State of Polygon Q4 2023

Key Insights

• Polygon PoS average daily active addresses increased every quarter of 2023, reaching 372,000 in Q4. Transactions also witnessed a 93% QoQ increase in the fourth quarter.
• Polygon PoS’s Total Value Locked (TVL) increased by 16% QoQ, concluding the quarter at $1.1 billion. At the end of Q4, Polygon PoS ranked sixth among blockchains based in TVL.
• Polygon Labs released information about the Aggregation Layer. The Aggregation Layer (AggLayer) aims to unify liquidity across a multichain ecosystem, allowing cross-chain transactions, and developers to connect any EVM L1 or ZK-powered L2.
• Adoption of the Polygon Chain Development Kit (CDK) continued to increase. Multiple notable teams announced adoption of the CDK including Astar Network, Canto, Flipkart, Gnosis Pay, Immutable, Libre, Manta, OKX, and more.
• The Polygon Protocol Council was introduced. This body, consisting of 13 members, will be responsible for conducting both regular and emergency upgrades to ensure security of the network.

Primer

Polygon Labs is a software company that develops zero-knowledge (ZK) scaling solutions for Ethereum, including Polygon Proof-of-Stake (PoS) network, Polygon zkEVM, and Polygon Miden. The Polygon Chain Development Kit (CDK) is a collection of open-source software components that makes it easy for developers to design and launch ZK-powered L2s on Ethereum.

In June 2023, Polygon Labs unveiled Polygon 2.0, a series of proposed upgrades to the Polygon ecosystem. The core vision of Polygon 2.0 is to enable unlimited scalability and unified liquidity through the integration of ZK technology, enabling an aggregated network that looks and feels like the internet. As a part of the Polygon 2.0 roadmap, the Polygon PoS network will be upgraded to a zkEVM Validium network that shares security with Ethereum. Polygon 2.0 will also bring significant updates to protocol architecture, tokenomics, and governance.

In January 2024, Polygon Labs released information about the Aggregation Layer (AggLayer) which creates an aggregated blockchain network that unifies liquidity across the Polygon ecosystem and allows developers to connect any EVM L1 or ZK L2, which can easily be spun up using Polygon CDK. The AggLayer, in conjunction with Polygon CDK, has been described as the future for Polygon.

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Key Metrics

Introduction

Polygon 2.0 represents a significant shift in the evolution of Polygon protocols. This set of enhancements covers multiple areas including protocol architecture, tokenomics, and governance.

The core vision of Polygon 2.0 is to build an aggregated blockchain network that enables 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.

Aggregation Layer (AggLayer)

In January 2024, Polygon Labs released information about the AggLayer within the Polygon ecosystem, addressing challenges in blockchain architectures by unifying the liquidity and state of ZK-secured chains. The AggLayer enables “near-instant atomic cross-chain transactions” and aims to unify liquidity across its ecosystem. Developers can connect any EVM L1 or L2 to the AggLayer. This allows the chains to “maintain full sovereignty” while enabling them to access a larger pool of liquidity, aggregated users, and dApps. The first version of AggLayer is scheduled for release in February 2024. V2 is expected later in the year, supporting asynchronous cross-chain transactions.

Polygon Chain Development Kit (CDK)

In Q3 2023, Polygon Labs released the Polygon Chain Development Kit (CDK). Polygon CDK is an open-source development framework for launching ZK L2 chains and transitioning existing EVM L1s to L2s. Polygon CDK’s primary attributes focus on customizability, interoperability, and ZKtech.

Since going live, a number of teams have announced the adoption of the CDK including: Immutable, Astar Network, Canto, Manta, OKX, Hypr Network, FlipKart, OEV Network, Libre, Aavegotchi, Accentrik, Arianee, CapX, Gameswift, Gnosis Pay, IDEX Nubank, Outerlife, Powerloom, and WireX.

