The rising cost of gas on the Ethereum network has spurred competition between projects developing scaling solutions.
Binance Smart Chain showed more than strong growth at the beginning of the year. This EVM-compatible platform provides fast and inexpensive transactions, but its big disadvantage is high centralization.
This led to an increased interest in Polygon (formerly Matic Network) — an ecosystem committed to cutting-edge innovation and positioning itself as the “Internet of Blockchains”. With nearly instant transactions and extremely low fees, the project made it into the top three leading blockchain protocols in terms of Total Value Locked (TVL) in a matter of months.
Here’s why the ecosystem is growing and what’s behind Polygon’s architecture:
- The Polygon ecosystem has seen tremendous growth in recent months, with increased onchain activity, a rise in native token prices, and a slew of DeFi projects and integrations.
- The Polygon PoS Chain system has specific features that put it far beyond a simple sidechain.
- Developers will have to add support for Optimistic rollups, ZK-Rollups and Validum, eventually becoming an aggregator of scaling solutions.
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Polygon: The Unprecedented Growth
Despite the very young age of the ecosystem, the daily volume of Polygon transactions has greatly exceeded that of Binance Smart Chain and Ethereum.
In June, the number of unique Polygon addresses quadrupled. This is a sign of an increasing user base and overall activity in the ecosystem.
The high on-chain activity is due to fast and cheap transactions. The average transaction cost on the Polygon blockchain is hundreds of times lower than that of Ethereum – this is an undeniable competitive advantage. A comparison is given in the table below:
Polygon Project & Partners
Polygon’s success is also aided by network effects due to integration with SushiSwap, Aave, Curve, 1inch and many other DeFi-platforms. The total TVL of the Polygon-based ecosystem with more than 350 projects exceeds $5 billion.
- Aave is the lending protocol leading the Ethereum ecosystem as well.
- QuickSwap is the Uniswap’s counterpart and leading Polygon-based DEX.
- IRON Finance is a protocol also powered by Binance Smart Chain, which has a partially secured IRON stablecoin that is soft-pegged to the U.S. dollar. The project, whose participants include billionaire Mark Cuban, was subjected to a “banking panic” in June.
- Curve is a stablecoin-focused platform based on an automatic market maker mechanism (AMM).
- SushiSwap is a DEX, known as the “vampire” fork of Uniswap.
- Dfyn is a platform, positioning itself as a network of decentralized exchanges, including on the basis of Level 2 solutions.
- Beefy Finance is a revenue farming optimizer based on Binance Smart Chain.
- Balancer is a non-custodial portfolio manager and AMM platform.
- Kyber is “a hub of targeted liquidity protocols for various DeFi use cases”.
- Autofarm is a DEX aggregator and revenue optimizer that also supports BSC, Huobi ECO Chain.
Many of the above projects originally ran on Ethereum (e.g. SushiSwap, Kyber and Balancer), or Binance Smart Chain (Autofarm). Polygon integration helped them strengthen their position in the DeFi market segment. Aave, which in recent months holds the leadership in TVL, is a striking example.
The chart below shows Polygon’s growing share of the combined TVL of various protocols. What is also notable is the June decline in BSC’s share while Ethereum-segment growth.
Other Reasons of Polygon’s Success
Blockchain Internet developers are comprehensively developing the ecosystem beyond various second layer (Layer-2, L2) solutions. In July, the project introduced a division of Polygon Studios focused on blockchain games and the NFT ecosystem. The new structure plans to attract major brands, popular content creators and investors who want to work in this direction to cooperate.
NFT marketplace OpenSea, which recently raised $100 million at a valuation of $1.5 billion, added the ability to purchase Polygon assets with a debit or credit card. The integration with the protocol allowed the company to reduce the potential transaction costs for users associated with paying for gas on the Ethereum network.
