Polygon 2.0: Tokenomics

Polygon Labs
July 13, 2023
Polygon News
Image source: Dribbble

From Linux to the Internet, our society fundamentally relies on open source software and protocols. However, open source projects are susceptible to the free rider problem and often struggle to align their contributors and provide value to them. The invention of blockchain protocols and their native tokens solved these issues, making open source protocols fully self-sustainable and much more powerful.

The Ethereum protocol is one great example of how a native token can bootstrap a flourishing ecosystem, provide network security in a self-sustaining manner and align and incentivize protocol participants. It has become obvious that well-designed native tokens are a transformational tool for development and growth of open source protocols.

Since the Polygon network’s inception in 2020, MATIC has been the protocol’s native token. To improve Polygon’s infrastructure and transform it into the Value Layer of the Internet, a redesigned Polygon protocol architecture has recently been introduced. These technical upgrades extend to all parts of the infrastructure, including the token.  

Today, a group of Polygon founders and researchers has published a white paper proposing POL, a technical upgrade of the native asset of the Polygon network. POL is the next generation protocol token, designed to become the major tool for coordination and growth of the Polygon ecosystem and the main driver of the vision of the Value Layer for the Internet.

The POL white paper offers an in-depth look at all important aspects of POL, as well as an economic model to simulate and analyze the effect of POL on the Polygon network and ecosystem. Technical details of POL smart contracts and migration will be laid out in an upcoming PIP (Polygon Improvement Proposal). Below is a high-level summary of the upgraded token’s benefits, utility, token economics, and migration process. 

3rd Generation Token

Bitcoin’s BTC is the first largely successful native token. Although it has been instrumental for the Bitcoin protocol, it is an unproductive asset; it does not give its holders any role in the protocol nor the incentives to perform such a role. Ethereum’s ETH improved on this and established the second generation of native protocol assets – productive tokens. Productive tokens enable their holders to become validators in their respective protocols, perform useful work and get rewarded for that. Polygon’s POL takes the next leap in this direction and introduces the third generation of native assets – hyperproductive tokens. Similarly to productive tokens, it enables its holders to become validators and receive rewards, but with two game-changing improvements:

  • Validators can validate multiple chains, i.e. as many chains as they want;
  • Every chain can offer multiple roles (and corresponding rewards) to validators.

This novel design secures, coordinates and aligns the Polygon ecosystem and supercharges its further growth, at the same time offering practically unlimited opportunities to POL holders.

Major Benefits

In conjunction with the redesigned protocol architecture, POL introduces multiple major benefits for the Polygon ecosystem.

  • Ecosystem security. A highly decentralized pool of PoS (Proof-of-Stake) validators can provide security, resilience and credible neutrality to every Polygon chain. Validators are incentivized to join the pool and secure as many chains as possible.
  • Infinite scalability. POL can support exponential growth of the Polygon ecosystem and eventual mainstream adoption. It enables the validator pool to scale to support thousands of Polygon chains without sacrificing security.
  • Ecosystem support. The Polygon ecosystem and the industry in general are still in early phases and will require ongoing support in years to come. POL can offer a sustainable, in-protocol mechanism for those activities. 
  • No friction. Blockchain protocols often require both users and developers to hold, stake or consume their native tokens in order to use the network. This causes friction and degrades user and developer experience. POL is designed in a way that does not introduce any such friction.
  • Community ownership. With decentralization as its core value, Polygon is meant to be governed by its community. POL should be enabled to hold governance rights, i.e. be utilized in governance frameworks.

Multifold Utility and Incentives

The utility of POL revolves around validators, with the goal of aligning and incentivizing them to perform useful work.

Validators are required to stake POL in order to join the validator set. Staking is instrumental for the protocol in multiple ways: (i) preventing Sybil attacks, (ii) aligning validators with the success of the ecosystem and (iii) enabling slashing, i.e. punishment of malicious validators.

