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State of Polygon Q1 2023

Apr 26, 2023 ⋅  17 min read

Key Insights

  • The Polygon PoS chain recorded an average of 400,000 daily active addresses and added a total of 22 million new addresses during the quarter.
  • Polygon PoS had the largest share of gaming users amongst EVM chains. The most popular games were Planet IX, Sunflower Land, Hunters On-Chain, and Benji Bananas.
  • Polygon Labs launched the zkEVM Mainnet Beta on March 27. The zkEVM is an open-source and permissionless EVM-equivalent solution with fast finality. Various projects are already live, with additional partnerships to be announced.
  • Polygon ID was made available to the public under an open-source license. Polygon ID is now self-service, enabling anyone to be an issuer, verifier, or holder of a Web3 identity. It is already in use by multiple development teams.
  • Polygon Labs announced that it would be spinning off Avail, its data availability layer. The primary reasons for this move are to focus more on ZK-scaling efforts and to more closely align with the Ethereum roadmap.
  • Polygon PoS underwent the Delhi hard fork in January 2023 to improve network performance and user experience. The hard fork aimed to reduce gas spikes and address chain reorganizations.

Primer on Polygon

Polygon is a general purpose scaling solution for Ethereum. It is actively developing multiple Ethereum scaling solutions, including ZK Rollups, Sidechains, and a blockchain SDK analogous to the Cosmos SDK or Substrate. The earliest and most widely used of the scaling solutions is the Polygon Proof-of-Stake (PoS) sidechain. Additionally, Polygon Labs is pursuing an aggressive business development strategy partnering with both Web3 and legacy companies, operating a venture arm, and developing a decentralized identity solution Polygon ID.

Key Metrics

Introduction

2022 was a challenging year for the crypto industry. Despite the setbacks, Polygon demonstrated remarkable resilience and progress achieving significant milestones, including partnerships with mainstream companies, innovation across its scaling solutions, widespread adoption, and increased development activity.

In Q1 2023, the crypto industry continued to face challenges with Operation Choke Point 2.0 and systemic banking issues. Nevertheless, Polygon saw sustained levels of activity across each sector, notable launches and upgrades across various scaling solutions, and an expanding list of prominent partnerships.

Performance Analysis

Today, the Polygon Proof-of-Stake (PoS) chain is responsible for nearly all of Polygon's activity. Everything in the Performance Analysis section pertains to the PoS chain, unless otherwise specified.

Financial Overview

Polygon's Q1 2023 financial metrics remained consistent with previous quarters. The market cap at the end of Q1 was $10.2 billion. Its 50% increase QoQ was in line with the broader crypto market's 46% change in total market cap. In October, the total supply of MATIC became fully vested, and with the token's burn mechanism, there was 9.99 billion MATIC in circulation by the end of the quarter. MATIC's staking yield and the treasury balance were flat QoQ.

Polygon's total network fees increased significantly. They spiked by 93% QoQ to $11.85 million, primarily due to the rise in the average transaction fee.

Network Overview

During Q1 2023, Polygon's account metrics experienced a slight pullback but still maintained high levels relative to historical trends. The network averaged approximately 400,000 daily active addresses and added a total of 22 million new addresses during the quarter.

Despite the small drop in account-related metrics, Polygon's transaction volume remained consistent over the past year, with an average of around 3 million transactions per day. Gaming continues to be the primary driver of network activity, followed by NFTs and DeFi.

Additionally, the Delhi hard fork in January 2023 was launched to improve network performance and user experience on the PoS Chain. The hard fork aimed to reduce gas spikes and address chain reorganizations. The changes would make the network more predictable and user-friendly, particularly for developers and validators.

However, in February 2023, there was another decrease in performance on the Polygon PoS Chain. It resulted in increased errors and lags in new blocks, causing a reorg to last 157 blocks, or approximately five minutes. This event follows a 120 block reorg in December. Polygon co-founders Jaynti Kanani and Mihailo Bjelic stated that this event was due to a particular bug and that they are currently working to minimize chain reorgs.

Ecosystem and Development

DeFi TVL

In 2022, TVL in Polygon's DeFi ecosystem was on a downward trend, but it stabilized in Q1 2023. Polygon started the quarter with $1.1 billion and peaked at $1.4 billion midway through the quarter. The quarter ended with Polygon's DeFi TVL at $1.2 billion.

The top two protocols, Aave V2 and Aave V3, maintained their positions by TVL in Q1. Aave V2 had $225 million TVL while Aave V3 had $211 million TVL at the end of the quarter. With over 90% of total lending protocol TVL, Aave continued to dominate the Polygon lending market.

