One major issue facing the blockchain ecosystem is a lack of scalability. While smart contract platforms like Ethereum (ETH) have exploded in popularity, the underlying technology desperately needs an upgrade. That's especially relevant as decentralised finance (DeFi) becomes more popular.

One project that aims to solve this problem is Polygon. Formerly known as the Matic Network, this blockchain solution aims to improve Ethereum's functionality without necessarily replacing it. Here's what you need to know about Polygon, its pros and cons, and whether it's a good investment in 2022.

What is Polygon (MATIC)?

Polygon was started in 2017 by software developers and co-founders Sandeep Nailwal, Jaynti Kanani, Anurag Arjun, and Mihailo Bjelic. At the time, their intention was to create a blockchain scaling solution that could solve the then-current limitations plaguing the Ethereum network. Back then, no one had an easy solution for how to help Ethereum scale into the billions of projected users.^[1]

Initially, the project was known as the Matic Network. While it originally received modest support in India, the project quickly attracted international attention and raised more than US$450 million in funding from various investors, including billionaire Mark Cuban. After going live in 2020, the Matic Network soon rebranded itself as Polygon.^[2]

While Polygon aims to shore up Ethereum's current weaknesses, it isn't trying to replace it, as so many other "Ethereum killers" like Polkadot, Cardano, and Avalanche aim to do.

How Does Polygon Work?

Polygon lets developers build Ethereum-compatible decentralised applications (Dapps) as parallel blockchains, also known as sidechains. These sidechains then connect to the Ethereum main chain. That's in contrast to building a Dapp directly onto Ethereum itself, further congesting the already crowded network.^[1]

Proof-Of-Stake Consensus

Like other newer cryptocurrencies, Polygon uses a modified Proof-of-Stake (PoS) consensus mechanism in order to verify transactions on a sidechain. Polygon requires network participants to stake their MATIC tokens for the right to validate transactions. In exchange, successful validators receive a portion of all transaction fees.^[3]

Participants And Delegators

Where Polygon differs from other PoS cryptos is that participants also can be delegators, another type of participant in the transaction verification process. Delegators stake their MATIC directly with a trusted validator as opposed to trying to become a validator themselves. In comparison, it's a lower-commitment version of staking, but still carries some risk if one vouches for a faulty validator.^[3]

What is Layer 2 Scaling?

Polygon is what's known as a Layer 2 scaling solution. Layer 2 solutions are third-party protocols that can integrate with a blockchain. In contrast, Layer 1 refers to the actual blockchain architecture itself. In this case, Polygon is a Layer 2 solution, whereas the Ethereum mainnet would be Layer 1.^[4]

What this means is that Polygon acts as a secondary layer of blockchain technology alongside Ethereum. However, Layer 2 protocols don't try to change the original blockchain it's operating on top of. All Polygon does is help the Ethereum mainnet handle significantly more transactions through its sidechains, and in the process, reduce gas fees and processing times.^[4]

Plasma Chains And Polygon Bridges

Besides its consensus mechanism, Polygon was also built on another piece of blockchain scaling technology known as the Plasma Chain. Initially developed during the 2017 days of the Matic Network, Plasma Chains are a type of software architecture that enables the rapid deployment of new sidechains.^[5]

As of 2022, Polygon has expanded its developer toolkit to now offer other scaling software tools to Dapp developers. These alternatives include "zk rollup" and "optimistic rollup." Both are variants with subtle differences, including how to distribute data between the Polygon and Ethereum blockchains.^[1]

Polygon interfaces with the Ethereum mainnet through bridges. These bi-directional bridges allow users to transfer assets between the two blockchains, while eliminating third parties like cryptocurrency exchanges such as Binance.^[6]

Polygon has two types of bridges, a slower Plasma bridge mainly intended for developers, and the faster PoS bridge, which can facilitate Ethereum (ERC-20) token transfers.^[6]

What Is MATIC?

