A Deep Dive into the Polygon (Matic) Ecosystem

Ethereum has had an enormous inflow of new users in recent months, with over 3 million unique addresses created over the last 30 days. While growth in the Ethereum ecosystem has been positive for the market as a whole, it has also demonstrated some of the notable shortcomings of Ethereum. For one, decentralized applications or Dapps have become notably expensive. With the average DEX transaction costing over 100 Gwei or $10 based on data from ethgasstation.com, the barrier to entry has become increasingly high for many around the world. While one possible solution, Ethereum mainchain upgrades, has been given a lot of attention in recent months due to the upcoming Ethereum 2.0 Upgrade scheduled for later this year, another possible solution, Ethereum sidechains, may offer a more efficient solution. The side chains for Layer 1 platforms like Ethereum have collectively been named Layer 2 (L2) scaling solutions. These L2 platforms are built on top of existing L1s and look to add sidechain functionality to reduce transaction costs and enhance speeds.

Polygon ($MATIC) is an L2 scaling solution built on Ethereum with the goal of remedying some of the most significant barriers to Dapp adoption: speed, scalability, and usability. Polygon calls itself the “Ethereum’s internet of blockchains” as users on Polygon can create off-chain transactions for payments and smart contract interactions. Polygon takes a unique approach to L2 scaling influenced by plasma, which is a proposed L2 scaling solution that involves creating a tree-like set of “child blockchains” that use the Ethereum blockchain as a trust and arbitration layer. Child blockchains help reduce transaction costs by allowing many transactions to be batched before being sent to the Ethereum blockchain.

Matic uses something called MoreVP (More Viable Plasma), which allows for assets on the Ethereum blockchain to stay in place while transactions on the L2 can happen on a separate proof-of-stake network. Matic has multiple sidechains, and each is EVM-enabled which allows for smart contracts to be deployed and interacted with at a far lower cost than on the Ethereum mainchain.

When researching Polygon, the first thing to understand is that Polygon is actually separate from the original MATIC blockchain that launched on Ethereum. Polygon’s new blockchain is built as a "commit chain" rather than a "side chain.” The main difference to note here is that sidechains typically rely on their own validators for security. In contrast, commit chains like Polygon can internalize Ethereum's network security by using Ethereum validators. Commit chains allow developers to take advantage of the scaling benefits of a side chain while getting the security of Ethereum.

In the Polygon ecosystem, two different types of chains can be built; Stand-Alone Chains and Secured Chains. Stand-Alone chains can have their own consensus models and thus are less secure than networks that use the Ethereum consensus model but are more flexible. Secured chains can either be secured by Ethereum directly or by validators in the Polygon ecosystem, making them more secure but less flexible than Stand-Alone Chains. Polygon's network architecture is unique in that it gives developers the ability to mix and match different scaling features rather than needing to select only one.

The Ethereum Layer- The Ethereum layer simply uses Ethereum as the base layer for the Polygon chain, high security but low flexibility. As a project on Polygon, you are not required to build on this layer.

Security Layer- The Security Layer is where Polygon provides the "validator as a service" function, allowing the Polygon validators to serve as the chains consensus mechanism. This is more flexible than using the Ethereum layer but slightly less secure. As a project on Polygon, you are also not required to build on this layer.

Polygon Networks Layer- The Polygon Networks Layer is made up of independent blockchain networks where each network can maintain central functions like block production and transaction collation. As a project on Polygon, you are required to build on this layer.

Execution Layer- The execution layer is responsible for executing the transactions that are issued in the Polygon ecosystem. As a project on Polygon, you are required to execute on this layer.

Polygon can overcome many barriers to Ethereum scaling due to its unique structure that includes both scalability and backward compatibility while preserving security and user experience.

The breakdown of the MATIC allocation is as follows:

MATIC’s seed round concluded in April 2019 after raising roughly $165,000 from institutional investors, including Coinbase Ventures and ZBS Capital. During the Seed Round, 1 MATIC sold for a price of $0.00079.

Next, early supporters were given the opportunity to invest at a price of $0.00263 per MATIC (more than 3x from Seed Round prices). The Early Supporter round raised $450,000 at a rate of $0.00263 per MATIC.

The next round of fundraising included a public sale on Binance Launchpad in which $5 million was raised at a price of $0.00263 per token (equal to early supporter price at launch).

The rest of the funds, equivalent to over 75% of the outstanding MATIC supply is dedicated to the team, advisors, foundation, ecosystem, and network operations that keep the MATIC mainnet running.