The next five protocols by TVL were decentralized exchanges (DEXs). Balancer V2 led the way with $111 million TVL, followed by Quickswap V2 ($100 million TVL), Uniswap V3 ($93 million TVL), Quickswap V3 ($58 million TVL), and Curve ($46 million TVL).

DEXs

Uniswap maintained its lead in DEX volume on Polygon. During Q1 2023, Uniswap was responsible for 80% of the total DEX volume. On average, the DEXs on Polygon had a total monthly volume of $3 billion during Q1 2023.

Meanwhile, aggregators only represented roughly 8% of the total volume and have seen a decrease in their percentage of volume QoQ. The two leading aggregators, 1inch and Paraswap, continued to hold their positions as the most utilized aggregators on the network.

Liquid Staking

At the end of Q1, 141 million MATIC was liquid staked out of a total of 3.8 billion staked, representing 3.7% of the total. Lido holds the majority market share with 60%, followed by Stader with 36%. Of note, Lido stMATIC staking withdrawals were paused for two weeks in March due to a bug. All in all, liquid staking remains a massive area for growth.

Stablecoins

During the previous quarter, USDC was the dominant stablecoin on Polygon. At the time, it had a $860 million market cap, constituting half of the total stablecoin market cap. However, due to Circle’s exposure to the banking crisis in Q1, USDC's market cap on Polygon decreased by 32% to $593 million. At the end of Q1, USDT was the top stablecoin on Polygon with a $735 million market cap, representing 48% of the total stablecoin market cap. Despite a 12% QoQ decrease, the overall stablecoin market cap on Polygon still ended at $1.5 billion.

NFTs

Polygon's NFTs were a highlight during the 2022 bear market. Polygon forged notable partnerships with Web2 companies such as Meta, Starbucks, Disney, and Reddit as well as with Web3 marketplaces like Rarible and Magic Eden.

In Q4 2022, Polygon NFTs reached an all-time high in daily active wallets. In Q1 2023, Polygon experienced a marginal pullback from 425,000 to 389,000 daily active wallets, a QoQ decline of 8%. However, Polygon maintained its momentum of notable partnerships and announcements:

  • Mastercard is launching a program for emerging artists called Mastercard Artist Accelerator. It will equip five emerging artists with the tools, skills, and access to create their own music paths in the digital economy.
  • Shemaroo, India’s leading entertainment company, is partnering with Polygon Labs to launch Virtasy.io, a Bollywood NFT marketplace. The marketplace will list NFTs from iconic Bollywood films, including images, movie clips, and metaverse-ready avatars.
  • PLAY! POP! GO! is a lifestyle omniverse that introduces a gamified approach to luxury streetwear and fine art. It is integrating with Polygon to offer digital twins to accompany physical clothing and an immersive gaming experience.
  • Unstoppable Domains and Polygon Labs have launched .polygon, a new domain ending aimed at simplifying user access to Web3 applications, NFTs, and decentralized websites.
  • Rarible is bringing its customizable community marketplace builder to NFT collections on the Polygon network. The zero-code tool allows anyone to create bespoke NFT marketplaces for free with customizable royalties, on-brand trading experiences, and built-in liquidity.
  • National Geographic launched its first NFT collection called "GM: Daybreak Around the World" to celebrate its 135th anniversary.

Additionally, global investment firm Hamilton Lane partnered with Securitize to tokenize a portion of its $2.1 billion Equity Opportunities Fund V on Polygon, making it accessible to individual investors. The tokenized feeder fund lowers minimum investments from an average of $5 million to $20,000, democratizing access to private equity assets. Securitize and Hamilton Lane plan to launch two more feeder funds in the coming months.

Gaming

Polygon's gaming sector has also been a standout performer. In Q1 2023, Polygon had the most active gamers of any EVM chain. The most popular games in order were:

  • Planet IX - An NFT-based strategy game with the goal of restoring a fallen planet while uncovering its mysteries. The game consists of 1.6 billion PIX, individual NFTs that can be collected using the ERC-20 utility token called IX Token (IXT). The game has a large and engaged community, with over 550,000 unique players and 400+ million NFTs sold.
  • Sunflower Land - A blockchain-based farming game where players must gather resources to grow their empire on a deserted island. There are thousands of unique in-game resources that are tradeable amongst players. The game is designed to be played for only a few minutes a day, allowing players to tend to their farm, complete daily quests, and trade with others. Sunflower Land was built by a team of passionate developers and artists and has a dedicated community of 60+ open-source developers and 200+ artists.
  • Benji Bananas - A free-to-play mobile action-adventure game with over 50 million downloads, where players control Benji the monkey and collect bananas for upgrades and power-ups. The upcoming play-to-earn model will allow users to earn special tokens and swap them for ApeCoin if they become Benji Bananas Membership Pass NFT owners.
  • Hunters On-Chain - A free-to-play action RPG game where players compete against each other and the environment in various game modes. Hunters On-Chain is the Web3 version of the popular mobile game Hunt Royale. The game was tokenized due to its potential for greater success and natural fit for Web3 mechanics.