In April, the Polygon team launched a $100 million fund with assets designed to make decentralized finance more popular, accessible and scalable. According to Sandeep Nailwal, the #DeFiforAll Fund will concentrate up to 2% of the total native token supply (200 million MATICs).
What Is Polygon Network About?
Polygon Network is a scaling solution for Ethereum that utilizes a unique SDK framework to scale the Ethereum blockchain so that it can support a larger number of transactions per second. The Polygon SDK enables developers to create their own scaling solutions on top of the Ethereum blockchain. This makes it possible for developers to create highly scalable dApps and protocols that can process a large number of transactions per second. In addition, the Polygon SDK also allows for the easy creation of decentralized exchanges and other financial protocols.
What Is Special About Polygon Network?
The project was launched in October 2017. Before the rebranding, Polygon was called Matic Network. Its co-founders Jaynti Kanani, Sandeep Nailwal, Anurag Arjun, and Michaelo Beli set out to solve the problem of Ethereum scaling.
Initially, the team started working on Plasma Chains, a second-level solution based on Plasma’s own implementation. Faced with several challenges, including data availability and a long withdrawal period, the project moved on to develop PoS Chain, an Ethereum sidechain that uses the Proof-of-Stake consensus mechanism.
The result of more than two years of work was the launch of the main Matic Network. The project began to attract more and more attention amid the growth of commissions in the Ethereum network, which emphasized the urgent need to find reliable and efficient solutions for scaling.
In February 2021, Matic Network changed the name of the project to Polygon. The rebranding was timed to coincide with the move to an ecosystem concept that allows the integration of different scaling solutions – from sidechains with different consensus mechanisms to L2 options like Plasma, Optimistic Rollups and ZK-rollups.
How Does Polygon Work?
Polygon supports two main types of Ethereum-compatible networks:
- autonomous (standalone) networks;
- secured networks that use the “security-as-a-service” model.
Autonomous networks rely on their own protection, they may have their own consensus model like Proof-of-Stake (PoS) or Delegated Proof-of-Stake. Such networks are independent and flexible, but it is these qualities that are a barrier to achieving a high level of security. For example, PoS requires a large number of robust validators. This type of model is usually suitable for corporate networks and established projects with strong communities.
Secure networks use a “security-as-a-service” model. It is either provided by Ethereum directly, such as through Plasma’s “fraud proofs”, or through a pool of validators. Secure networks provide the highest level of security, sacrificing some degree of independence and flexibility.
Of the L2 solutions Polygon uses only Plasma so far, but other Layer 2 scaling technologies are being worked on. They are quite difficult to integrate with existing infrastructure, because Plasma and PoS frameworks are not directly compatible with Rollups or Validium.
The changes introduced in the lite paper aim to make Polygon a popular scaling tool for EVM-compatible applications, providing a high degree of flexibility for developers and a wide range of infrastructure options for different types of services.
There are 100 validators in the Polygon ecosystem, and various projects can call on their services. This concept is similar to the collective security mechanism Polkadot.
Polygon Network’s Architecture
The Polygon architecture consists of four abstract and component layers:
- Ethereum Layer. Polygon networks can use Ethereum as a base layer, which has a high degree of security. This layer is implemented as a set of smart contracts and is used for operations such as finalization, checkpointing, stacking, dispute resolution and data exchange. It is optional: Polygon-based networks are not required to use it.
- The security layer is another optional layer that makes the validators-as-a-service model work. It allows Polygon-based networks to use a set of validators that periodically check the state of systems in exchange for a commission.
This layer is typically implemented as a meta-blockchain running in parallel with Ethereum and responsible for registration, reward distribution, shuffling and validation of Polygon networks. It is abstract and can have many implementations with different properties. The layer can be implemented directly on Ethereum using miners as validators.
- Networking Layer. This is the first mandatory layer in the Polygon architecture. It consists of sovereign blockchains, each of which can provide transaction matching, local consensus and block creation.
This layer ensures the interoperability of systems. Developers can create their own layer of networks, or use Heimdall’s PoS-validator layer to run their applications.