Polygon's native cryptocurrency is a token called MATIC. MATIC is used to pay fees on the Polygon network. It's also used for validators and delegators who wish to stake their tokens.

MATIC is built off the Ethereum blockchain, which makes it an ERC-20 token. This means MATIC coins are compatible with and are easily traded against other Ethereum tokens and altcoins. They can be stored in any crypto wallet that stores Ethereum (most of them do), and you can buy MATIC on most crypto exchanges.^[7]

MATIC also plays an important role in network governance. MATIC holders get to vote on proposed changes to Polygon.

Advantages Of Polygon

Polygon allows end-users to do many of the same things that Ethereum offers, but with less congestion and significantly smaller fees. Almost every DeFi protocol or Dapp built on Ethereum can be accessed through Polygon. This includes decentralised exchanges like Uniswap and SushiSwap, lending protocols, and NFT marketplaces like OpenSea.

Speed

As a Layer 2 solution, Polygon can process transactions at a startlingly fast speed. The network has an average block processing time of 2.3 seconds compared to Ethereum's 13.2. Faster transactions and more processing capacity also lend to significantly lower transaction fees.^[8]

Lower Transaction Fees

Users often pay a fraction of a cent per transaction on Polygon. In contrast, Ethereum, during peak congestion, has seen gas fees rise as much as US$70 per transaction. That can also be attributed to Ethereum's processing capacity, which currently handles around 14 transactions per second. Polygon boasts up to 65,000 transactions per second per sidechain.^[5]

Symbiotic Relationship

Unlike Solana, Cardano, Polkadot, and other Ethereum killers, Polygon doesn't need to take over or overthrow Ethereum to be successful. It's built on top of it, in a sort of symbiotic relationship between the two blockchains, with Polygon helping bring out Ethereum's full potential.

Disadvantages Of Polygon

As a Layer 2 blockchain, Polygon's reliance on Ethereum also is a weakness. If anything happens to disrupt the Ethereum network, or if it ceases to exist, Polygon will immediately lose value.

Competition

Additionally, Polygon isn't the only scaling solution out there right now. A few other Layer 2 candidates include Arbitrum, Optimism, Immutable-X, and X-Dai. None of these is as popular as Polygon, but they still represent a threat as competitors.

Lack Of Mainstream Appeal

Being a Layer 2 blockchain also means Polygon won't ever have the mainstream appeal of other cryptos. Bitcoin (BTC), Ether, and Monero are all coins that have practical applications for billions of people. MATIC tokens are a bit more niche and they're mainly used by developers on the Polygon network.

Polygon (MATIC) Price In 2022 And Predictions

While there's long-term value in the project, the short-term situation for crypto investors is rough. The Federal Reserve is expected to continue hiking up interest rates to combat inflation. As a result, growth investments, especially tech, are expected to struggle in this new macroeconomic environment.

Cryptocurrencies have suffered a significant selloff as well. Bitcoin is down around 35% in 2022 through May, with most other cryptos following suit. This includes MATIC, which has been down by over 66% since early January.^[9]

As of 16th May 2022, MATIC price is US$0.86 per coin, compared to US$2.60 during the new year. Despite losing so much value, Polygon still remains the 18th largest blockchain in the world, with a market cap of US$6.8 billion.^[9]

Because of this situation, the short-to-mid term outlook for crypto is bearish. There's good reason to expect this crypto winter will continue until the general market sentiments shift. That likely isn't going to happen until 2023 at the earliest, if not longer.

Summary

Polygon is a very promising blockchain project, one that could play an essential role in helping Ethereum go fully mainstream. It's also much easier to help current blockchain networks scale, as Polygon does, than try and promote entirely new smart contract platforms from scratch, which are what many so-called "Ethereum-killers" are attempting to do.

As DeFi continues to grow as a trend, Polygon has a bright future ahead of it as one of the top Layer 2 scaling solutions in the blockchain ecosystem.