While there are over 10 billion MATIC tokens, the amount in circulation is just under 6.4 billion or roughly 64%. While investors who bought into MATIC via the Launchpad sale were given immediate access to their tokens, the rest of the groups were given lockups of varying lengths. Seed investors and Early Supporters were given access to half of their tokens immediately, with the rest being released in October of 2019. Tokens dedicated to the Team, Advisors, Foundation, Ecosystem, and Staking Rewards will be distributed over time, with 100% of the tokens estimated to be dispersed by Q4 of 2022.

Most Active Dapps on Polygon by # of users over the last 24 hours

While many of the top projects on Ethereum like Sushiswap, Curve, 1inch, and Balancer have been ported over to Polygon, there are also Polygon-native projects that are gaining popularity and are bringing people to the Polygon ecosystem.

A brief overview of some of the most active native Dapps on Polygon:

QuickSwap

Quickswap is a next-gen DEX built on Polygon, allowing users to make fast and cheap transactions on over 100 trading pairs. Quickswap was initially forked from the Uniswap protocol and is powered by the QUICK token. Quickswap has quickly become the most active Polygon project by number of users, with over 225,000 users over the last 30 days and more than $4.5 billion in trading volume. At the time of writing, there is over $1 billion in liquidity on the platform, making it one of the most liquidity DEXs on the market despite only launching in March of 2021.

Polycat Finance

Polycat Finance is a yield aggregator, and DEX describing itself as "a value-oriented, economically sustainable hybrid yield aggregator on Polygon.” Polycat Finance is powered by the FISH token, an ERC20 token with a maximum supply of 3 million FISH. FISH also serves as the governance token on Polycat, and FISH owners receive 'dividends' (a percentage of trading fees on the platform) now that the maximum supply of 3 million FISH was reached in August. Polycat Finance also has a unique mechanism for supporting early-stage projects that allows them to raise money via an IFO (Initial Farm Offering). Users can stake their fish and receive the new tokens (along with the additional yield they earned) once the pool's FISH tokens are burned.

Despite reaching a TVL of over $284 million in June, Polycat Finance's current TVL is just under $130 million at the time of writing. The number of daily users on the platform fell from over 15,000 at its peak in June down to 900 users in early August which has risen to over 5,000 users over the last 24 hours as APY's on the platform have begun to trend upwards.

Upcoming Updates:

Aavegotchi

Aavegotchis are NFT gaming avatars on the Ethereum blockchain adhering to the ERC721 standard. The Aavegotchi universe is powered by the $GHST token, which allows users to upgrade their tokens and earn yield through Aave, bridging the gap between blockchain gaming and DeFi by gamifying the yield experience. Aavegotchi ported their code from the Ethereum mainnet to Polygon in March of 2021, which has allowed the game to grow significantly due to the lower barrier to

entry. An Aavegotchi team member Nick Mudge tweeted on March 17 of 2021 that in the 15 days after the Polygon upgrade was deployed, the upgrade had already saved users over $14 million on the platform in gas fees, demonstrating a strong use case for Polygon.

Upcoming Updates:

PolyMarket

PolyMarket is a decentralized information market built on Polygon that went live in June 2020. PolyMarket allows users to trade binary contracts on a myriad of real-world events, from elections to celebrity court cases. On the platform, users can suggest markets for a specific event, and other users are able to make binary bets on the outcome of the event. Events on the platform trade between a value of $0.00 and $1.00, representing the collective belief of the likelihood of the event occurring. If a contract’s “Yes” is valued at $0.82, for example, this means the market believes there is an 82% chance of the event happening. Unlike traditional betting, however, users have liquidity on their bets and can trade them like assets making the process far more flexible and efficient. By allowing users to create unique markets and have live liquidity, PolyMarket has become an extremely accurate prediction model by using the wisdom of the crowd. Currently, there is no native PolyMarket token, and users can place their bets using USDC.

0xUniverse

0xUniverse is a Polygon-based game powered by the 0XE token where users can build spaceships and explore a vast universe. 0XE token serves as an in-game utility token and is used as 'energy' to engage in battles and build in-game. 0xUniverse also involves NFTs through planet NFTs, which are an essential part of the game. Each planet is unique, the rarity (and thus the value) of the planet is determined by the planet's design and resources, and players look to colonize planets for profit. 0xUniverse also has an embedded storyline, and players can engage with the storyline by finding ancient artifacts hidden on their planets to build ‘knowledge.’’ 0xUniverse is a Polygon based game where users can build spaceships and explore a vast universe.

In order to begin playing the game, you first need your own planet and a spaceship. Spaceships can be built after accumulating “knowledge” on your home planet. Planets can be purchased on sites like Opensea, where the cheapest Planets can be purchased for just 0.0009 ETH at the time of writing.

Upcoming Updates:

On-Chain Data

The number of unique addresses on the Polygon network jumped exponentially in 2021, going from roughly 120,000 addresses to over 35,000,000 addresses over the 8-month period representing a growth of roughly 28,000%.