- Execution Layer. It is responsible for interpreting and executing transactions in Polygon networks. The layer consists of the execution environment and execution logic sub-layers. It is an EVM-compliant layer that enables easy application integration.
As a result, Polygon can provide a variety of system options-with a focus on security, transaction speed, cost minimization, and sovereignty. Given the age-old trilemma of scalability, projects can choose the best fit for their use cases and move from one solution to the next.
This architecture also allows different Polygon-based scalability solutions to interact with each other, preventing the creation of siloed, isolated systems.
As of now, Polygon only has PoS and Plasma networks available. The project also provides a development kit (SDK) to help new projects create flexible and customizable scaling solutions.
Matic Plasma Chains is a second-tier solution based on the Plasma scalable decentralized application framework, which was once proposed by Joseph Poon and Vitalik Buterin.
Plasma uses smart contracts and Merkle trees to create an unlimited number of child chains which are copies of the parent Ethereum network. The main blockchain offloads the child chains, opening up the possibility of fast and inexpensive transactions.
One disadvantage of the solution is the long withdrawal period from L2 which takes about a week. Plasma cannot be used to scale applications based on complex smart contracts. The solution supports only simple functions like fund transfers and exchange transactions.
Matic PoS Chain is a public (permissionless) sidechain that runs in parallel with Ethereum. Its security is ensured by the Proof-of-Stake consensus mechanism with its own set of validators.
The Matic PoS Chain also relies on the security of the ether network when it comes to checkpoints and stacking. This sidechain is an example of Ethereum compatible blockchain networks , allowing Ethereum projects to integrate with it simply and seamlessly.
During the consensus process in Polygon, validator users stack MATIC tokens. Polygon chains provide a mechanism for removing stacked funds (slashing). It prevents stakeholders from offering invalid blocks, verifying blocks, and conducting transactions in violation of network rules.
Matic PoS Chain includes two levels:
- Bor Block Production Layer is responsible for aggregating transactions into blocks;
- Heimdall’s PoS validator layer supports all validation nodes (stackers) that run parallel to the Matic Network stacking contracts and manage validator accounts, produce slashing and release awards.
Bor Block Producers are a subset of network members who are periodically shuffled by Heimdall validators. These groups are selected from the pool to validate only a specific set of blocks, called a span.
Heimdall runs on the Tendermint engine, which has changed data structures and signature scheme. It is responsible for block validation, the work of the block creator selection committee, and controlling the process of introducing sidechain blocks into Ethereum blockchain (checkpointing).
This layer aggregates the blocks created by the Bor into the Merkle tree. The summarized data is sent to the main Ethereum network as a commit, capturing the last state of the Polygon system.
The above mechanism is similar to Optimistic rollups, where users trust the last state on the Ethereum network with no evidence of fraud. However, Polygon uses a sidechain architecture, which comes with some risks. For example, there can be miscreants among the validators, and bugs in the consensus algorithm are not excluded.
Heimdall validators are required to stack MATIC tokens in Ethereum before they can engage in checking and securing their network. Checkpointing is done approximately every 34 minutes. At least two-thirds of the validators must confirm the result of this process. Only then is the data sent to Ethereum.
Rewards are distributed among validators in the form of MATIC tokens. They include a staking reward and user transaction fees.
Anyone can participate in validation. You need to own at least one Polygon network token to do so. As of this writing, more than 28% of the project’s coin supply is involved in stacking. It’s worth noting that MATIC is not a control token: voting is limited to changes in parameters associated with validators.
An important function of Heimdall validators is to synchronize data between networks.
“State Sync” is a native mechanism for reading Ethereum data from the Matic EVM chain. Heimdall layer validators receive StateSynced events and pass them to Bor,” the documentation on the Matic Network website states.
This event means that there is a state update of the Ethereum core network, information about which needs to be passed to Polygon. The reverse process is done via checkpointing.
