, validators need to stake their MATIC tokens. The more MATIC you stake, the more MATIC rewards you get. This sounds good, but if validators accidentally mess up the ledger's accounting records, their deposits can be slashed.

So that’s one use case for the MATIC token, you need to stake the token in order to have a chance to produce blocks on the blockchain and get MATIC rewards. Another use case is gas fees, anyone who wants to transact on the Matic chain must pay fees using MATIC to enable the validators to pick up their transactions and include them in the ledger.

In fact, you need to buy and use MATIC tokens to use the Matic blockchain. In the future, the MATIC token will also be used as a governance mechanism, so people who own MATIC can basically vote in proportion to their holdings to make certain actions on the network, such as allocating community funds or deploying software updates.

06

Summarize

I think there are some interesting lessons from this story. The first lesson is to always be curious and trust yourself: just follow the thread of thought in your mind, it will always keep you on track. You will definitely learn something, you might meet like-minded people, and you might even build something life-changing with them!

This is especially true in the cryptocurrency industry, which is a global industry with no barriers to entry. Any kid from a small corner of the world can come up with an idea, deploy it into this global computer system, and see it rapidly adopted.

Second, it is always worthwhile to contribute to the community. Life and entrepreneurship should not be a zero-sum game where all growth must come at the expense of someone else. JD and Matic engineers made a name for themselves by building one of the most popular free developer tools in the Ethereum ecosystem.

Many key connections and ideas are made from the first acts of building for the public good. It doesn't matter if you're producing content, designing assets, or software projects. Contribute to the community and you'll be rewarded.

Finally, while the cryptocurrency industry does have its share of scammers, it also attracts some of the most talented people and produces some of the most groundbreaking ideas of our time. Furthermore, this community is made up of many people who simply want to improve the society we all live in.

The best example is Sandeep Nailwal, the co-founder of Matic, who, frustrated by the suffering around him, founded the India COVID-19 Crypto Relief Fund to try to fight the pandemic that has hit India. As of the time of writing, Sandeep has raised hundreds of millions of dollars for this cause.