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Indian blockchain firm Polygon looks to save crypto-universe’s network woes

Crypto-currencies have gained mainstream acceptance across the world in the wake of the COVID-19 pandemic. But due to infrastructure issues, the crypto-universe continues to under-perform as transaction costs remain high. Polygon, formerly called Matic Network, a Bengaluru-based blockchain development company is trying to solve these network issues for all participants in the crypto-universe.

Last week, San Francisco-based crypto-exchange Coinbase announced that it would list Polygon’s token ‘MATIC’ on its platform and would support trading in MATIC to USD, MATIC to Bitcoin, MATIC to Euro and MATIC to Sterling Pound transactions. Within 48 hours of listing, MATIC’s price grew by 60% after receiving an overwhelming response from individual investors and crypto-firms. Prior to the Coinbase listing, MATIC has been trading on Binance since 2019.

Both Coinbase and Binance were early investors in Matic Network which was founded in 2017, said Arjun Kalsy, vice president of Growth at Polygon.

“We liked Ethereum because it was widely adopted among developers. But we found that it had scalability issues and that is how the conversation started. We realised that if we do not find ways to scale the Ethereum network, blockchain will amount to nothing. While Ethereum processes 7 to 15 transactions per second, our network is scalable to 20,000 TPS and beyond. The aim is to give the user the same experience on a blockchain as they do on Web 2.0 environment, if not then the utility of the blockchain and its adoption suffers”— Arjun Kalsy, vice president of Growth at Polygon. (emphasis added)

The company essentially has build a secondary blockchain, on the same design contours of the Ethereum blockhain. But unlike Ethereum which suffers from high transaction costs and slow processing speeds, Polygon’s network is much cheaper and faster since it sheds some of the burden and traffic on the Ethereum network, while at the same time ensuring that all transactions are eventually reported on the Ethereum blockchain.

What is Polygon?

In a May 2018 blogpost, Polygon said that while blockchain and cryptocurrencies are gaining attention, they have not achieved mass adoption due to scalability and user experience issues. The Polygon Network is essentially a secondary blockchain layer or sidechain that works alongside the Ethereum network. A sidechain is a semi-independent blockchain that works in tandem with a ‘main chain’.

“Even on Ethereum, which is the most widely used smart contracts platform, there have been no significant Dapps [decentralised apps] which have seen mass adoption. There have been a few cases where one or the other application temporarily succeeded in achieving a significant user base, but it led to crippling of the entire network during the high load times,” it said in its blog.

“Every public blockchain has a token. Ethereum’s token is Ether, similarly Bitcoins’ token is called Bitcoin. So imagine that the Ethereum blockchain is running and another blockchain running separately. Our token, MATIC, is built on the same principles and technology so it is easy for developers to develop solutions on Polygon at a lower cost and better user experience. Their solutions can then be quickly scaled to the Ethereum blockchain”— Arjun Kalsy, vice president of Growth at Polygon

Who are the founders?

  • Jaynti Kanani: Chief executive officer.
    Previously, was a data scientist at Housing.com and a software engineer at Persistent Systems
  • Sandeep Nailwal: Chief operations officer
    Co-founded ScopeWeaver.com in 2017 and previously worked as the head of technology and supply chain at the Welspun Group
  • Anurag Arjun: Chief product officer.
    Was an assistant vice president at IRIS Business Services Ltd for three years. Worked with SNL Financial an S&P Global Company, Dexter Consultancy Pvt Ltd and Cognizant Technology Solutions

What does Polygon do?

Polygon aims to solve network issues on Ethereum through its own network, which offers better scalability, security, interoperability, better user and developer experience than available on the main Ethereum blockchain, it said in its blogpost.

“Decentralized Apps are making huge progress but the current blockchain ecosystem is not prepared to scale as per the demand. Slow block confirmations, block size limitations and computations — in smart contract based blockchains — need to be solved before we target mass adoption by mainstream users. And most importantly, it needs awesome user experience”—Matic Networks blogpost [May 25, 2018]

While Ethereum is a proof-of-work blockchain, Polygon is a proof-of-stake blockchain. In a proof-of-work blockchain, crypto-miners need to solve complex cryptographic equations for each transaction on the block. The miner which is rewarded for solving the block tends to be the one with the biggest computer processing power. In a proof-of-stake blockchain, miners are chosen by an algorithm and not based their computing power. They act as transaction validators on Polygon, rather than miners who have to solve cryptographic equations.

Why is Proof of Stake important?

Since all miners are working at the same time to solve the block, on the PoW blockchain, the Ethereum network tends to suffer from high transaction costs and long wait times for transactions to be processed. When a miner solves the block, their output is published on the Ethereum network and they are rewarded in crypto-tokens.

Since the Ethereum blockchain handles a lot of traffic, it has an inherently high cost. This means that many decentralised applications (Dapps) on Ethereum suffer from a throughput problem in addition to scalability issues. For instance, the average transaction fee on the Ethereum blockchain surged to over $40 per transfer at the end of February, and now stands at around $21 per transaction.