Due to its architecture features, Polygon has a very short block interval – 2-4 seconds. This provides a high throughput.
Not Really A Sidechain
Jakub, the developer and founder of Finematics, thinks that Polygon’s PoS Chain is more than just a sidechain. He calls this system the Commit Chain.
“When it comes to the Polygon Commit Chain, it should be differentiated from a sidechain because it has many additional features that rely on the security of the core Ethereum network,” he said in his article.
Jakub points out that it used to be customary to refer to not only Plasma and Rollups, but also sidechains, as they are all built on top of the core network, as second-tier solutions.
“After a while, the Ethereum community started to distinguish between L2 solutions, fully secured by the Ethereum core network, and other scaling options with their own consensus mechanisms – sidechains.”
According to him, many sidechains use a consensus mechanism that limits the number of entities that have the ability to verify data. For example, in the case of Delegated Proof-of-Stake, there are usually only 21 validators; Proof-of-Authority-based systems also have a small number.
“In the Polygon PoS Chain, anyone can join the network and start validating its state. This is important because anyone can become a validator and verify that transactions are being processed correctly on their own,” Jakub explained. “This model allows anyone to participate in network security, with any number of MATIC tokens.”
As it was mentioned earlier, validation is performed by a certain number of blockchain producers in the Bor network. The latter are periodically “shuffled” by Heimdall validators. Selected members of the network validate only certain sets of blocks (span). After that a new selection process starts. This is a specific Polygon feature.
“This is not to the detriment of transaction speed, because all validators do not need to constantly check blocks,” stressed the founder of the Finematics project.
What Are the Bridges To Polygon?
Heimdall validators make decentralized crosschain token transfers between Ethereum and Polygon possible. There are two types of bridges – Plasma and PoS.
Initially, the project used only a bridge Plasma, which is characterized by a high level of security. Its main drawback was a seven-day period of assets withdrawal, which can seem too long to many users.
Then the developers introduced the PoS bridge, designed to solve the problem of long withdrawals. This tool is much faster, but less secure, and it assumes users trust the validators.
There are also bridges from third-party projects. For example, Zapper Bridge, which works only in the direction from Ethereum to Polygon. xPollinate service from Connext supports transfer of crypto assets between xDai, Polygon, Fantom and Binance Smart Chain ecosystems. A bridge from income aggregator EVOdefi provides similar functionality.
When users interact with bridges, they send crypto assets to them and receive equivalent coins based on another network.
To date, many decentralized systems have been developed, with significant technical differences between them. Such bridges play an important role since they make the DeFi segment more liquid, active and less fragmented.
The Polygon team is actively developing advanced scaling solutions and investing multi-millions in DeFi development. As a result, many well-known projects, including Aave, Curve, and SushiSwap, have integrated with the new ecosystem. This has allowed them to become more liquid and strengthen their position in the market.
Multiple new applications have been created that rely on cheap and fast transactions using MATIC. The price of the latter, thanks to high demand and network effects, has increased by more than 5,000% in a year.
Polygon allows industry participants without much money to experiment, moving funds between different platforms like LEGO building blocks. Fast and extremely cheap transactions open up rather complicated investment strategies for users, using platforms like StakeDAO, where different protocols are involved.
The team has the difficult task of being among the first to implement ZK-rollups, Optimistic Rollups and other advanced developments. If successful, the project will become the centerpiece of EVM-compliant L2 solutions and justify itself as an “aggregator of scaling technologies.” This should be facilitated by the first mover advantage and the obvious directions of DeFi segment development towards interoperability, minimization of transaction costs and fastest possible transactions.
On the other hand, competitors are not slacking: significant capital is flowing into viable alternatives like Binance Smart Chain and Solana. These ecosystems also have impressive TVL figures: $5.63 billion and $1.54 billion respectively (as of August 15, 2022).
Time will tell who will win in this arms race. In any case, the competition will not hurt the further development of the industry.
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