A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That’s Gaining Popularity

The back-to-back launches of DeFi giants Aave, Sushiswap and Curve on Polygon have driven Polygon’s total value lock-in (TVL) to over $4 billion, up 450% in one month. In addition, MATIC has grown 95 times since the beginning of the year.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

Rising Gas fees on Ether last year sparked an arms race to find scalable, decentralized, secure solutions to lower user costs. Users still crave DeFi yields and liquidity rewards; many newcomers just don’t want to pay the expensive entry fees to play the casino on Ether. Newer, more efficient Layer 1s like Coin Smartchain (BSC) have stolen a march on Ether, but the flagship smart contract platform still has a devout following of DeFi users and developers who want to help make it more cost-efficient.

For protocols that want to take advantage of Ether’s unparalleled developer community, the only solution to high Gas fees is to push low-value transactions from the bottom to so-called extension solutions, at least temporarily.

Polygon is one of these solutions, and it is leading the way in the development of a vertical scaling strategy for Ether. Currently, Polygon sees the significant benefit of being the only Ether-aligned and EVM-compatible sidechain in that it offers lower fees and faster transaction times. While other Layer 2 (Layer 2) solutions continue to be delayed, Polygon can use its first-mover advantage to build a solid and lasting ecosystem.

Many popular games and other low-value applications that can only survive in a low-cost environment are quickly turning to Polygon. with the launch of senior DeFi giants Aave, Sushiswap and Curve on Polygon, driving Polygon’s total value lock-in (TVL) to over $4 billion, a 450% increase in one month.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

But not content with its growing sidechain business, Polygon has reinvented itself and launched a new initiative to provide users with a software development kit (SDK) to build any second-tier solution. If successful, it will play a central role in the burgeoning second tier world.

Matic Sidechain
Polygon launched Matic in 2017 to work on developing the Plasma chain as an extension solution to Ether. At the time, Plasma was a relatively new technology designed to push some of the heavy computational work in smart contracts from Ether to a few smaller second-tier chains. Since then, Plasma has fallen out of favor as a scaling technology. It suffers from nearly insurmountable security and data availability issues. These shortcomings have led the Ether community to turn to contracts such as Optimistic and ZK Rollup as solutions to Ether’s congestion woes (more on this below).

Polygon launched Matic in May 2020 with two components: a PoS sidechain variant, which they call a “commit chain” that supports smart contract development, and a Plasma-based portal ramp for routing Ether to Matic sidechain transactions. Polygon uses a separate set of validators that do not share the security of Ether (the common standard for layer 2). These validators periodically push Matic PoS state changes to Ether (a process called checkpointing) to finalize transactions. While this approach uses Ether as a clearing layer, it does not provide full protection against malicious validators corrupting the checkpointing process.

Although Polygon’s Matic PoS chain is only a second layer, it is still one of the few viable alternatives to Ethernet deployment at this time. Ether’s high demand for block space has been driving some developers and protocols to move to Matic PoS rather than stick with a Rollup alternative. Today, there is a clear market for an Ethernet-compatible blockchain with the benefits of low fees and near-instant settlement.

Polygon’s recent success
Polygon initially appealed to protocols that prioritized low transaction costs. Most of the applications moving to Matic PoS have low-value and high-volume use cases. These protocols include gamified financial collectibles (e.g. Aavegotchi), games (e.g. Neon District), virtual worlds (e.g. Decentraland), and prediction/gambling markets (e.g. Polymarket and SportX). Other Polygon-based applications include Somnium Space, Artvatars, Cryptovoxels, and F1 Delta Time.

And Polygon has burst onto the scene as a cost effective DeFi protocol option. Two of its biggest financial applications are Uniswap-fork’s Quickswap and DeFi darling Aave. Aave on Polygon has attracted more than $3.3 billion in locked-in value (TVL) as of May 11 since its launch in early April, about a quarter of the locked-in value of Aave v2 (which runs on Ether). Quickswap facilitated an average daily volume of $76 million in April, about 6 percent and 21 percent of the average volume of Uniswap and SushiSwap during the same period.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

Lower fees and faster transaction times on Layer 2, sidechains and non-Ethernet Layer 1 enable decentralized exchanges (DEXs) and lending protocols to appeal to a broader audience, which could lead to rapid growth in transaction volumes and user activity. polygon has had recent success because it is off-the-shelf, while most other second layers are still under development. After Aave’s deployment to Polygon, experienced DEXs Curve and Sushiswap have followed suit.

Quickswap has had early success as a fork of Uniswap, which originated in Polygon.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

Since the beginning of the year, Quickswap has made gains on Layer 2 DEX, growing faster than Ether stalwarts like SushiSwap, and at one point it was even with SushiSwap on April 30.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

At this point, Polygon has become the leading choice for Tier 2 DeFi activity, as it has outperformed its closest rival, ZKSwap, by as much as three times in the last month.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

While the Coin Smartchain (BSC) and newcomer Firecoin Ecosystem Chain (Eco Chain) are the main destinations for defectors, Polygon has attracted more assets and value from Ether than any non-Layer 1.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

Polygon was also the choice of many investors among the many Layer 1 competitors and quadrupled its market cap in less than a month.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

Competition
So far, Polygon’s main competitors are Layer 1s like Coin Smartchain (BSC), as the market for Ethernet-centric scaling solutions is slow to materialize. loom Network essentially collapses in 2020, while Deversifi and Loopring are more application-specific. As BSC collapses under the burden of its massive node requirements, Polygon may become the de facto general-purpose computing solution for developers and users looking for a low-cost replica of Ether.

