Polygon 2.0: A New Lease of Life for MATIC

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Introduction

Polygon is a layer-2 scaling solution for the Ethereum blockchain. It is designed to address the scalability and cost issues of Ethereum, while still maintaining its security and decentralization.

Polygon works by creating a network of sidechains that are connected to the Ethereum mainnet. Sidechains are essentially separate blockchains that are connected to the mainnet through a bridge. This allows Polygon to process transactions much faster and cheaper than the Ethereum mainnet.

Polygon is a popular choice for developers who are building decentralized applications (dApps) on Ethereum. It offers a number of advantages over other scaling solutions, including:

• Scalability: Polygon can process thousands of transactions per second, compared to Ethereum's 15-20 transactions per second.

• Cost: Polygon transactions are much cheaper than Ethereum transactions, typically costing less than $0.01.

• Security: Polygon is secured by the Ethereum mainnet, which is one of the most secure blockchains in the world.

• Decentralization: Polygon is a decentralized network, which means that it is not controlled by any single entity.

Polygon is also used by a number of popular dApps, including QuickSwap, Aave, and SushiSwap. It is a rapidly growing ecosystem, with over 30 million active addresses and over 5,000 dApps deployed on the network. These applications, unlike other blockchains, are highly diversified and include:

• Gaming: Polygon can be used to scale blockchain-based games, which often require high transaction throughput and low fees.

• DeFi: Polygon can be used to scale decentralized finance (DeFi) applications, which allow users to lend, borrow, and trade assets without the need for intermediaries.

• Web3: Polygon can be used to scale Web3 applications, which are decentralized applications that run on the blockchain.
  

Polygon 2.0

In June 2023, Polygon announced Polygon 2.0 - a series of upgrades aiming to better address a number of key challenges facing the Ethereum network today, including:

• Scalability: Ethereum is currently struggling to scale, with high transaction fees and slow transaction times. Polygon 2.0 aims to address this challenge by using ZK-rollups technology to achieve unlimited scalability.

• Security: Polygon 2.0 will be secured by a highly decentralized network of validators. This will make the network more secure and resilient to attacks.

• Usability: Polygon 2.0 will provide a unified experience for users, regardless of which scaling solution they are using. This will make it easier for users to interact with the Polygon ecosystem.

• Governance: Polygon 2.0 will be governed by a decentralized community. This will give users a say in the future of the network.

At its core, Polygon 2.0 is a network of zero-knowledge Layer-2 (L2) blockchains that leverage ZK-rollups technology to achieve unlimited scalability and unified liquidity. ZK-rollups bundle thousands of transactions into a single proof, which is then verified on-chain. This process significantly reduces gas fees and transaction times, while maintaining the security of the Ethereum network.

Polygon 2.0 also introduces a number of architectural changes that further improve its scalability and security. For example, the new protocol is organized into four distinct layers: the Staking Layer, Interop Layer, Execution Layer, and Proving Layer. This separation of concerns allows for greater efficiency and flexibility and also makes it easier to integrate new features and technologies in the future.

In addition to its scalability and security benefits, Polygon 2.0 also features a number of governance enhancements that empower the community to take ownership of the network. For example, the new token economic model introduces a variable inflation rate that can be adjusted by the community to incentivize validator participation and fund ecosystem development.

New Tokenomics Model

Polygon is proposing a new native token, POL, which is a technical upgrade of the current token MATIC. POL is designed to become the major tool for the coordination and growth of the Polygon ecosystem and the main driver of the vision to become the Value Layer for the Internet.

POL is a 3rd generation token that is hyperproductive. This means that validators can validate multiple chains and every chain can offer multiple roles (and corresponding rewards) to validators. This novel design secures, coordinates, and aligns the Polygon ecosystem and supercharges its further growth, at the same time offering practically unlimited opportunities to POL holders.

In conjunction with the redesigned protocol architecture, POL introduces major benefits for the Polygon ecosystem, including:

• Ecosystem security: A highly decentralized pool of PoS (Proof-of-Stake) validators can provide security, resilience, and credible neutrality to every Polygon chain.

• Infinite scalability: POL can support the exponential growth of the Polygon ecosystem and eventual mainstream adoption. It enables the validator pool to scale to support thousands of Polygon chains without sacrificing security.

• Ecosystem support: The Polygon ecosystem and the industry in general are still in the early phases and will require ongoing support in years to come. POL can offer a sustainable, in-protocol mechanism for those activities.

• No friction: Blockchain protocols often require both users and developers to hold, stake, or consume their native tokens in order to use the network. This causes friction and degrades user and developer experience. POL is designed in a way that does not introduce any such friction.

• Community ownership: With decentralization as its core value, Polygon is meant to be governed by its community. POL should be enabled to hold governance rights, i.e. be utilized in governance frameworks.

With the POL token parameters outlined, the team has defined initial tasks to bring the 2.0 vision to life in PIP-18. This process starts with a MATIC to POL migration, allowing the protocol to adopt the new standard as the native gas token for Polygon PoS. Once completed, the staking layer can be implemented so validator rewards will be carved out of the new token supply, which lays the foundation for the remainder of the 2.0 structure to be unveiled.

A New Lease of Life

These initial steps pave the way for the full transition of Polygon 2.0. We believe that the market will respond positively to the transition from MATIC to POL, and is likely to begin pricing in the wider upgrade once timelines become clearer. The recent improvement proposals detail these changes to start in early Q4 (from October 2023), pending community approval.

Given Polygon’s position as a scaling solution, traditional Layer-2 tokens such as Optimism (OP) and Arbitrum (ARB) remain the closest comparables. Over the last 6 months, MATIC has lagged behind it's counterparts, as traders have shunned older tokens in favor of newer projects. This is a common trend seen within cryptocurrencies, with traders constantly focussing on recently-listed assets to trade instead of their older counterparts.

There are two main reasons why traders focus on newer tokens:

• They are more likely to be undervalued by the market. Since they are newer, there is less information available about them. This means that there is more potential upside for traders who are willing to take on the risk of investing in them.

• The greater fool theory. This theory states that investors are willing to buy assets at inflated prices because they believe that there will always be a greater fool who is willing to buy them at even higher prices. This can be especially powerful in new tokens, where the lack of upside levels to act as resistance can lead to systematic price discovery.

Conclusion

The relaunch of MATIC as POL could be seen as a way to address both of these issues. By retiring MATIC and relaunching as a new token, Polygon can create a clean slate. This could attract new investors and traders who are looking for newer tokens with potential upside.

In addition, the relaunch could be seen as a way to signal to the market that Polygon is committed to innovation and growth. This could help to boost the price of MATIC/POL and attract more users to the Polygon ecosystem.

Overall, Polygon 2.0 represents a significant milestone in the evolution of the blockchain, aimed at establishing it as the Value Layer of the Internet. This set of enhancements covers multiple areas including protocol architecture, tokenomics, and governance. The end goal is the democratization of global economic access, by boosting decentralized finance, digital ownership, and innovative coordination mechanisms.

With that in mind, we believe that MATIC could outperform into the token swap in early Q4, and the launch of the upgraded POL token is likely to offer plenty of volatility and trading opportunities in the early days of listing.

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