In the fourth quarter, there were a number of notable CDK integrations and announcements including with Celestia, Hyper Oracle, and Gateway. Additionally, Polygon Labs and the NEAR Foundation entered into a collaboration to develop a ZK-prover specifically designed for WebAssembly blockchains; NEAR DA has also integrated with Polygon CDK. The zkWasm prover aims to bridge the gap between Wasm-based chains and the Ethereum ecosystem, including Polygon CDK chains.

Polygon Miden

Polygon Miden is an upcoming ZK L2 rollup utilizing the Rust-based Miden Virtual Machine (MVM) instead of the Ethereum Virtual Machine (EVM). Miden aims for high-throughput, private applications using ZK-proofs, emphasizing privacy as a core feature for scalability. Additionally, Polygon Labs introduced Polylang, a TypeScript-based language for Miden VM.

On September 29, Polygon Labs shared details about the development of Miden and announced plans for a testnet. Leading up to this Miden testnet launch, Polygon Labs has published a series of blog posts explaining Polygon Miden’s components.

Polygon PoS Upgrade to zkEVM Validium

As part of the Polygon 2.0 upgrade, there was a proposal for the Polygon PoS chain to transition into a zkEVM validium. This change enables Polygon PoS to enhance security, performance, and compatibility within an aggregated blockchain network. As a zkEVM validium, transaction data for Polygon PoS will be made available offchain, resulting in lower fees compared to traditional rollups, while maintaining robust security guarantees.

Additional Developments

• Polygon PoS underwent the Aalborg Hard Fork on Oct. 11, 2023. This upgrade included PIP-11, which introduces a mechanism called milestones that enable faster deterministic finality.
• The Solana Foundation and Polygon Labs co-hosted the inaugural Crypto Policy Bootcamp in Washington D.C., aimed at fostering dialogue between policymakers and the crypto industry.
• Polygon Labs hosted multiple events in Hong Kong.
• Polygon introduced a new testing toolkit for the PoS chain, simplifying the management of Devnets. This toolkit streamlines the process of creating and managing private test networks, allowing developers to test their dApps and smart contracts more efficiently.
• Polygon launched Polygon Village 2.0, a comprehensive support program for founders, offering over $110 million in MATIC grants.
• Polygon launched Polygon Portal, a unified user interface that simplifies the management of assets on Polygon chains and bridging to and from Ethereum.
• Polygon PoS mainnet underwent the Agra Hard Fork on Nov. 28, 2023. This introduced the implementation of multiple PIPs.
• Polygon ID Release 5 which enhances credential liquidity, enabling a more efficient and user-friendly experience in managing decentralized identities.

Financial and Network Overview

Market Capitalization

In Q4 2023, the total crypto market cap experienced a sharp increase, largely driven by anticipation surrounding spot BTC ETFs. MATIC’s circulating market cap increased 80% QoQ from $4.9 billion to $8.8 billion, outpacing the overall crypto market’s growth of 54%. This Q4 growth brought MATIC’s YoY change to 29%. MATIC’s market cap ranks in the top 15 among all crypto projects.

Revenue

In Q4 2023, Polygon PoS’s revenue from network transaction fees surged 67% QoQ, increasing from $5.1 million to $8.4 million. On November 16, daily revenue hit a yearly peak of nearly $1 million, driven by activity surrounding Inscription NFTs. This surge temporarily pushed gas fees up by 1,000%. However, these spikes quickly reverted to standard levels. Even discounting this temporary surge, Polygon’s revenue for the quarter still showed an increase. For 2023, the total revenue for Polygon PoS was $37 million.

Supply

As part of the Polygon 2.0 upgrade, MATIC is being phased out in favor of POL. POL will enable holders to contribute to network security on various protocols in the Polygon ecosystem via a native re-staking protocol, earning rewards for diverse services. These services range from basic transaction validations to more advanced tasks like generating ZK-validity proofs. Each protocol in the Polygon ecosystem can offer customized roles and rewards for 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.

POL adopts an inflationary model with a yearly emission rate subject to community governance to incentivize validator participation and fund a community-governed treasury.

