Today I'm going to talk about one of the biggest cryptocurrencies in the world that’s also helping Ethereum in a massive way.
Did you know that there was once a transaction on Ethereum that cost over 10,000 Ethereum tokens? At the time of writing, that's worth around $17 million.
Think of all the stuff you could get with that kind of money!
Extreme cases aside, what about smaller transactions on Ethereum, before it was updated to Ethereum 2.0?
Well, it may surprise you that at one stage it was $20 per transaction - clearly a huge problem for mainstream adoption.
Three Indian software engineers definitely thought there was a better way, and that's why they came up with Polygon.
Does Polygon Solve Something?
Polygon (formerly known as Matic Network) is a Layer 2 scaling solution.
The layer 2 bit just means it operates on top of an existing network - in this case, Ethereum.
You could say Polygon is a project designed to help Ethereum be more efficient, affordable, and scalable.
At its core is an open-source, modular framework that supports building and connecting decentralized applications, known as dApps, and blockchain networks.
This connection aspect is an important component of Polygon.
How is Polygon Different?
By enabling different blockchain networks to work together, it’s helping promote the widespread adoption of decentralized systems.
It also has its own token called MATIC, which is used to pay for transaction fees and to participate in network governance.
There are other features too, like support for smart contracts, a decentralized exchange and an expanding range of dApps and tools for developers.
At the time of writing this article, Polygon is among the top 10 biggest cryptocurrencies in terms of investment.
Big investments you say? But in what, exactly?
Well, that can be described by looking at its tokenomics - or how wealth is distributed through Polygon.
Exploring Polygon Tokenomics
Polygon's token, MATIC, has a total supply of 10 billion tokens.
At the time of writing, about 87% of this supply is in current circulation.
The Polygon Ecosystem - a network built on top of the Polygon blockchain - had 23.3% of the token supply.
The Polygon foundation - a non-profit organization supporting Polygon’s development - had 21.9%.
Add the 12% supply of the staking rewards to that and you have over half of the total supply locked into Polygon's overall system.
Another 19% was reserved for the Binance Launchpad, while 3.8% was sold in the token's private sale.
As for the developers, the Polygon team and its advisors have a combined 20% of the supply reserved for themselves.
Once the total supply reaches 10 billion coins, MATIC should become deflationary, with a percentage of the total MATIC being permanently taken out of circulation each year.
That largely explains the economics behind the project, but how about the technical stuff?
How Does Polygon Work?
Okay so, imagine a chocolate factory.
It's a really slow factory, though.
The conveyor belts on the factory line are all clogged up and the output is way down.
To solve this, you could try one of two solutions.
The first solution could be upgrading the existing factory.
The problem with this solution is that it would be a massive undertaking to do it.
You might have to take down the existing walls, relocate equipment to make space and so on.
It might be better to build something new from scratch.
The better solution turns out to be something in the middle - a secondary factory built right beside the first one.
This new factory can take the load off the first factory and make production much more efficient.
The chocolates move through the first factory, go to the second one, get processed there, and come back for a quality check at the first factory.
As it happens, this second factory could describe Polygon's side-chain (like a side factory) for Ethereum.
It takes the load off the main Ethereum chain, processes what it needs to quickly, and then gets the result back to Ethereum to verify.
But side chains are not the only way Polygon can help blockchains like Ethereum.
It can also use things like roll-ups to help speed things along.
Roll-ups? What are they?
Well, let's take another look at the chocolate factory analogy.
Assume the most time-consuming part of the whole process is the packaging.
Next, imagine you get a special order - one that's equal to five of your regular-sized orders.
Here are two ways you could go about completing the order.
The first way would be to make five individual chocolate bars, pack them up all separately, and send them out together as a group.
Another way you could do it, though, would be to make five individual chocolate bars, package all five in one big wrapper, and then send that out instead.
This second way would be much faster because you would only have to package the chocolate one time instead of five different times.
That's how roll-ups work in Polygon. They roll up data and transactions into one big chunk and process them at once.
There's obviously more technical detail behind the actual process and how Polygon helps blockchains scale. But for now, this analogy works.