The number of daily active users on the Polygon network, a good indication of real adoption, also increased dramatically over the 8-month period and scaled with the exponential address growth. Daily active users on Polygon went from roughly 750 at the start of 2021 to 192,000 on 8/1, representing 25,000% growth.

According to data from Nansen, The number of daily transactions on Polygon surpassed Ethereum transactions in May and has since dwarfed Ethereum's daily transaction number with almost 4x as many transactions per day at the time of writing.

Despite having nearly 4x as many transactions, gas fees on Polygon are significantly cheaper in total than Ethereum gas fees, equating to just under $40,000 as opposed to Ethereum’s $21mn per day.

The result of this difference in fees is that the ratio of tokens being deployed on Polygon versus Ethereum has increased dramatically since the start of 2021, going from 0 (no Polygon deployments) to over 73% in August of 2021. This uptrend represents a seismic shift in the crypto community towards L2 solutions that happened as Ethereum's gas prices increased at the beginning of the year and showed that developers are using Polygon as a legitimate alternative to Ethereum.

Derivatives Data

Binance futures are currently the most active polygon market, doing over $360,000,000 in volume over the last 24 hours. According to Binance futures data, the current long/short ratio for MATIC is over 4:1, with 82% of traders opting to long MATIC indicating very bullish investor sentiment.

At the time of writing, funding rates for MATIC on Binance, a good indication of bullishness or bearishness, recently peaked around 0.075%. A positive funding rate means that longs are currently more aggressive than shorts (as they are willing to pay a fee to take on a long, which is bullish). When funding rates are negative, such as on 7/22, the market is bearish overall as traders must pay to short the market.

Github Data

Github data suggests that the number of developers being onboarded onto the Polygon network continues to grow, albeit slowly, with an average of 10 contributions per day in July and just five stars. There are currently 61 Repositories on Polygon’s Github, with the most starred repository being the Matic Smart Contract Repository.

Sentiment Data

Over $600 million was lost recently when Poly Network, a multi-chain yield aggregator, was exploited on August 9 of 2021. While the exploit was not related to a security flaw in Polygon's core infrastructure, the token suffered a noticeable dip in sentiment from 58 down to a low of 34. This precipitous drop in sentiment preceded a price movement of 6% for the MATIC token as the community reacted to the news, which indicates that sentiment plays a role in Polygon’s price movements.

Recent Development: Polygon’s Foray into Zero-Knowledge (ZK) Solutions, Acquisition of Hermez Network $HERMEZ

Zero-Knowledge (ZK) proofs are a technique used to prove statements that preserves the privacy of both parties involved in the transaction. This means that the sender, receiver, amount, and contents of the transaction can be shielded while still allowing for transactions to be verified. Rather than requiring all parties to see the contents of a transaction, ZK focuses on providing only the necessary information to process a transaction without disclosing any additional details. ZK is able to function via an automated validator that acts as an encrypted intermediary between two parties. In order to verify information, party A waits on confirmation from the validator to assess the accuracy of party B’s information, rather than having to verify the information directly. This allows both parties' privacy to be protected as the independent validator only gives the parties access to the necessary information rather than their complete wallet history. Polygon believes that ZK proofs are the answer to the concerns around privacy on the Ethereum blockchain. To accomplish the goal of transitioning to a ZK-based platform, Polygon announced on August 13 that they had put aside $1bn to focus on implementing ZK solutions. Funding will be used to make acquisitions, hire talent, encourage adoption and build innovative solutions. The first step of this process was the acquisition of Hermez, an EVM compatible scaling solution based on ZK technology trading under the $HERMEZ ticker.

Other Recent Developments

August 10, 2021 Quickswap becomes the first Polygon project listed on Coinbase Pro

August 6, 2021,  MATIC token to be listed on Bitstamp

August 2, 2021, Simplex announces partnership with Polygon for instant fiat purchases

July 28, 2021, The Graph to use Polygon for its billing system

July 27, 2021, Binance Completes Polygon Wallet Integration 

July 24, 2021, Trust Wallet Adds Support for Polygon

July 20, 2021, Harvest Finance Launches on Polygon

July 19, 2021, Polygon launches Polygon Studios, Polygon’s gaming & NFT arm

Overall, scaling solutions like Polygon are likely to gain significant traction as network congestion continues to be an issue on the Ethereum blockchain. With its multi-layer system, Polygon is able to verify transactions in just a few seconds while still being uploaded onto the Ethereum blockchain, blending scalability and security. Polygon’s advanced Dapp infrastructure makes it easy for new projects to launch on-chain and for existing Ethereum projects to port their code. Over the next few months, we will likely see most existing projects built on Ethereum begin to move exclusively onto L2 solutions like Polygon in order to reduce transaction prices and increase speed.

This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.