This is the full report released by Messari to update the significant growth of Polygon (MATIC) in the second quarter of 2023, consolidating its position as the top Layer 2 ecosystem.
Key Insights
- Polygon Labs unveiled Polygon 2.0, a network of zero-knowledge Layer-2 blockchains. It aims to become the “Value Layer of the Internet” and brings significant updates to protocol architecture, tokenomics, and governance.
- Polygon zkEVM experienced steady growth, showcasing notable collaborations and integrations with industry players. By the end of the quarter, it achieved 200,000 unique addresses.
- Despite a hostile U.S. regulatory environment, Polygon’s network fundamentals were unaffected by the news.
- Polygon expanded its list of collaborations with prominent legacy companies and institutions, including Franklin Templeton, Securitize, Mastercard, and Warner Music Group. These additions complement an existing roster that includes Adobe, Adidas, Disney, Meta, Nike, Reddit, Robinhood, and Starbucks.
Primer on Polygon
Polygon is a suite of Ethereum-based scaling solutions that allow developers to move computation and data storage off Ethereum and into low-fee, high-speed development environments. Polygon offers the following solutions:
- Polygon PoS – Polygon’s flagship product is the Polygon PoS network, a Delegated Proof-of-Stake (DPoS) EVM-compatible sidechain for the Ethereum network.
- Polygon zkEVM – A Zero-Knowledge (ZK) Layer-2 rollup protocol for Ethereum that launched on mainnet beta on March 27, 2023. Polygon zkEVM aims to enable secure, quick, and cheap transactions. As a ZK-rollup, Polygon zkEVM bundles transactions into batches that are executed off-chain.
- Polygon Miden – Polygon Miden is an upcoming Zero-Knowledge (ZK) Layer-2 rollup protocol designed for Ethereum. Setting itself apart from zkEVM, Polygon Miden does not rely on the Ethereum Virtual Machine (EVM). Instead, it utilizes the Miden Virtual Machine (MVM), written in Rust. This unique approach allows developers to build high-throughput and private applications using modern smart contract languages like Rust, offering enhanced safety and aiming for minimal fees, all while benefiting from the security of the Ethereum network.
- Polygon Supernets – An app-chain-focused scaling solution for Polygon PoS that is in testnet. Polygon Supernets aim to expand the block space of Polygon PoS by providing both Layer-2 and Layer-3 networks for specific applications. Polygon Supernets are EVM-compatible, allowing applications built on Polygon PoS to achieve greater throughput and cheaper transaction costs.
- Polygon ID – A privacy-preserving identification service for Web3 users. Polygon ID uses ZK-proofs to verify a user’s credentials privately without disclosing unwanted personal information.
In June 2023, Polygon Labs unveiled Polygon 2.0, a network of zero-knowledge Layer 2 blockchains. It aims to become the “Value Layer of the Internet” and brings significant updates to protocol architecture, tokenomics, and governance. Polygon 2.0 is the future of the Polygon ecosystem.
Key Metrics
Polygon 2.0
Introduction
Polygon 2.0 represents a significant milestone in the evolution of the Polygon 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. In this segment, we delve into the core attributes and consequences of Polygon 2.0 that have been revealed thus far.
Unlimited Scalability and Unified Liquidity
The core vision of Polygon 2.0 is to enable unlimited scalability and unified liquidity through the integration of zero-knowledge (ZK) technology. This upgrade aims to address the inherent scaling challenges faced by Web3, where the addition of new chains often results in fragmented liquidity and an underwhelming user experience. By leveraging ZK-powered Layer-2 (L2) chains and a novel cross-chain coordination protocol, Polygon 2.0 creates a unified network that offers practically boundless scalability and seamless cross-chain interactions.