So alongside plenty of features to Polygon… there are also some advantages, too!
Looking at the Benefits of Polygon
The first benefit is that Polygon increases the processing capacity of the Ethereum network, making it more useful.
Ethereum has been the number one smart contract ecosystem for some time now.
But being a giant has had its problems!
As mentioned earlier, Ethereum was incapable of handling the kind of load that people needed it to. Polygon’s approach helps solve that, which is why it’s such a popular cryptocurrency.
By eliminating crazy fees on every single transaction, it has made Ethereum usable again.
It also means that dApps which were previously unavailable to the masses became accessible for all.
Polygon has had tens of thousands of different dApps functioning on it around the end of 2022, around an 800% increase compared to how many were functional at the start of the same year.
This shows how Polygon gives users the capacity to really use the Ethereum network on a global scale.
But obviously, that isn't the only thing that Polygon improved.
Polygon’s second big benefit is that it has made transactions a lot cheaper.
Going back to the chocolate factory - apart from the issue of not producing enough chocolates, the second big issue is that the cost of the chocolates is way too high.
Just increasing throughput isn’t enough - you’d also have to make the chocolates cheaper if anyone were going to buy them.
In the same way, Polygon simply increasing the processing capacity of Ethereum wasn't enough.
It also had to ensure that transactions were cheap enough for anybody to be able to afford them.
Fortunately, it did.
Polygon has helped bring down the cost of transactions from several dollars, sometimes tens or even hundreds of dollars, to less than a cent at the time of writing.
That is a big plus in the quest for mass adoption.
Does Polygon have Shortcomings?
The first downside is that Polygon only focused on Ethereum which makes it a little one-dimensional.
When Polygon came into the space, Ethereum's scalability issues were the most prominent problem it could have dealt with at the time.
It was a big problem.
As time went on, Polygon introduced more than just the one side-chain scaling solution that it started out with. It now has roll-ups and even some other technologies as well.
That being said, it is still focused solely on Ethereum.
It would've been great if Polygon had been designed to assist multiple networks and benefit them all in the same way it’s helping Ethereum.
So that's one. The other concerning thing about Polygon is that…
It's heavily centralized - and that makes it hard to trust it completely.
At the time of writing, Polygon operates with 100 validators - computers on its network which validate transactions.
How Many Validators is 'Enough'?
While 100 might sound like a lot, it’s way less than some of its competitors. Solana, for example, has 1900 validators - almost 20 times as many!
This is one of the reasons why Polygon has the smallest Nakamoto Coefficient among the most popular alt-coins.
This metric represents a network's stability, security, and decentralization. Basically, all the things you vital to support a healthy, public blockchain.
Solana's NC rating is 32, while Polygon's is a dismal 4.
This puts it behind Avalanche which has an NC of 28, and Cardano which had a score of 22 by 2022.
All of that means this: if a handful of people tried to attack and use the Polygon network, it would be easier for them to do it to Polygon than doing the same to Cardano, Avalanche, or Solana.
There was also a recent hard fork "early feedback" vote that may have changed the fate of the blockchain. Surprisingly, it only involved 13 validators making that big of a decision.
This clearly presents an issue of too much power in the hands of very few people.
In the context of Polygon's already low Nakamoto coefficient, it’s certainly something to think about for Polygon's future.
So to Recap
Polygon is a Layer 2 scaling solution that operates on top of Ethereum.
It’s designed to help Ethereum scale to a point where it could be used by the masses - making it more affordable and efficient.
It has its own token, MATIC, which is used on the network for transactions and making decisions about the network.
MATIC has a total supply of 10 billion tokens, with around 87% of in circulation now - with half of it locked into Polygon itself.
Polygon uses side-chains and roll-ups to help speed up transactions and increase mobility.
It has a number of benefits, such as scalability, lower transaction fees, fast confirmation times and an ecosystem of tools for developers.
But it may be a little one-dimensional in its focus on Ethereum, with some concerns about how centralized it is.
Despite those concerns, Polygon continues to be a very strong presence in the space and one of the biggest cryptocurrencies around.