However, competition is heating up among true Layer 2 extensions. starkware’s ZK Rollup already offers support for some of the more popular Layer 2 DeFi protocols, while Offchain Labs (Arbitrum) and Optimism’s Optimism Rollup solution are approaching production-ready solutions Optimism and Arbitrum will be able to offer the complete DeFi ecosystem at launch. In addition, Optimism has Uniswap on board, while Bancor and Balancer will also be available on Arbitrum shortly after the release of the main Arbitrum network.

Once these more technically proficient Layer 2 networks become available, large DeFi protocols can be deployed to multiple chains. Indeed, three of Polygon’s early enablers do have broad multi-chain aspirations. For example, Sushiswap is also deployed on Fantom and can be deployed almost anywhere; Curve has launched a licensed fork on BSC (Ellipsis); and Aave is planning a version based on Optimism.

Early deployments on existing solutions may simply be a land grab for protocols to hedge their bets. If users are not offered their choice of chain, channel or known exchange and lending application on Rollup, then a new fork will meet their needs. the second highest volume DApp on Polygon is a fork of Uniswap, and each sidechain and second layer may eventually replace all top DeFi protocols with forked versions, as is the case with BSC, unless big companies take the lead.

BSC, Solana and Terra have demonstrated that users can be incentivized to leave the security and decentralization of ethereum through lower fees and faster execution. For example, Raydium, based on the Solana ecosystem, already outpaces other Layer 2 DEXs (except ZKSwap) on a TVL basis.

MATIC token
The MATIC token was launched in 2019 via the Coinan Initial Exchange Offering (IEO). Its first use case did not appear until a year later, when Matic’s PoS sidechain was launched in May 2020.

Polygon’s MATIC tokens were used to pledge on its PoS sidechain. This model sets it apart from most other solutions. Layer 2 competitors such as Matter Labs (zkSync), Offchain Labs (Arbitrum), Starkware and Optimism have all received funding from the traditional venture capital market. While some application-specific second layer networks have tokens, such as Loopring and ZKSwap, these tokens are not used to compensate node verifiers, and Loopring’s tokens will also provide the holder with a proportionate share of governance rights.

One advantage of MATIC tokens is that there are few experienced second tier tokens available in the market. Because other solutions have gone the venture capital (VC) route, it is likely to be a practical way for retail users to gain exposure to the expected rise in risk exposure of second tier options. As a result, its recent performance has been phenomenal, growing 95 times since the beginning of the year.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

In addition, MATIC is not a true governance token. Voting is limited to adjusting the parameters of the validator. It is also inflationary, with the protocol holding the right to add approximately 50% to the token currently in circulation. polygon transactions use a very small amount of MATIC within the chain, and ETH within and outside the chain.

Fees
As transaction fees remain low, pre-mined MATIC as a betting bonus is currently the main source of income for verifiers. Recently, fees reached a record $3,000 per day with 4 million transactions per day.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

Source: Nansen Pro

MATIC verifiers are currently returning 15%, creating a virtuous cycle in a bull market. However, next year’s rewards will drop to less than half and to zero in just four years. Will Polygon lose security if there are not enough fees?

More importantly for investors, will MATIC increase in value as fees decrease and the tokens available to pay validators and principals decrease each year?Polygon token holders face a classic Catch-22: it is difficult to profit in a network where transaction costs are about $0.00004, regardless of TVL and transaction volume. (Note: Catch-22 is synonymous with the paradoxical, deceptively dark rules of “insurmountable obstacles” or “insurmountable dilemmas” in English.

Technology growth companies often rely on a theory similar to Jevons’ paradox: efficient trading in terms of cost and speed will stimulate enough demand to compensate for lower initial revenues. However, if the price of Gas rises, will the volume of Dapp transactions migrate to other Layer 2 or Layer 1 networks? 10-20% collateral rewards are unlikely to last forever unless the supply is changed and significantly inflated MATIC tokens.

With negligible fees, Polygon will face challenges to justify its $15 billion market cap in circulation ($24 billion FDV as of May 18). In comparison, MakerDAO is expected to receive 100,000 times Polygon’s fees, but it has only a third of Polygon’s market cap.

Polygon’s pivot
Polygon’s core team has turned to all the tools and infrastructure needed to create all EVM-compatible second-tier solutions. Their first product will be an SDK 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 Polygon will also provide PoS validators from its existing network as well as a bridge between the various Layer 2 networks and will be, in their words, an “aggregator of scalable solutions”.

A Polymorphic Approach to Scaling Ether: A Detailed Look at Polygon, the Scaling Network That's Gaining Popularity

There is no doubt that we are in and will probably never leave the multi-chain world. This means that efficient bridges and a variety of interoperable second layer solutions are needed, and that new use cases may require varying degrees of decentralization, security and cost. Detailed information about the Polygon SDK is currently scarce, but Polygon hopes to be a second layer solution for Ether, similar to Polkadot’s Substrate and Cosmos SDK’s new first layer solution.

Final Thoughts
With its recent strong token performance, Polygon has the capital to invest in new projects. on April 28, they announced that they will invest the equivalent of $100 million in MATIC to improve the accessibility of DeFi, possibly on its sidechain and any new second layer and SDK they create.

If this pivot is successful, Polygon will sit at the center of an EVM-compatible second layer of the Internet, connecting each layer to itself and to Ether. While the market for scaling Ether will become crowded in the coming months, Polygon’s community-driven support, first-mover advantage and timely pivot may be enough to give it an edge over new entrants.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/a-polymorphic-approach-to-scaling-ether-a-detailed-look-at-polygon-the-scaling-network-thats-gaining-popularity/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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