Polygon PoS Upgrade to zkEVM Validium
As part of the Polygon 2.0 upgrade, it is proposed for the Polygon Proof-of-Stake (PoS) chain to transition into a zkEVM validium. This change enables Polygon PoS to enhance its security, performance, and compatibility within the Polygon 2.0 ecosystem. With zkEVM validium, transaction data is made available off-chain, resulting in lower fees compared to traditional rollups, while maintaining robust security guarantees. The proposed timeline for the upgrade is as follows:
- June 2023 – July 2023: Pre-PIP discussion and consensus
- October 2023 – November 2023: PIP publishing, discussion, and consensus
- November 2023 – January 2024: PIP implementation and testing
- February 2024 – March 2024: Upgrade, i.e., PIP activation on mainnet
Protocol Architecture
The architecture of Polygon 2.0 is a key element in realizing its vision. It is organized into four protocol layers, each serving a specific purpose:
- Staking Layer – Leverages Polygon’s native token to provide staking services to participating chains. The Staking Layer is implemented on Ethereum via two contracts: the Validator Manager and the Chain Manager.
- Interop Layer – Facilitates cross-chain messaging within the Polygon ecosystem. It enables secure shared access to native Ethereum assets and near-instant and atomic cross-chain transactions.
- Execution Layer – Handles block production and transaction sequencing.
- Proving Layer – Incorporates a highly performant ZK proving protocol for generating and verifying proofs across Polygon chains.
Tokenomics
Polygon Labs has proposed a new native token, POL, as part of the Polygon 2.0 upgrade. The new POL token will be a 1:1 upgrade of the existing MATIC token and will inherit MATIC’s 10 billion supply as its initial supply.
POL will enable holders to become validators for multiple Polygon chains and receive rewards for a variety of services. This includes standard validation services, such as accepting user transactions and determining their validity, as well as broader services, such as producing zk validity proofs for transactions or providing data availability guarantees. Notably, each individual Polygon chain can offer customized roles and rewards for its validators. Validators can choose to validate multiple chains at once to compound their rewards in a similar manner to EigenLayer’s restaking offering on Ethereum.
Finally, Polygon’s new token economic model removes the finite 10 billion supply cap on its native token. Instead, POL will switch to an inflationary model to incentivize validator participation and fund a community-governed treasury. Both categories are expected to receive 1% POL inflation for the next 10 years until the community determines whether to drop the inflation rates.
Governance
Polygon Governance 2.0 introduces three main governance pillars for the Polygon ecosystem. Protocol Governance, System Smart Contract Governance, and Community Treasury Governance. Each pillar of governance will have its own unique governance framework, aiming to create scalable and efficient governance mechanisms.
- Protocol Governance: Facilitated by the Polygon Improvement Proposal (PIP) framework, providing a platform for proposing upgrades to Polygon protocols.
- System Smart Contracts Governance: Addresses upgrades of protocol components implemented as smart contracts. The Ecosystem Council, governed by the community, will be responsible for these upgrades.
- Community Treasury Governance: Establishes a self-sustainable ecosystem fund, the Community Treasury, to support public goods and ecosystem projects. The governance process involves two phases, starting with an independent Community Treasury Board and evolving into community-driven decision-making.
Financial Overview
Market Capitalization and Revenue
Polygon’s market capitalization experienced a significant surge in Q1 2023, reaching nearly $14 billion in mid-February. Although it retraced some of the gains, Polygon closed Q1’23 with a market cap of $9.92 billion, marking a 50% increase compared to the previous quarter and outperforming the broader market.
However, during the second quarter, Polygon’s market cap declined to $5.82 billion, reflecting a 41% QoQ decrease. Despite the market cap contraction, Polygon’s market cap was still up year-over-year.
Polygon generates revenue from network fees, which remained relatively stable QoQ at $11.4 million, equivalent to an annualized revenue of $57 million.
Note: Polygon 2.0 will bring significant changes to Polygon’s revenue and value accrual. See the Polygon 2.0 – Unlimited Scalability and Unified Liquidity section for further details.