On the other hand, in a PoS blockchain only a select set of miners use their resources to solve the block therefore, relinquishing some network capacity. Polygon aims to solve these high transaction cost and low throughput issues with its own blockchain network that runs alongside Ethereums’ main underlying blockchain. So instead of multiple miners solving the block on the Ethereum network, they can solve the block on the Polygon network and then transfer the output or result back onto the Ethereum network.

“Our chain essentially compresses transactions. We Merkle root every 256 transactions and place only one transaction on the Ethereum main chain. So instead of placing 100% of transactions on Ethereum, we place only one aggregated transaction. This reduces the total amount of transactions taking place on the Ethereum network” — Arjun Kalsy, vice president of Growth at Polygon

 How does this system work?

Think of it like a bank settlement system. When a depositor presents a cheque at a teller, the bank employee checks the validity of the cheque, they verify the account details and then process the transaction. Once the cheque is accepted by the system, the money is deposited into the payee’s account within a day or two. At the end of the day, each bank settles payments to its counterpart through their account with the central bank.

At present, on Ethereum every step of the transaction is recorded on the blockchain which tends to clog the network. Polygon essentially splits this entire transaction. While the cheque deposit and account verification functions will take place on Polygon, only the final settlement transaction is recorded on the main Ethereum blockchain. This frees up network capacity on Ethereum, therefore reducing the time and cost of processing transactions.

How is Polygon designed?

There are four layers to Polygons’ blockchain solution:

  1. Ethereum layer: smart contracts on the Ethereum blockchain
  2. Security layer: this runs side by side with Ethereum enabling participants to play the role of a validator
  3. Polygon networks layer: an ecosystem of blockchain networks on top of Polygon’s side-chain
  4. Execution layer: this is a connection between Polygon’s network and the Ethereum Virtual Machine which is used for executing smart contracts

The goal is to enable communication between different blockchains functioning on Polygon and the main Ethereum chain. The company offers developers a hub through which different blockchains can easily integrate into. This reduces the challenges of high fees, poor scalability, and limited security that the main Ethereum blockchain suffers from.

Why has MATIC received an overwhelming response?

For many Indian crypto-exchanges and exchanges globally, Polygon and other PoS blockchains offer an important solution to the crypto-universe. Theoretically, crypto-currencies or assets are meant to be cheaper and faster than traditional financial networks. But because crypto-currencies are still under development, un-regulated and operate in an essentially open-source world, teething issues remain.

Polygons’ system, Indian crypto-founders from Giottus and ZebPay told MediaNama, can solve many issues in the crypto-world. If proven successful, even Bitcoin can move to Polygon’s network which would reduce the cost of mining Bitcoins and improve transaction speeds, they said. Effectively, Polygon seeks to disrupt the economics of crypto-mining as it exists today.

“Miners have to be incentivised and the more complicated the block is, the more they need to be incentivised. When the network has a low transaction throughput but with thousands of users, this leads to a runaway arms race. The scarcity of mining capacity creates a transaction fee issue, which can sometimes cross $100. Under a PoS network, the requirement to solve a complex cryptographic equation is removed. This reduces the cost of computing for a miner and therefore, reduces the cost of solving a block. So while the miner is paid less per transaction, their overall throughput can increase”— Arjun Kalsy, vice president of Growth at Polygon

What are the implications of the proposed crypto ban on the company?

Kalsy said that since Polygon is a blockchain developer firm, and does not source funds from investors, the government’s proposed legislation to ban trading or mining in “private crypto-currencies” will not affect the company.

“We are a software company and not a crypto-exchange company. We do not have a financial or fiduciary relationship with investors in our token. That is between the crypto-exchanges where MATIC is listed and the investors on that platform,”— Arjun Kalsy, vice president of Growth at Polygon

What does the listing on Coinbase mean for the company?

Now that Polygon is listed on the world’s largest crypto-exchange, Coinbase, it can attract investors from across the world. Kalsy said that a part of the funds that they have raised will go towards research and development. “We have a treasury of tokens that can only be used for running the company. Now with the price of token rising, the value of these tokens has increased which means we have more money to put into operations and hire more people across teams,” he said.

“While Binance has a huge number of users in South East Asia, Coinbase has a huge presence in the United States, Canada and the west. A listing on Coinbase is seen as equivalent to listing on the NASDAQ or the New York Stock Excahnge, for example. It is the most credible crypto-exchange in the world and is soon planning to list on the stock exchanges in the US, which means it will come under the Securities and Exchange Commission” — Arjun Kalsy, vice president of Growth at Polygon


MediaNama has prepared a guide on crypto-currency regulations in India, listing the government’s position over the last few years and various policy recommendations; read it here: A complete low-down on crypto-currency regulation in India.

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