Polygon, the layer-2 scaling network, rolled out a major upgrade on Tuesday, incorporating Ethereum’s London hard fork. With EIP 1599 now on its mainnet, the Polygon upgrade will now limit the supply of MATIC and make the tokens potentially more valuable.
Polygon upgrade EIP 1559 happened at block 23,850,000 just before 11 a.m. Hong Kong time. The purpose of the upgrade is to replace the current gas fee calculation mechanism to make it easier for users to estimate transaction fees while burning MATIC tokens. First tested on the Mumbai testnet in December, the Polygon upgrade also now offers “better fee visibility,” according to the Polygon team.
Tuesday’s update went smoothly, according to all accounts, and some suggest that this may lead to a boom in the price of MATIC, independently on Ethereum.
EIP-1559 replaces the first-price auction, in which the highest bidder wins, with a base fee for transactions. Users can also pay a priority fee to miners to speed up processing of their transactions.
“The key difference here is that the ‘base fee’ is burned rather than paid to miners,” Marcus Sotiriou, analyst at digital asset broker GlobalBlock, told Forkast. “This means that over time there will be less supply in circulation, hence making the MATIC token more deflationary.”
While the purpose of the Ethereum and Polygon upgrades is the same, there are differences in how they burn tokens. On Ethereum, the Ether token burn happens block by block, but for Polygon, MATIC tokens are first burnt on Polygon and then completed on Ethereum, Matthew Rossi, director of product management at Polygon told Forkast in an email.
“The update will have an immediate and noticeable effect on all of Polygon’s core stakeholders, i.e., MATIC owners as well as the ecosystems’ validators and delegators, dApp devs and users,” Rossi said. “Developers will benefit from the overhaul by having their Ethereum-related operations face minimal operational and tooling issues. At the same time, validators and delegators can reap the advantages of the upgrade’s aforementioned deflationary pressure — since all of their incentives are denominated in MATIC anyway.”
Polygon’s MATIC is the 14th largest crypto by market cap with its founders originating from India. Polygon has gained superstar status as the gateway to Ethereum when the latter was struggling with high network congestion and gas fees.
MATIC has a fixed supply of 10 billion tokens, with 6.8 billion currently in circulation. According to Polygon’s estimates, a total of around 0.27% of the total MATIC supply will be burned annually. Limiting the supply of MATIC would, therefore, make it deflationary, meaning that it will likely become more valuable over time.
While the upgrade does not lower transaction fees, which fluctuate with demand and supply, it allows users to estimate costs more accurately and hence reduces the number of users overpaying, Sotiriou said.
As a layer-2 scaling solution for Ethereum, Polygon usually offers lower transaction fees than Ethereum. But it has also struggled to keep transaction fees in check as it skyrocketed due to increased demand earlier this month, according to data from Dune Analytics.
Shivam Thakral, CEO of Indian crypto exchange BuyUcoin, told Forkast that the upgrade will “result in fewer spam transactions and less network congestion as currently the base fees increase automatically once the block is filled up.”
Following the trial of the upgrade in December, the price of MATIC had soared by nearly 30%, although it has now retraced those gains, mirroring the larger downtrend in crypto prices. “I expect MATIC to rise to new all-time highs soon and I would not be surprised if it rallied by over 30% in the coming weeks,” Sotiriou said.
However, Tony Sycamore, City Index’s senior market analyst for APAC, believes that it could take nearly six months for the upgrade to affect MATIC prices.
The current slump in MATIC prices “suggests greater macro forces are driving prices at this point of time, including interest rate hikes and reduced central bank liquidity,” Sycamore told Forkast. “Additionally, as the upgrade has been well-flagged, I think the price movement in the short term will be limited.”
In the long term, the upgrade will likely help drive MATIC prices higher as the benefits from the change start to materialize, Sycamore said.
At publishing time, MATIC prices — down 30.3% since its all-time high of US$2.92 on Dec. 27 — tumbled another 6.1% in the last 24 hours, to US$2.03, according to CoinGecko data.
But for developers and the larger Polygon ecosystem, the lower fees associated with the upgrade are still coming as good news.
“Projects built on Ethereum may be more inclined to shift over to MATIC with this upgrade,” Sotiriou said.