MATIC Token
Polygon’s native token, MATIC, serves multiple functions within the network:
- Used as payment for network gas fees (Native MATIC on Polygon PoS)
- Used as a medium of exchange throughout the Polygon ecosystem (Native MATIC and MRC-20 WMATIC on Polygon PoS)
- Staked to operate a validator (ERC-20 MATIC on Ethereum)
- Delegated to a validator (ERC-20 MATIC on Ethereum)
- Used to reward validators (ERC-20 MATIC on Ethereum)
- Governance on the Heimdall layer (ERC-20 MATIC on Ethereum)
In October, MATIC reached full vesting, with a total supply of 10 billion tokens. MATIC follows the EIP-1559 upgrade, which includes a mechanism that burns a portion of every network transaction fee paid in native MATIC. The “base fee,” a fluctuating portion of the gas fee, is burned, while the remaining fee is distributed to the block’s proposing validator as a “priority fee” or tip. To date, a total of 16 million MATIC has been burned through this mechanism.
Note: Polygon 2.0 will replace the MATIC token with a new token called POL. See the Polygon 2.0 – Tokenomics section for further details.
Treasury
Polygon’s Treasury concluded Q2 2023 with a holding of 1.80 billion MATIC tokens, amounting to a value of $1.12 billion. The Treasury is under the control of Polygon Technologies, which has strategically allocated the majority of its expenditures toward the scaling efforts of the Polygon network. These funds have been utilized for various purposes, including the acquisition of ZK-projects and teams, the development of ZK-based solutions, talent recruitment, and research funding.
Note: Polygon 2.0 will fund a community-governed treasury with a new tokenomic model. See the Polygon 2.0 – Tokenomics section for further details.
Network Overview
Usage
In Q2, Polygon experienced a surge in average daily new addresses, increasing by 256% QoQ from 243,000 to 866,000. The network witnessed the creation of nearly 80 million new addresses throughout the quarter. This surge in new addresses coincided with the launch of the zkEVM, indicating heightened enthusiasm within the community.
Conversely, the number of transactions on the Polygon network experienced an 18% decline QoQ, decreasing from 2.9 million daily transactions to 2.4 million daily transactions. This decline in transaction volume directly corresponds to the launch of the zkEVM.
Development
Polygon has demonstrated strong activity and commitment to the developer community. In Q4 2022, it hosted multiple events and signed partnerships to strengthen developer relationships. In Q1, the Polygon Labs @ the Pit (later renamed to DevX Global Tour) accelerator kicked off a global developer tour.
In Q2, Polygon continued the DevX Global Tour Hackathon. It visited Asian cities such as Tokyo, Hong Kong, and Kuala Lumpur, and allowed developers to compete for a share of $125,000 in bounties. The hackathon is going to Europe in July, visiting Amsterdam, Zagreb, London, Paris, Lisbon, and Berlin. Additionally during Q2, Polygon partnered with Google Cloud to offer resources and benefits to early-stage startups in the Polygon ecosystem. Polygon Copilot, an AI-powered tool to support developers, was also launched.
Polygon saw a five-fold spike in deployed contracts in Q2, and it ranked sixth in developer activity through the first half of 2023 according to Electric Capital, boasting 201 full-time developers and 837 total developers.
Additional Solutions
Polygon zkEVM
Polygon zkEVM is a Layer-2 rollup protocol for Ethereum that launched on March 27, 2023. Polygon zkEVM aims to enable secure, quicker, and cheaper transactions. As a ZK-rollup, Polygon zkEVM bundles transactions into batches that are executed off-chain. After the transactions are executed off-chain, Polygon zkEVM publishes the transaction data on-chain. In addition to the data of the transactions, Polygon zkEVM also publishes a validity proof, which cryptographically verifies the correctness of the data published on-chain.
Throughout Q2, Polygon zkEVM experienced notable collaborations and integrations with industry players such as Celer Network, Synapse, Balancer, and Uniswap (not yet operational). Additionally, Polygon unveiled the Polygon Bridge to zkEVM, enhancing connectivity within the ecosystem. Monthly reports were introduced to highlight zkEVM’s activity and development progress
During the quarter, Polygon zkEVM demonstrated consistent growth, boasting 200,000 unique addresses and a total of 1.8 million transactions (equivalent to approximately 19,700 daily transactions). However, it is important to note that the activity on zkEVM remains a fraction of that on the PoS chain. As the quarter concluded, Polygon zkEVM reported a TVL of $40 million, primarily driven by Quickswap’s contribution of $20 million.