Once they stake POL, validators enter the validator pool and become eligible to subscribe to validate any Polygon chain. In return for performing this useful work, validators can establish at least three incentive streams:

  1. Protocol rewards: The staking protocol continuously emits predefined amounts of POL and distributes them to all active validators as the base, protocol reward. These rewards would replace MATIC protocol rewards that Polygon validators currently receive.
  2. Transaction fees: As mentioned above, validators are allowed to validate any number of chains, and they normally collect transaction fees from all those chains.
  3. Additional rewards: To attract more validators, some Polygon chains can choose to introduce additional rewards. These rewards can be in any token, including but not limited to POL, stablecoins or native tokens of those Polygon chains.

Speaking of validator incentives, it is important to note that the concept of validation in Polygon is broader than the usual, narrow definition. This further improves the value proposition of the validator role – in addition to validating multiple chains, validators can also perform multiple roles on a single chain. These roles include: (i) validation in the narrow sense, i.e. accepting transactions and generating blocks, (ii) zero-knowledge proof generation, (iii) participation in DACs (Data Availability Committees) and any other useful work on any Polygon chain.

Future-Proof Ecosystem

As mentioned above, both the Polygon ecosystem and Web3 in general will take time to mature and reach mass adoption. Until that point, the Polygon ecosystem should ideally have enough resources for various important activities:

  • Protocol development;
  • Protocol research;
  • Ecosystem grants;
  • Adoption incentives etc.

To ensure this, we propose to introduce continuous POL emission to fund Community Treasury – a self-sustainable ecosystem fund that can support the above activities. The Community Treasury should be governed by the Polygon community, via an agreed upon governance process. This governance process, as well as the wider Polygon governance framework, will be established and announced as part of the Polygon 2.0 effort. 

Seamless Upgrade

The upgrade from MATIC to POL would  require a simple technical action – sending MATIC to the upgrade smart contract, which will automatically return the equivalent amount of POL. 

Token holders would be given ample time to upgrade, e.g. 4 years or more. If the community consensus is gathered in support of this proposal, the migration could start within months.

Successful protocols not only address the problems they are created to tackle, they also grow and evolve together with the problem space. After more than a decade of collective development, blockchain protocols are now on the cusp of mass adoption. It’s only natural that token designs change to reflect the expanded mission and lessons learned along the way. That is what the new Polygon tokenomics aims to accomplish.

Dive into the details in the POL white paper, find answers to your questions in the FAQ below, and check the Polygon 2.0 roadmap to track the progress. Tune into the Polygon Labs Blog and our social channels to keep up with updates about the Polygon ecosystem.

Let’s build the Value Layer of the Internet together!

Tokenomics FAQ

1. Is POL a new token? What happens to MATIC, will both exist? 

Practically speaking, POL is an upgrade and renaming of the MATIC token. From the protocol viewpoint, MATIC and POL would not and can not coexist; POL can only replace MATIC.

2. Are you introducing the Community Treasury because the Polygon Foundation needs additional funds? 

No. The Community Treasury is being proposed as an independent support vehicle, aiming to provide further support in a highly competitive blockchain infrastructure market. Every year, multiple new infrastructure protocols launch with strong token treasuries; the Polygon community should be able to respond to that. In addition to this, the introduction of the Community Treasury should increase transparency, decentralization and community involvement.

3. Will POL be used for gas fees?

Every Polygon chain’s community can decide which token will their chain use for gas fees; some of them might choose POL. As a result of the upgrade, Polygon PoS chain would become one of them. That being said, using ETH for gas fees provides significant UX benefits for Layer 2 chains, which subsequently leads to higher adoption and more fees for validators. 

4. Is this proposal a response to the recent events in the regulatory environment globally?

No. Ever since Matic Network expanded its vision and got rebranded to Polygon, it has been publicly discussed and understood that the native token should eventually be upgraded as well. This specific proposal has been worked on for almost a year.

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