During Q3, the Polygon Labs team unveiled three Polygon Improvement Proposals for community consideration: PIP-17, PIP-18, and PIP-19. PIP-17 details the POL token and its relevant contracts. PIP-18 introduces the inaugural phase of the Polygon 2.0 upgrade. PIP-19 suggests transitioning the primary gas token on Polygon PoS from MATIC to POL, emphasizing an upgrade to the PoS Plasma Bridge Contract to facilitate the token transition. On October 25, the POL contract was deployed on mainnet.

Usage

Throughout 2023, Polygon PoS experienced a consistent growth in active addresses, reaching a peak of 372,000 daily active addresses in Q4. This increase was led by the DeFi and gaming sectors. For comparison to leading Layer 2s during the same period, Optimism averaged 72,000 daily active addresses and Arbitrum 150,000.

Daily transactions on Polygon PoS witnessed a rise of 93% QoQ, increasing from 2.3 million to 4.5 million. In late November, a surge in transactions occurred, with several days exceeding 10 million transactions, driven by an Ordinals craze. Even when excluding these spikes, Polygon PoS experienced an increase in daily transactions during the fourth quarter.

Governance

Polygon Governance 2.0 introduces three main governance pillars for the Polygon ecosystem. 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 Protocol 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.

Source: Polygon Blog

In the fourth quarter, PIP-29 proposed the introduction of the Polygon Protocol Council, which was adopted by the community. The council is responsible for conducting both regular and emergency upgrades to system smart contracts, specifically those components of Polygon protocols that are implemented as smart contracts on Ethereum. The Protocol Council consists of 13 publicly named members.

Ecosystem Overview

DeFi

Polygon PoS’s Total Value Locked (TVL) increased by 16% QoQ, concluding the quarter at $1.1 billion. At the end of Q4, Polygon PoS ranked sixth among blockchains based on TVL.

In the fourth quarter, Aave continued to lead as the dominant protocol by TVL on Polygon PoS, boasting a TVL of $520 million, which marked a 44% increase from the previous quarter and constituted 49% of the aggregate TVL. Quickswap followed with a TVL of $107 million, reflecting a 20% increase and accounting for 10% of the aggregate TVL. Uniswap reported a TVL of $92 million, up 36% QoQ, making up 9% of the total, while Compound’s TVL rose to $78 million, a 42% increase, representing 7% of the aggregate TVL.

The most notable decline was observed in PearlFi, whose TVL fell by 97% QoQ. This decrease was due to the redemption of all liquid DAI from the USDR treasury, triggering panic selling and a depeg. Consequently, the PearlFi team decided to pause PEARL emissions.

In Q4, Polygon PoS saw its average daily DEX trading volume rise to $169 million, a 74% increase from the previous quarter. Uniswap accounted for 45% of this total volume, while Quickswap contributed 28%. Retro Finance, launched on Polygon in late July, experienced a significant rise in trading volumes, claiming the third spot among DEXs with a 10% share. Overall, DEXs on Polygon PoS generated over $15.5 billion in trading volume during the fourth quarter, making it the seventh largest chain by DEX trading volume.

The market cap of stablecoins on Polygon PoS remained steady QoQ, with a slight decrease of 3% from $1.29 billion to $1.26 billion. USDT reclaimed its position as the top stablecoin on Polygon PoS, with its market cap growing by 37% QoQ to $614 million, representing 49% of the total stablecoin market cap on Polygon PoS. In contrast, USDC saw its market cap decrease by 21% QoQ to $484 million, accounting for 39% of the total stablecoin market cap. Circle launched native USDC on Polygon PoS in October.

NFTs

After a strong performance in the third quarter, driven by the DraftKings Reignmaker NFT collection, the NFT activity on Polygon PoS experienced a slowdown in the fourth quarter. The average daily number of NFT active addresses decreased by 57% QoQ, reaching 9,900, while the average daily number of NFT transactions dropped by 54% QoQ to 11,300. When compared YoY, NFT active addresses and transactions saw declines of 22% and 60%, respectively.