Polygon Miden
Polygon Miden is an upcoming Zero-Knowledge (ZK) Layer-2 rollup protocol designed for Ethereum. Setting itself apart from zkEVM, Polygon Miden does not rely on the Ethereum Virtual Machine (EVM). Instead, it utilizes the Miden Virtual Machine (MVM), written in Rust. This unique approach allows developers to build high-throughput and private applications using modern smart contract languages like Rust, offering enhanced safety and aiming for minimal fees, all while benefiting from the security of the Ethereum network.
In anticipation of the Miden testnet launch, Polygon Labs has released a series of detailed blog posts explaining Polygon Miden. It introduces a unique Transaction Model with accounts, notes, and transactions, enabling local execution, proof, and efficient asset transfers. The State Model combines Ethereum’s account model, Bitcoin’s UTXO model, and ZK-proofs, addressing state bloat by storing commitments instead of the full state. Operators manage the global state, while users are incentivized to store data locally, maximizing privacy and minimizing state growth.
Polygon Supernets
Polygon Supernets is an app-chain-focused scaling solution for Polygon PoS that is in testnet as of May 18, 2023. Polygon Supernets aim to expand the blockspace of Polygon PoS by providing both Layer-2 and Layer-3 networks for specific applications. Polygon Supernets are EVM-compatible, allowing applications built on Polygon PoS to achieve greater throughput and cheaper transaction costs.
During Q4 2022 and Q1 2023, Polygon announced several partnerships and collaborations with companies developing their own Supernets. Notably, the IDEX team shared plans for XCHAIN, a DEX-focused zk-rollup appchain that will function as a Polygon ZK Supernet, utilizing Polygon’s zkEVM.
Polygon Supernets V0.9, released in Q2 2023, introduces expanded allowlists and transaction blocklists, staking and token separation support, NFT bridge integration, transaction fee management, deployment optimizations, and enhanced access management. It brings Polygon closer to its goal of creating “super networks” with scalability and sovereignty. A comprehensive source code audit is ongoing to ensure compliance and security, with migration support planned for future releases.
Ecosystem Overview
TVL
Polygon’s TVL experienced a challenging period during the 2022 bear market, with consistent declines in each quarter. However, in Q1 2023, the TVL stabilized, and this stability carried over into Q2 2023. Polygon concluded the quarter with a TVL of $1.09 billion, securing its position as the fifth-ranked chain in terms of TVL.
TVL Top Protocols
Polygon’s top protocols by TVL demonstrated stability throughout the second quarter, maintaining their positions. The leading protocols in terms of TVL are the established blue chips Aave (V2 and V3) with $206 million and $251 million respectively, followed by Uniswap V3 with $88 million TVL, Quickswap DEX with $71 million, Curve with $62 million, and Balancer V2 with $54 million.
Notably, there were two additions to the top ten list during the quarter. PearlFi, a ve(3,3) exchange launched in mid-June, quickly gained traction and achieved a TVL of $42 million within a few weeks of going live on mainnet. On the other hand, Compound V3, an established lending protocol, entered the top ten after launching on Polygon in March. Its TVL steadily increased and reached $40 million by the end of Q2.
The combined TVL of protocols outside the top ten was $200 million.
DEXs
In Q2, Polygon’s DEXs averaged $124 million in daily volume and accumulated a total quarterly volume of $11.3 billion. Uniswap V3 maintained its position as the leading DEX, accounting for 43% of the total DEX volume on Polygon. Quickswap V3 followed closely with 21% of the volume, and MetaTdex contributed 19% to the overall volume. The remaining DEXs on the network accounted for 18% of the cumulative volume. With a total cumulative volume of $138.94 billion, Polygon ranks third in all-time DEX volume, trailing only Ethereum and BNB Chain.