Additionally, Polygon had several notable gaming announcements and partnerships with Superlayer, Delab Games, AQUA, Immutable, and Nexon. Overall, Polygon averaged 115,000 daily active gaming wallets and over 40 million total gaming transactions.

Developer Activity

Polygon has been highly active in the developer community during both Q4 2022 and Q1 2023. During the fourth quarter, Polygon hosted several events, tours, and signed various partnerships aimed at expanding and strengthening its relationship with developers. Our Q4 2022 report highlighted Polygon’s suite of developer-focused products and initiatives.

The momentum continued into Q1 2023 with the launch of the Polygon Labs @ the Pit accelerator in partnership with Jump Crypto. The two-week event provided mentorship and resources to support developers. The event will hit the road this year, with its first stop in Singapore.

The emphasis on developer engagement appears to be paying off, as the 2022 Developer Report by Electric Capital recognized Polygon as a top developer ecosystem. According to the report, Polygon grew from 200 to over 1,000 developers since 2018. It had a 40% YoY increase in total developers and averaged over 500 monthly active developers in 2022. Its rapid growth to 150 full-time developers came in under 4 years. The report ranked Polygon among leading developer ecosystems outside of Ethereum, alongside Solana, Cosmos, and Polkadot.

Decentralization and Staking

Polygon's PoS chain relies on a fixed set of 100 active validators to secure the network. At the end of Q1, the Polygon validator ecosystem had over 3.8 billion MATIC locked up, worth $4.2 billion at the time. In the second half of 2022, Polygon re-emphasized the further decentralization of the validator set.

Polygon released a validator decentralization deep dive report on November 9, 2022. It highlighted the distribution of validators across geographies, cloud providers, entities, and other factors. Additionally, Polygon Improvement Proposal 4 (PIP-4) provides a framework for understanding how validators are performing against objective standards. The framework's goal is to enhance the self-regulation of the validators and foster additional transparency and accountability. PIP-4 also calls for increasing the active validator set to 105.

Qualitative Analysis

Polygon zkEVM

Polygon launched the zkEVM Mainnet Beta on March 27. This event was the culmination of months of testing, auditing, and upgrading the Polygon protocol. The Mainnet Beta is open-source and permissionless, and it is EVM-equivalent with fast finality features.

Several notable names launched on the Polygon zkEVM Mainnet Beta from day one. These include Lens, Balancer, Midnight Society, Oath of Peak, ANKR, Alchemy, Sequence, Quickswap, and The Graph. Immutable X also announced its upcoming partnership on the Polygon zkEVM.

Polygon Labs put in place several security measures for the Polygon zkEVM protocol to ensure user safety during the beta phase. In Stage I, there will be a Security Council that can swiftly upgrade the protocol, and Stage II will include enhanced security measures. The protocol has undergone multiple external audits and is hosting an ongoing bug bounty program. As the launch involves sophisticated technology and is a fresh initiative, Polygon Labs is prepared for possible performance complications. Therefore, they will keep end users informed of any downtime on their website.

Polygon Miden

Polygon Miden is an upcoming zero-knowledge rollup designed to extend the functionality of Ethereum on three key dimensions: scalability, safety, and privacy. Miden aims to provide scalable solutions to the blockchain's slow verification process and allow developers to create new functionality. By prioritizing ZK friendliness over EVM compatibility, Miden enables developers to build applications that would be difficult to build on account-based systems. The system's architecture includes an actor-based execution model and a hybrid state model that will allow actors to prove the validity of their own state transitions to the rest of the network. Polygon Labs will release a series of blog posts describing Polygon Miden over the coming months in anticipation of the testnet launch.

Polygon Supernets

Polygon Edge is a modular blockchain development framework. It’s designed to support a variety of scaling and infrastructure solutions for developing Ethereum-compatible chains. Similar to Substrate on Polkadot or the Cosmos SDK, Edge facilitates the development of application-specific chains called Polygon Supernets. These Supernets are powered by Polygon Edge and allow users to quickly setup a custom, high-performance blockchain network.