Several significant announcements emerged from the Polygon PoS NFT sector:

• Magic Eden is expanding its support for Polygon with new features designed to enhance the user experience and functionality for NFT interactions.
• Book.io and Trescool announced a partnership to launch on Polygon, offering users the option to purchase digital books and contribute to CO2 removal efforts.
• Club Mahindra introduced an NFT collection that utilizes generative AI to merge iconic masterpieces.

Gaming

Polygon PoS’s gaming activity has fallen for three consecutive quarters following its peak in Q1 2023. In the fourth quarter, Polygon PoS gaming averaged 11,300 daily active addresses (-54% QoQ) and 128,000 daily active transactions (-16% QoQ).

The most significant gaming-related news for the Polygon PoS gaming sector was the launch of the Immutable zkEVM testnet in the third quarter. Immutable zkEVM is one of the first external networks to utilize the Polygon Chain Development Kit (CDK). This development is projected to attract a considerable number of gamers to the Polygon ecosystem. The Immutable zkEVM mainnet launch is slated for early 2024.

Institutional

In the fourth quarter, Polygon witnessed several notable institutional developments:

• Libre announced the launch of a dedicated chain powered by Polygon CDK, tailored for institutional Web3 infrastructure for alternative investments. This initiative allows regulated entities to issue tokenized assets, with Brevan Howard and Hamilton Lane as the inaugural partners.
• A collaboration between 21Shares and Polygon was established to introduce a regulated market for security tokens on Polygon’s PoS network.
• HSBC announced it is collaborating with Polygon to create a decentralized identity solution, utilizing Polygon ID.
• Wipro launched Falcon, a platform for managing equipment data within global supply chains, on Polygon PoS.
• Fox Corporation unveiled Verify, an open-source protocol on Polygon PoS, aimed at enabling publishers to register and authenticate the origin of media content, particularly in combating the proliferation of AI-generated media.
• Polygon Labs became a member of the Tokenized Asset Coalition (TAC), an initiative focused on leveraging public blockchains, asset tokenization, and institutional DeFi to transform capital formation and management onchain.
• The City of Lugano upgraded its payment application to incorporate Polygon PoS, enhancing transactional capabilities within the city.
• Amazon Managed Blockchain introduced support for Polygon PoS, offering users improved access and interaction with Polygon’s network via Amazon’s blockchain management service.

zkEVM

Polygon zkEVMlaunched on March 27, 2023, as a Layer-2 Ethereum rollup. Leading protocols have integrated or announced integrations with Polygon zkEVM, including Celer Network, Synapse, Balancer, and Uniswap. In Q3, it underwent its first upgrade Dragon Fruit, and in Q4 it underwent its second upgrade Inca Berry which includes cryptographic optimizations, bug fixes, and notable changes to the prover and node systems.

Other notable announcements from the fourth quarter included support for the Bridged USDC Standard, Chainlike data feeds integration, a mechanism for more accurate transaction fee calculation called effectiveGasPrice, and details about the upcoming Etrog upgrade.

Closing Summary

In 2023, the Polygon ecosystem experienced substantial growth, marked by the introduction of Polygon 2.0 and the continuous rollout of its features. These included the deployment of the new POL token contracts, the adoption of the Polygon CDK by leading teams, and the announcement of the Aggregation Layer (AggLayer). The AggLayer, designed to unify liquidity and facilitate seamless integration across the ecosystem, alongside the Polygon CDK, is the future of the Polygon ecosystem.

The network’s technical advancements were mirrored by a surge in activity; Polygon PoS’s daily active addresses consistently rose each quarter, peaking at 372,000 in Q4. The fourth quarter also saw transactions skyrocket by 93% QoQ, while the TVL grew by 16% QoQ, reaching $1.1 billion.

Heading into 2024, Polygon is set to continue to develop Polygon 2.0 to enhance the network’s capabilities and appeal to both users and developers. Polygon PoS already ranks among the top networks in every major category and only expects this to increase as the network evolves.