Liquid Staking
At the end of Q2, Polygon experienced an increase in liquid staked MATIC, reaching 221 million MATIC, which represents 37% QoQ growth. This growth can be attributed to Lido’s integration of five new node operators in early May. Lido stands as the leading liquid staking protocol on Polygon, with 138 million liquid staked MATIC, accounting for 62% of the total. Stader follows with 77 million liquid staked MATIC, constituting 35% of the total.
Liquid staking on Polygon represents a fraction of the total staked MATIC (5.8%).
Stablecoins
During Q1 2023, USDC, which has historically been the dominant stablecoin on Polygon, experienced a significant decrease in market cap due to Circle’s exposure to Silicon Valley Bank. By the end of Q1, USDT emerged as the top stablecoin on Polygon, with a market cap of $735 million, representing 48% of the total stablecoin market cap. Meanwhile, USDC’s market cap settled at $593 million, accounting for 38% of the market cap.
In the second quarter, USDT saw a decline of $137 million in market cap, closing the quarter at $598 million, representing 41.6% of the total stablecoin market cap. In contrast, USDC’s market cap remained relatively stable QoQ, reaching $600 million, equaling 41.8% of the total market cap, allowing it to regain the lead by a narrow margin.
Overall, Polygon’s stablecoin market cap experienced a 7% decline QoQ, moving from $1.54 billion to $1.44 billion. Polygon closed the quarter with the sixth-largest stablecoin market cap.
NFTs
Polygon’s NFT ecosystem has shown resilience during the bear market, seeing continued growth in Q2 2023. The average weekly NFT sales volume on Polygon increased by 42% QoQ, reaching $8.6 million.
Open Sea remains the dominant NFT marketplace on Polygon, accounting for 84% of the total NFT volume in Q2. Magic Eden, which joined the network in Q1, secured the second spot with a 9% market share.
Several leading NFT collections on Polygon contributed to the network’s success, including Lama Kings, Doodle Changs, y00ts, Bungo Beanz, and Super Pengs.
Polygon’s NFT ecosystem has attracted the attention of major brands and organizations. Starbucks announced plans to launch its second NFT collection on Polygon, while Sports Illustrated opted to leverage Polygon for its new NFT ticketing service called Box Office. Moreover, attendees at the Monaco Grand Prix had the opportunity to receive their tickets as NFTs on Polygon, showcasing the network’s practical applications.
Polygon has also been actively promoting music NFTs and supporting the development of Web3 music applications. In partnership with Warner Music Group, they have established a music accelerator program to foster innovation in this space, further highlighting Polygon’s commitment to the intersection of music and blockchain technology.
Gaming
Polygon gaming has shown considerable growth within the Polygon ecosystem. In Q1, Polygon boasted the highest number of active gamers among all EVM chains. Throughout Q2, the top-performing games on Polygon included Pixels, Arc8, Benji Bananas, Sunflower Land, Decentral Games, and Skyweaver. Additionally, Polygon has previously announced several notable partnerships and collaborations, involving companies such as Superlayer, Delab Games, AQUA, Immutable, and Nexon.
Additional Highlights
Crypto Native
- Taurus integrates Polygon on its tokenization and custody platforms, allowing clients to tokenize any asset and leverage Polygon’s benefits.
- Solana wallet Phantom expands to Ethereum and Polygon, allowing users to transact across all three blockchains and providing features for NFT holders such as floor price data and direct listing on marketplaces.
- The Graph now supports Polygon. Developers on Polygon can begin migrating subgraphs over to The Graph network.
Institutional
- Franklin Templeton, one of the world’s largest asset managers, launched its Nasdaq-listed OnChain U.S. Government Money Fund (FOBXX) on the Polygon blockchain, making it the first U.S.-registered fund to use a blockchain for transactions and share ownership.
- Securitize expanded liquidity potential and access to Hamilton Lane’s Senior Credit Opportunities Fund via Polygon, offering on-demand redemptions and a fully-digitized subscription process.
- Brazil-basedBTG Pactual, Latin America’s biggest investment bank, launched its own stablecoin called BTG Dol on the Polygon blockchain, providing clients with a dollar-backed asset.
- Mastercard is collaborating with Solana, Aptos, Polygon, and Avalanche to establish common crypto standards and create the Mastercard Crypto Credential.