Following a Q4 filled with several notable Supernet announcements and partnerships, Polygon announced the first 10 companies to build their own Polygon Supernets, with support from implementation partners and solution providers. The companies include gaming ventures Nexon, Plai Labs, and two others; DeFi leaders Nu, Lemon, and Ripio; and enterprises Acentrik and Gaia-x, among others.

Polygon Avail Spinoff

In March, Polygon Labs announced that it would be spinning off Avail, its data availability layer. This move aims to focus more on ZK-scaling efforts. It will also align more closely with the Ethereum roadmap, specifically supporting the upcoming EIP-4844 and other data availability updates.

As a result of this spinoff, Avail Co-founder Anurag Arjun will be leaving Polygon Labs to focus exclusively on Avail. Avail is protocol-agnostic and plans to work with any execution environment designed to scale blockchains, including sovereign chains, validiums, and optimistic chains. The public testnet is currently live, and further announcements about moving to the public mainnet are expected soon.

Polygon ID

Polygon ID is a self-sovereign identity solution launched in June 2022. It uses ZK cryptography to enable fully private and verifiable on-chain verification. In doing so, it addresses know-your-customer (KYC) requirements while allowing users to retain complete privacy. In March 2023, Polygon ID was made available to the public under an open-source license, and it is now fully self-service, allowing anyone to become an issuer (e.g., KYC providers, DAOs, etc.), verifier (e.g., dApps) or holder (i.e., users) of a Web3 identity.

Polygon ID has already attracted several development teams to start building solutions using its technology. The decentralized identity infrastructure stack offers several use cases for developers, such as zero-knowledge proof technology for identity verification, passwordless login for improved user experience, and reusable credentials. In addition, Polygon University has two courses centered around Polygon ID.

Polygon Improvement Proposals (PIPs)

Polygon Labs released details regarding the updated Polygon Improvement Proposal (PIP) framework. Community-driven PIPs describe standards and design specifications for the Polygon network, including core protocol specifications, client APIs, and contract standards.

The updated framework includes four classifications of PIPs:

  • Core: Changes that are not strictly necessary for reaching consensus but may still be pertinent to core components, such as Heimdall and Bor improvements.
  • Contracts: Upgrades to the core contracts deployed on Ethereum.
  • Interface: Improvements to client API/RPC specifications and standards and language-level standards like method names and contract ABIs.
  • Informational: Recommendations, information, or general thoughts on an issue posted to the broader community. Although informational PIPs do not require consensus of the validating stake, they can be adopted by the larger ecosystem, for example, as a new token standard.

The PIP lifecycle under the updated framework is as follows:

  1. A proposal is published on the Polygon Community Forum to engage with the community and receive feedback. Authors should provide all relevant information.
  2. A Github pull request is created, allowing a PIP editor to assign a number and status to the proposal or suggest changes. The proposal will then be considered ready for peer review.
  3. PIPs are peer-reviewed and discussed in Polygon Builder Sessions, where the proposal is communicated to the larger community.
  4. The “Last Call” status is assigned by editors to collect feedback over the following 14 days.
  5. After all feedback is taken into account, the final step lays the groundwork for the developer team to start prioritizing and implementing the PIP.

Closing Summary

Despite challenges faced by the crypto industry, Polygon has continued to demonstrate resilience and progress throughout 2022 and into Q1 2023. With an expanding list of prominent partnerships, innovation in scaling solutions, and a vibrant ecosystem, Polygon remains a strong contender in the Ethereum scaling race.

Polygon's most notable achievements in Q1 2023 include the launch of the zkEVM Mainnet Beta, the public launch of Polygon ID under an open-source license, and new partnerships with companies like Mastercard, Shemaroo, and National Geographic. The gaming sector, with popular titles like Planet IX, Sunflower Land, Hunters On-Chain, and Benji Bananas, has also flourished on Polygon. Furthermore, Polygon's focus on developer engagement has led to its recognition as a top developer ecosystem by Electric Capital.

Moving forward, Polygon's continued success will depend on its ability to maintain and grow its network, address performance issues, and further develop its scaling and privacy solutions.

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Nick is a research analyst at Messari on the Protocol Services team. Prior to joining Messari, Nick worked in Deloitte's Consulting practice.

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Nick is a research analyst at Messari on the Protocol Services team. Prior to joining Messari, Nick worked in Deloitte's Consulting practice.

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