Over the years, Ethereum has brought all kinds of advancements into the crypto space, including smart contracts and high-interest-paying decentralized applications. However, it faces three BIG challenges.
The first is the low throughput issue, which is a fancy way of saying Ethereum can only handle 30 transactions per second. This processing speed is considerably low, since many alternatives can process many more transactions in the same timeframe.
For example, the Cardano blockchain does about 257 TPS, while the Solana and Polkadot networks can process up to 65,000 and 1,000 transactions per second, respectively.
Secondly, the Ethereum network isn’t user-friendly since you are effectively bidding in an auction against EVERYONE else who wants to pay to be one of those 30 transactions. In short, this means it is expensive, like $20 to send your friend $1 expensive.
Lastly, the Ethereum blockchain presents developers with limited options. All Ethereum projects run on the same network and have similar throughput. This implies that they share in all of Ethereum’s problems, with no exceptions.
But what if there was another blockchain that leveraged Ethereum’s technology while also offering higher throughput, extremely low transaction fees, and better options?
Welcome to Whiteboard Crypto, the #1 Youtube channel for crypto education, and here we explain topics of the cryptocurrency world using analogies, stories, and examples so you can easily understand them. In this video, we are going to explain what Polygon is, how it works, as well as the tokenomics of the MATIC coin.
In 2017, three Indian developers, (Sandeep Nailwal, Jaynti Kanani, and Anurag Arjun), sought to find a solution to Ethereum’s problems , which resulted in the creation of the Matic (which has now rebranded to the Polygon) network. One thing to note here is that even though they rebranded to the Polygon network, the coin is still called the Matic coin.
What Is Polygon?
Polygon is a layer-two (L2) scaling platform that allows Ethereum-based applications to tackle the problems that I mentioned earlier while also leveraging Ethereum’s security. Its primary focus is to increase the usage of DeFi tools and apps by connecting blockchains together. The network currently hosts about 3000+ decentralized applications (dApps), of which over 80 big names migrated from the Ethereum main chain. Since Polygon is so similar to Ethereum, many developers that create useful tools will move them from Ethereum to other EVM blockchains like Polygon to increase their reach and usage.
What is an EVM?
If you’re wondering what an EVM is, it stands for Ethereum Virtual Machine and it’s the code run by computers around the world to carry out the blockchain’s smart contracts. Polygon has an EVM, but so does the Binance Smart Chain, Fantom, and a few other big networks… they all utilize the main Ethereum code. Since they run basically the same code, this makes sense how developers can simply move their code over to a new network and it’ll work the same without many changes.
Polygon Consensus Mechanism
When we think about Polygon, most people think of the Polygon Proof-Of-Stake chain, which is simply a sidechain to ethereum utilizing a proof of stake consensus mechanism. There are a few other changes to this sidechain, but what’s really important is that it’s way faster and can handle many more transactions per second, also meaning it’s much more affordable to the end user.
One of the core ideas behind Polygon is to equip developers with user-friendly and flexible tools so they can fast-track Ethereum’s transformation into a multi-chain platform. Basically, Polygon isn’t just this single Proof-of-stake chain that we usually think of… they are a series of blockchains that help scale Ethereum. When they actually achieve this, developers can easily create all kinds of scaling solutions that they can use with Ethereum, like completely separate chains, like ZK Rollup chains, Optimistic Rollup chains, or any other sidechains they desire. Check out our videos on sidechains and rollups if you want to learn about those, there are really unique and creative ways to bundle up data to save space on the Ethereum chain. The Polygon POS chain is just one way to scale Ethereum, in reality Polygon plans to create many solutions for users to scale it.
At first, I thought Polygon was simple, but when you look at it’s internals, there’s a lot more than regular users see.
For users like you and me, we can sum up Polygon in one sentence: Ethereum, but with super cheap gas fees. Right now, to transfer your ethereum from one account to another, the fee is $30. However, on the Polygon network, it is less than a penny. This means users are free to try new apps and test things out without the fear of losing $150 over a token swap. Personally, the Polygon and Binance Smart Chains are the two DeFi blockchains I recommend to new users, so take that for what it’s worth.
How Does Polygon Work?
Polygon is driven by the Layer-2 scaling solution and Proof-of-Stake protocol, serving as what is called a Commit Chain to the main Ethereum Chain. If you don’t know what a Commit chain is, it functions as a transaction network that operates close to a main chain; therefore, in Polygon’s case, it actually works alongside Ethereum. Before we continue, if you have no idea what Layer 2 means, you should watch our specific video on it first, then the rest of this stuff in the video will probably make sense.
The Polygon Commit chains group up clusters of transactions and process them all together before sending the data back to the main chain. Think of it like this. Instead of sending an entire video of all the transactions, Polygon just sends a single snapshot every now and then so that the Ethereum chain can still understand what is happening without processing a ton of data. This is why the Polygon network can process up to 65,000 transactions per second.
Experts predict that a time will come when Polygon will host thousands of chains that work hand-in-hand with Ethereum to increase throughput to millions of transactions per second.
Polygon’s architecture runs on a four-layer system comprising of the Ethereum layer, security layer, the Polygon networks layer, and finally the execution layer. I’ll be honest with you, you don’t really need to know this stuff, so skip ahead if you want to get into Tokenomics.
The Ethereum layer is made up of different Ethereum-based smart contracts. These contracts are in charge of staking, transaction approval, and interaction between the Ethereum blockchain and the numerous Polygon chains. It’s how Polygon actually checks in with Ethereum from time to time.
The security layer works alongside Ethereum to provide validator services, giving chains an additional layer of security. That said, it is important to note that both the security and Ethereum layers are optional, they aren’t required for Polygon to work.
The Polygon networks layer is the ecosystem of projects or blockchain networks developed on Polygon. Every project or blockchain that exists within this ecosystem has its own community where local consensus is reached and blocks produced.
Next is the execution layer, popularly known as Polygon’s Ethereum Virtual Machine(EVM). Its primary function is to execute smart contracts on the Polygon blockchain. This compatibility with the EVM smoothen the user experience for developers and programmers using the Ethereum chain.
I know you’ve been itching to get to the part where you’ll see the investment potentials of Polygon. So, let’s take a look!
The Polygon network has a native token, MATIC, which has been trading at around $2 with a market capitalization value of around $13 billion. MATIC tokens are disbursed monthly and have a total supply of 10 billion tokens of which nearly 6.8 billion is already in circulation. The difference is tokens held for staking rewards and tokens with a time-locked release schedule that we’ll talk about later.
The developers had sold about 3.8% of MATIC’s total supply in their initial private launch in 2017... Then during the Initial Exchange Offering, another 19% of the max supply was sold. The development team owns 16% of the total supply, the advisors have 4%, and staking rewards come to around 12%. Also, the ecosystem already has 23.33% of the supply, while 21.86% went to the Polygon foundation.
Since new Matic tokens are being printed to reward stakers, it is technically inflationary, however Matic has a limited supply, and soon they will be implementing their version of EIP1559, base transaction fees will be burned, effectively making it deflationary. You might be wondering “how will we reward stakers when the funds to pay them run out?” Well, the Polygon team hope by then the extra transaction fees that users add to prioritize their transactions will be enough to incentivize staking validators to keep doing their thing.
Personally, I love using the Polygon ecosystem to invest in, namely the Curve.Finance application, has been earning me around 30% APY for the past few months. Aave on the Polygon network also had amazing rates a few months ago, but some new investors seem to have caught on.