Sustainability
- Regen Network has partnered with Toucan to launch a bridge to the Polygon network, enabling the issuance and tokenization of carbon credits on Regen Network and establishing the Nature Carbon Tonne (NCT) as the first digital carbon token in the Cosmos ecosystem.
- Solid World launches liquidity pools for carbon markets on the Polygon PoS network, aiming to democratize access and scale financing for nature-based carbon projects worldwide.
Decentralization and Staking Overview
Polygon PoS operates as a Delegated Proof-of-Stake (DPoS) sidechain for Ethereum, allowing users to become validators and contribute to network security while earning rewards. However, the number of active validators on Polygon PoS is capped at 100. As of the end of Q2, the validator set is full, and new validators can only join if an existing validator exits.
Staking rewards on Polygon PoS are allocated in MATIC tokens on Ethereum. Rewards are proportional to a validator’s stake relative to all active validators and include a 10% bonus for successfully submitting a checkpoint on the Heimdall layer. Validators also receive native MATIC transaction fees for proposing blocks on the Bor layer.
As of the end of Q2 2023, the five largest MATIC validators, by the amount staked, are cumulatively staking 1.52 billion MATIC (39.5% of the total MATIC staked, or 15.2% of the total token supply). The five largest validators are as follows:
- Luganodes: 431.7 million ERC-20 MATIC staked (11.3% of the total stake).
- BinanceNode: 359.7 million ERC-20 MATIC staked (9.4% of the total stake).
- Web3NodesValidator: 263.4 million ERC-20 MATIC staked (6.9% of the total stake).
- Coinbase Cloud: 252.7 million ERC-20 MATIC staked (6.6% of the total stake).
- Allnodes.com: 209.6 million ERC-20 MATIC staked (5.5% of the total stake).
Note: Polygon 2.0 will revamp the validator model and validator payout scheme. See the Polygon 2.0 – Architecture and Tokenomics sections for further details.
Stake
The percentage of MATIC staked continues to gradually increase, reaching 3.84 billion MATIC (38% of the total supply) by the end of Q2.
Governance
Polygon Governance 2.0 introduces three main governance pillars for the Polygon ecosystem. Protocol Governance, System Smart Contract Governance, and Community Treasury Governance. Each pillar of governance will have its own unique governance framework, aiming to create scalable and efficient governance mechanisms.
- Protocol Governance: Facilitated by the Polygon Improvement Proposal (PIP) framework, providing a platform for proposing upgrades to Polygon protocols.
- System Smart Contracts Governance: Addresses upgrades of protocol components implemented as smart contracts. The Ecosystem Council, governed by the community, will be responsible for these upgrades.
- Community Treasury Governance: Establishes a self-sustainable ecosystem fund, the Community Treasury, to support public goods and ecosystem projects. The governance process involves two phases, starting with an independent Community Treasury Board and evolving into community-driven decision-making.
Community participation is encouraged by Polygon Labs through feedback and proposals. The PIP Bounty Program rewards exceptional submissions, with $40,000 allocated over one year. The framework covers core improvements, contracts on Ethereum, API specifications, and informational PIPs.
Closing Summary
Despite a difficult U.S. regulatory environment during Q2, Polygon’s financial and network fundamentals were unaffected. Polygon announced a host of new protocol updates and partnerships during the quarter, showing continued resilience.
The standout news of the quarter was the launch of Polygon 2.0. This is a network of zk L2s, conceived to become the “Value Layer of the Internet.” Polygon 2.0 brings with it significant enhancements in protocol architecture, tokenomics, and governance, marking a pivotal step in the network’s evolution.
Running concurrently, the Polygon zkEVM continued its growth trajectory, showcasing impressive collaborations and integrations. By the end of the quarter, it had reached 200,000 unique addresses.
Polygon’s developer and user bases are among the most expansive in crypto, and it remains committed to pushing the boundaries. As competition intensifies, the successful rollout of Polygon 2.0 and continued adoption of the Polygon zkEVM will become increasingly critical in the coming quarters.
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